XNYS:SEM Select Medical Holdings Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the Quarterly Period Ended March 31, 2012

 

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the Transition Period From                    to                     .

 

 

 

Commission File Numbers: 001 – 34465 and 001 – 31441

 

SELECT MEDICAL HOLDINGS CORPORATION

 

SELECT MEDICAL CORPORATION

(Exact name of Registrants as specified in their charters)

 

Delaware
Delaware

 

20-1764048
23-2872718

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. employer identification
number)

 

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.  YES x  NO o

 

Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

As of April 30, 2012, Select Medical Holdings Corporation had outstanding 141,056,662 shares of common stock.

 

This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation.  Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly-owned operating subsidiary of Holdings.  References to the “Company,” “we,” “us,” and “our” refer collectively to Select Medical Holdings Corporation and Select Medical Corporation.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated balance sheets

3

 

 

 

 

Consolidated statements of operations

4

 

 

 

 

Consolidated statements of changes in stockholders’ equity and income

5

 

 

 

 

Consolidated statements of cash flows

6

 

 

 

 

Notes to consolidated financial statements

7

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

22

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

41

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

42

 

 

 

PART II

OTHER INFORMATION

42

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

43

 

 

 

ITEM 1A.

RISK FACTORS

43

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

43

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

44

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

44

 

 

 

ITEM 5.

OTHER INFORMATION

44

 

 

 

ITEM 6.

EXHIBITS

44

 

 

 

SIGNATURES

 

 



Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

December 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,043

 

$

9,274

 

$

12,043

 

$

9,274

 

Accounts receivable, net of allowance for doubtful accounts of $47,469 and $44,466 in 2011 and 2012, respectively

 

413,743

 

465,687

 

413,743

 

465,687

 

Current deferred tax asset

 

18,305

 

19,894

 

18,305

 

19,894

 

Prepaid income taxes

 

9,497

 

 

9,497

 

 

Other current assets

 

29,822

 

34,178

 

29,822

 

34,178

 

Total Current Assets

 

483,410

 

529,033

 

483,410

 

529,033

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

510,028

 

491,773

 

510,028

 

491,773

 

Goodwill

 

1,631,716

 

1,631,383

 

1,631,716

 

1,631,383

 

Other identifiable intangibles

 

72,123

 

71,868

 

72,123

 

71,868

 

Assets held for sale

 

2,742

 

2,742

 

2,742

 

2,742

 

Other assets

 

72,128

 

79,779

 

70,719

 

78,463

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,772,147

 

$

2,806,578

 

$

2,770,738

 

$

2,805,262

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

16,609

 

$

19,100

 

$

16,609

 

$

19,100

 

Current portion of long-term debt and notes payable

 

10,848

 

14,451

 

10,848

 

14,451

 

Accounts payable

 

95,618

 

94,058

 

95,618

 

94,058

 

Accrued payroll

 

82,888

 

70,634

 

82,888

 

70,634

 

Accrued vacation

 

51,250

 

54,701

 

51,250

 

54,701

 

Accrued interest

 

15,096

 

5,942

 

11,980

 

5,489

 

Accrued restructuring

 

5,027

 

4,325

 

5,027

 

4,325

 

Accrued other

 

101,076

 

95,652

 

106,316

 

95,652

 

Income taxes payable

 

 

16,095

 

 

16,095

 

Due to third party payors

 

5,526

 

6,011

 

5,526

 

6,011

 

Total Current Liabilities

 

383,938

 

380,969

 

386,062

 

380,516

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

1,385,950

 

1,399,039

 

1,218,650

 

1,231,739

 

Non-current deferred tax liability

 

82,028

 

85,029

 

82,028

 

85,029

 

Other non-current liabilities

 

64,905

 

69,459

 

64,905

 

69,459

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,916,821

 

1,934,496

 

1,751,645

 

1,766,743

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 145,268,190 shares and 142,158,133 shares issued and outstanding in 2011 and 2012, respectively

 

145

 

142

 

 

 

Common stock of Select, $0.01 par value, 100 shares issued and outstanding

 

 

 

0

 

0

 

Capital in excess of par

 

493,828

 

479,547

 

848,844

 

850,800

 

Retained earnings

 

328,882

 

359,990

 

137,778

 

155,316

 

Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

 

822,855

 

839,679

 

986,622

 

1,006,116

 

Non-controlling interest

 

32,471

 

32,403

 

32,471

 

32,403

 

Total Equity

 

855,326

 

872,082

 

1,019,093

 

1,038,519

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

2,772,147

 

$

2,806,578

 

$

2,770,738

 

$

2,805,262

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Quarter Ended March 31,

 

For the Quarter Ended March 31,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

693,186

 

$

744,021

 

$

693,186

 

$

744,021

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

557,416

 

611,619

 

557,416

 

611,619

 

General and administrative

 

16,566

 

14,224

 

16,566

 

14,224

 

Bad debt expense

 

14,350

 

10,375

 

14,350

 

10,375

 

Depreciation and amortization

 

17,222

 

16,199

 

17,222

 

16,199

 

Total costs and expenses

 

605,554

 

652,417

 

605,554

 

652,417

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

87,632

 

91,604

 

87,632

 

91,604

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of unconsolidated subsidiaries

 

(73

)

2,465

 

(73

)

2,465

 

Interest income

 

56

 

 

56

 

 

Interest expense

 

(25,664

)

(23,922

)

(18,662

)

(21,250

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

61,951

 

70,147

 

68,953

 

72,819

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

26,564

 

27,575

 

29,014

 

28,510

 

 

 

 

 

 

 

 

 

 

 

Net income

 

35,387

 

42,572

 

39,939

 

44,309

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

1,715

 

1,030

 

1,715

 

1,030

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

 

$

33,672

 

$

41,542

 

$

38,224

 

$

43,279

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.29

 

 

 

 

 

Diluted

 

$

0.22

 

$

0.29

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

Select Medical Holdings Corporation

Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

Select Medical Holdings Corporation Stockholders

 

 

 

 

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Retained
Earnings

 

Non-controlling
Interests

 

Balance at December 31, 2011

 

$

855,326

 

145,268

 

$

145

 

$

493,828

 

$

328,882

 

$

32,471

 

Net income

 

42,572

 

 

 

 

 

 

 

41,542

 

1,030

 

Issuance and vesting of restricted stock

 

960

 

65

 

0

 

960

 

 

 

 

 

Exercise of stock options

 

95

 

29

 

0

 

95

 

 

 

 

 

Stock option expense

 

300

 

 

 

 

 

300

 

 

 

 

 

Repurchase of common shares

 

(25,739

)

(3,204

)

(3

)

(15,302

)

(10,434

)

 

 

Distributions to non-controlling interests

 

(1,098

)

 

 

 

 

 

 

 

 

(1,098

)

Other

 

(334

)

 

 

 

 

(334

)

 

 

 

 

Balance at March 31, 2012

 

$

872,082

 

142,158

 

$

142

 

$

479,547

 

$

359,990

 

$

32,403

 

 

Select Medical Corporation

Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

Select Medical Corporation Stockholders

 

 

 

 

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Retained
Earnings

 

Non-controlling
Interests

 

Balance at December 31, 2011

 

$

1,019,093

 

0

 

$

0

 

$

848,844

 

$

137,778

 

$

32,471

 

Net income

 

44,309

 

 

 

 

 

 

 

43,279

 

1,030

 

Federal tax benefit of losses contributed by Holdings

 

935

 

 

 

 

 

935

 

 

 

 

 

Additional investment by Holdings

 

95

 

 

 

 

 

95

 

 

 

 

 

Net change in dividends payable to Holdings

 

5,240

 

 

 

 

 

 

 

5,240

 

 

 

Dividends declared and paid to Holdings

 

(30,981

)

 

 

 

 

 

 

(30,981

)

 

 

Distributions to non-controlling interests

 

(1,098

)

 

 

 

 

 

 

 

 

(1,098

)

Other

 

(334

)

 

 

 

 

(334

)

 

 

 

 

Contribution related to restricted stock awards and stock option issuances by Holdings

 

1,260

 

 

 

 

 

1,260

 

 

 

 

 

Balance at March 31, 2012

 

$

1,038,519

 

0

 

$

0

 

$

850,800

 

$

155,316

 

$

32,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended March 31,

 

For the Three Months Ended March 31,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

35,387

 

$

42,572

 

$

39,939

 

$

44,309

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

17,222

 

16,199

 

17,222

 

16,199

 

Provision for bad debts

 

14,350

 

10,375

 

14,350

 

10,375

 

Loss (gain) from disposal or sale of assets

 

188

 

(3,550

)

188

 

(3,550

)

Non-cash stock compensation expense

 

880

 

1,261

 

880

 

1,261

 

Amortization of debt discount

 

507

 

311

 

 

311

 

Changes in operating assets and liabilities, net of effects from acquisition of businesses:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(100,135

)

(62,319

)

(100,135

)

(62,319

)

Other current assets

 

(3,076

)

(4,419

)

(3,076

)

(4,419

)

Other assets

 

2,052

 

2,028

 

1,914

 

1,935

 

Accounts payable

 

11,777

 

(1,560

)

11,777

 

(1,560

)

Due to third-party payors

 

(474

)

485

 

(474

)

485

 

Accrued expenses

 

(9,948

)

(20,585

)

(3,588

)

(17,922

)

Income and deferred taxes

 

26,238

 

27,382

 

28,688

 

28,317

 

Net cash provided by (used in) operating activities

 

(5,032

)

8,180

 

7,685

 

13,422

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(12,920

)

(11,751

)

(12,920

)

(11,751

)

Proceeds from sale of assets

 

250

 

16,511

 

250

 

16,511

 

Investment in business

 

 

(7,840

)

 

(7,840

)

Acquisition of businesses, net of cash acquired

 

(2,000

)

 

(2,000

)

 

Net cash used in investing activities

 

(14,670

)

(3,080

)

(14,670

)

(3,080

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

205,000

 

230,000

 

205,000

 

230,000

 

Payments on revolving credit facilities

 

(105,000

)

(215,000

)

(105,000

)

(215,000

)

Payments on 2011 credit facility term loans

 

 

(2,125

)

 

(2,125

)

Payments on 2005 credit facility term loans

 

(59,563

)

 

(59,563

)

 

Borrowings of other debt

 

5,496

 

5,835

 

5,496

 

5,835

 

Principal payments on other debt

 

(2,494

)

(2,328

)

(2,494

)

(2,328

)

Dividends paid to Holdings

 

 

 

(14,743

)

(30,981

)

Repurchase of common stock

 

(2,026

)

(25,739

)

 

 

Proceeds from issuance of common stock

 

81

 

95

 

 

 

Equity investment by Holdings

 

 

 

81

 

95

 

Proceeds from (repayment of) bank overdrafts

 

(9,418

)

2,491

 

(9,418

)

2,491

 

Distributions to non-controlling interests

 

(1,671

)

(1,098

)

(1,671

)

(1,098

)

Net cash provided by (used in) financing activities

 

30,405

 

(7,869

)

17,688

 

(13,111

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease in) cash and cash equivalents

 

10,703

 

(2,769

)

10,703

 

(2,769

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

4,365

 

12,043

 

4,365

 

12,043

 

Cash and cash equivalents at end of period

 

$

15,068

 

$

9,274

 

$

15,068

 

$

9,274

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

41,365

 

$

31,285

 

$

28,648

 

$

26,042

 

Cash paid for taxes

 

$

103

 

$

204

 

$

103

 

$

204

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              Basis of Presentation

 

Select Medical Corporation (“Select”) was formed in December 1996 and commenced operations during February 1997 upon the completion of its first acquisition. Select Medical Holdings Corporation (“Holdings”) was formed in October 2004 for the purpose of affecting a leveraged buyout of Select, which was a publicly traded entity.  On February 24, 2005, Select merged with a subsidiary of Holdings, which resulted in Select becoming a wholly-owned subsidiary of Holdings (the “Merger”). On September 30, 2009 Holdings completed its initial public offering of common stock.  Generally accepted accounting principles (“GAAP”) require that any amounts recorded or incurred (such as goodwill and compensation expense) by the parent as a result of the Merger or for the benefit of the subsidiary be “pushed down” and recorded in 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, 2012 and for the three month period ended March 31, 2011 and 2012 have been prepared in accordance with GAAP.  In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods.  All significant intercompany transactions and balances have been eliminated.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012.

 

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, 2011 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2012.

 

2.              Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

7



Table of Contents

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“Update 2011-05”) that improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Update 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. Update 2011-05 does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, Update 2011-05 does not affect the calculation or reporting of earnings per share. Update 2011-05 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively. The Company adopted Update 2011-05 on January 1, 2012.  Update 2011-05 had no effect on the Company’s presentation of other comprehensive income for the three months ended March 31, 2011 and 2012 because the Company did not have any items of other comprehensive income during these periods.

 

3.  Intangible Assets

 

The Company’s intangible assets consist of the following:

 

 

 

As of March 31, 2012

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

(in thousands)

 

Amortized intangible assets:

 

 

 

 

 

Non-compete agreements

 

$

25,909

 

$

(25,824

)

 

 

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

Goodwill

 

$

1,631,383

 

 

 

Trademarks

 

57,709

 

 

 

Certificates of need

 

11,914

 

 

 

Accreditations

 

2,160

 

 

 

Total

 

$

1,703,166

 

 

 

 

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At March 31, 2012, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 8.2 years, respectively.

 

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Amortization expense for the Company’s intangible assets with finite lives follows:

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2012

 

 

 

(in thousands)

 

Amortization expense

 

$

326

 

$

255

 

 

Amortization expense for the Company’s intangible assets primarily relates to the amortization of the value associated with the non-compete agreement entered into in connection with the acquisition of the outpatient rehabilitation division of HealthSouth Corporation. The useful life of the outpatient rehabilitation division of HealthSouth Corporation’s non-compete is five years. Amortization expense related to this intangible asset for each of the next five years commencing January 1, 2012 is approximately as follows (in thousands):

 

2012

 

$

340

 

2013

 

0

 

2014

 

0

 

2015

 

0

 

2016

 

0

 

 

The changes in the carrying amount of goodwill for the Company’s reportable segments for the three months ended March 31, 2012 are as follows:

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Total

 

 

 

(in thousands)

 

Balance as of December 31, 2011

 

$

1,333,553

 

$

298,163

 

$

1,631,716

 

Other

 

(333

)

 

(333

)

Balance as of March 31, 2012

 

$

1,333,220

 

$

298,163

 

$

1,631,383

 

 

4.  Restructuring Reserves

 

In connection with the acquisition of substantially all of the outpatient rehabilitation division of HealthSouth Corporation, the Company recorded an estimated liability of $18.7 million in 2007 for business restructuring which was accounted for as additional purchase price. This reserve primarily included costs associated with workforce reductions and lease termination costs in accordance with the 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.

 

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The following summarizes the Company’s restructuring activity:

 

 

 

Lease Termination Costs

 

 

 

(in thousands)

 

December 31, 2011

 

$

5,027

 

Amounts paid in 2012

 

(435

)

Accretion expense

 

83

 

Revision of estimate

 

(350

)

March 31, 2012

 

$

4,325

 

 

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 Regency acquisition.

 

5.  Fair Value

 

Financial instruments include cash and cash equivalents, notes payable and long-term debt.  The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

 

The carrying value of Select’s senior secured credit facility was $878.0 million and $891.2 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of Select’s senior secured credit facility was $823.3 million and $859.0 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of Select’s senior secured credit facility was based on quoted market prices for this debt in the syndicated loan market.

 

The carrying value of Select’s 7 5/8% senior subordinated notes was $345.0 million at both December 31, 2011 and March 31, 2012.  The fair value of Select’s 7 5/8% senior subordinated notes was $326.4 million and $341.1 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

 

The carrying value of Holdings’ senior floating rate notes was $167.3 million at both December 31, 2011 and March 31, 2012.  The fair value of Holdings’ senior floating rate notes was $143.9 million and $147.6 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

 

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6.  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, gain (loss) on early retirement of debt, stock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries, and other income (expense).

 

The following tables summarize selected financial data for the Company’s reportable segments for the three months ended March 31, 2011 and 2012.  The segment results of Holdings are identical to those of Select with the exception of total assets:

 

 

 

Three Months Ended March 31, 2011

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

 

$

519,924

 

$

173,191

 

$

71

 

$

693,186

 

Adjusted EBITDA

 

100,353

 

21,406

 

(16,025

)

105,734

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,140,798

 

482,444

 

178,201

 

2,801,443

 

Select Medical Holdings Corporation

 

2,140,798

 

482,444

 

180,577

 

2,803,819

 

Capital expenditures

 

10,487

 

2,181

 

252

 

12,920

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

 

$

553,038

 

$

190,899

 

$

84

 

$

744,021

 

Adjusted EBITDA

 

99,954

 

22,478

 

(13,368

)

109,064

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,222,825

 

437,364

 

145,073

 

2,805,262

 

Select Medical Holdings Corporation

 

2,222,825

 

437,364

 

146,389

 

2,806,578

 

Capital expenditures

 

7,051

 

3,791

 

909

 

11,751

 

 

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A reconciliation of Adjusted EBITDA to income before income taxes is as follows (in thousands):

 

 

 

Three Months Ended March 31, 2011

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Adjusted EBITDA

 

$

100,353

 

$

21,406

 

$

(16,025

)

 

 

 

 

Depreciation and amortization

 

(12,046

)

(4,459

)

(717

)

 

 

 

 

Stock compensation expense

 

 

 

(880

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

88,307

 

$

16,947

 

$

(17,622

)

$

87,632

 

$

87,632

 

Equity in losses of unconsolidated subsidiaries

 

 

 

 

 

 

 

(73

)

(73

)

Interest expense, net

 

 

 

 

 

 

 

(25,608

)

(18,606

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

61,951

 

$

68,953

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Adjusted EBITDA

 

$

99,954

 

$

22,478

 

$

(13,368

)

 

 

 

 

Depreciation and amortization

 

(11,843

)

(3,650

)

(706

)

 

 

 

 

Stock compensation expense

 

 

 

(1,261

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

88,111

 

$

18,828

 

$

(15,335

)

$

91,604

 

$

91,604

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

2,465

 

2,465

 

Interest expense, net

 

 

 

 

 

 

 

(23,922

)

(21,250

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

70,147

 

$

72,819

 

 

7.  Income per Common Share

 

The Company applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings. Effective January 1, 2009 the Financial Accounting Standards Board (“FASB”) clarified that share based payment awards that have not yet vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. Participating securities are defined as securities that participate in dividends with common stock according to a predetermined formula. These participating securities should be included in the computation of basic earnings per share under the two class method. Based upon the clarification made by FASB, the Company

 

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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.

 

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 March 31,

 

 

 

2011

 

2012

 

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation

 

$

33,672

 

$

41,542

 

Less: Earnings allocated to unvested restricted stockholders

 

361

 

633

 

Net income available to common stockholders

 

$

33,311

 

$

40,909

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average shares — basic

 

152,838

 

141,426

 

Effect of dilutive securities:

 

 

 

 

 

Stock options

 

218

 

214

 

Weighted average shares — diluted

 

153,056

 

141,640

 

 

 

 

 

 

 

Basic income per common share

 

$

0.22

 

$

0.29

 

Diluted income per common share

 

$

0.22

 

$

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,

 

 

 

2011

 

2012

 

 

 

(in thousands)

 

Stock options

 

2,372

 

2,415

 

 

8. Commitments and Contingencies

 

Litigation

 

The Company is a party to various legal actions, proceedings and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages,

 

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recoupments, fines and other penalties. The Department of Justice, CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

 

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, 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. 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 could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

 

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 April 2012, the Company’s long term acute care hospital in Evansville, Indiana (“SSH—Evansville”) received two subpoenas from the Office of Attorney General for the State of Indiana. One subpoena demanded certain patient medical records of SSH—Evansville. The second subpoena demanded reports and documents related to SSH—Evansville for various periods beginning in 2006, including certain financial, statistical, billing and quality reports; certain policies and procedures; joint venture board meeting minutes and documents related to certain complaints and internal investigations. Two days later, SSH-Evansville received a Request for Information or Assistance from the Office of Inspector General of the U.S. Department of Health and Human Services (Indianapolis, Indiana Field Office) covering the period beginning in 2007 seeking substantially the same records demanded by the Office of Attorney General for the State of Indiana, additional patient medical records of SSH—Evansville and additional documents and information of SSH—Evansville, including documents concerning SSH—Evansville’s relationships with its joint venture partner and eight other identified persons and entities. Separately, also in April 2012, the Company’s long term acute care hospital in Beech Grove, Indiana received a request from an investigator with the Medicaid Fraud Control Unit of the Office of Attorney General for the State of Indiana to produce the medical records of a single patient.  On May 1, 2012, the Evansville (Indiana) Police Department executed a search warrant at SSH-Evansville purporting to seek evidence pertaining to the crime of theft.  The search warrant sought various items of personal property, including copy machines, facsimile machines, printers and personal communication devices, and various documents and business records regarding SSH-Evansville for a period beginning in May 2004, including claims for Medicaid and Medicare payment, EOB forms, patient files, Medicaid and Medicare reimbursement manuals, personnel files, complaints and investigations of employees, contractors and physicians and other documents. The Company has produced and will continue to produce documents in response to these requests, and intends to fully cooperate with these government investigations. At this time, the Company is unable to predict the timing and outcome of this matter.

 

Construction Commitments

 

At March 31, 2012, 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 $6.1 million.

 

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9.              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 notes are fully and unconditionally guaranteed, except for customary limitations, on a senior subordinated basis by all of Select’s wholly-owned subsidiaries (the “Subsidiary Guarantors”). Certain of Select’s subsidiaries did not guarantee the 7 5/8% senior subordinated notes (the “Non-Guarantor Subsidiaries”).

 

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31, 2011 and March 31, 2012 and for the three months ended March 31, 2011 and 2012.

 

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.

 

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Select Medical Corporation

 

 

 

Condensed Consolidating Balance Sheet

 

 

 

March 31, 2012

 

 

 

(unaudited)

 

 

 

Select Medical
Corporation
(Parent Company
Only)

 

Subsidiary
Guarantors

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,255

 

$

3,355

 

$

664

 

$

 

$

9,274

 

Accounts receivable, net

 

 

419,428

 

46,259

 

 

465,687

 

Current deferred tax asset

 

13,388

 

2,798

 

3,708

 

 

19,894

 

Other current assets

 

10,817

 

19,262

 

4,099

 

 

34,178

 

Total Current Assets

 

29,460

 

444,843

 

54,730

 

 

529,033

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

14,844

 

421,174

 

55,755

 

 

491,773

 

Investment in affiliates

 

2,798,795

 

74,531

 

 

(2,873,326

)(a) (b)

 

Goodwill

 

 

1,631,383

 

 

 

1,631,383

 

Other identifiable intangibles

 

 

71,868

 

 

 

71,868

 

Assets held for sale

 

2,742

 

 

 

 

2,742

 

Other assets

 

25,832

 

51,852

 

779

 

 

78,463

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,871,673

 

$

2,695,651

 

$

111,264

 

$

(2,873,326

)

$

2,805,262

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

19,100

 

$

 

$

 

$

 

$

19,100

 

Current portion of long-term debt and notes payable

 

12,519

 

365

 

1,567

 

 

14,451

 

Accounts payable

 

8,755

 

72,263

 

13,040

 

 

94,058

 

Intercompany accounts

 

968,181

 

(880,432

)

(87,749

)

 

 

Accrued payroll

 

95

 

70,296

 

243

 

 

70,634

 

Accrued vacation

 

4,219

 

43,784

 

6,698

 

 

54,701

 

Accrued interest

 

5,286

 

203

 

 

 

5,489

 

Accrued restructuring

 

 

4,325

 

 

 

4,325

 

Accrued other

 

36,427

 

52,441

 

6,784

 

 

95,652

 

Income taxes payable

 

16,095

 

 

 

 

16,095

 

Due to third party payors

 

 

18,661

 

(12,650

)

 

6,011

 

Total Current Liabilities

 

1,070,677

 

(618,094

)

(72,067

)

 

380,516

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

749,069

 

419,086

 

63,584

 

 

1,231,739

 

Non-current deferred tax liability

 

(3,660

)

79,745

 

8,944

 

 

85,029

 

Other non-current liabilities

 

49,471

 

19,608

 

380

 

 

69,459

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,865,557

 

(99,655

)

841

 

 

1,766,743

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s Equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

0

 

 

 

 

0

 

Capital in excess of par

 

850,800

 

 

 

 

850,800

 

Retained earnings

 

155,316

 

669,785

 

18,861

 

(688,646

)(b)

155,316

 

Subsidiary investment

 

 

2,125,521

 

59,159

 

(2,184,680

)(a)

 

Total Select Medical Corporation Stockholder’s Equity

 

1,006,116

 

2,795,306

 

78,020

 

(2,873,326

)

1,006,116

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

 

32,403

 

 

32,403

 

Total Equity

 

1,006,116

 

2,795,306

 

110,423

 

(2,873,326

)

1,038,519

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

2,871,673

 

$

2,695,651

 

$

111,264

 

$

(2,873,326

)

$

2,805,262

 

 


(a)  Elimination of investments in consolidated subsidiaries.

(b)  Elimination of investments in consolidated subsidiaries’ earnings.

 

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Select Medical Corporation

 

 

 

Condensed Consolidating Statement of Operations

 

 

 

For the Quarter Ended March 31, 2012

 

 

 

(Unaudited)

 

 

 

Select Medical
Corporation (Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Net operating revenues

 

$

84

 

$

644,325

 

$

99,612

 

$

 

$

744,021

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

489

 

525,465

 

85,665

 

 

611,619

 

General and administrative

 

14,110

 

114

 

 

 

14,224

 

Bad debt expense

 

 

8,842

 

1,533

 

 

10,375

 

Depreciation and amortization

 

705

 

13,170

 

2,324

 

 

16,199

 

Total costs and expenses

 

15,304

 

547,591

 

89,522

 

 

652,417

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(15,220

)

96,734

 

10,090

 

 

91,604

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

 

 

Intercompany interest and royalty fees

 

(793

)

785

 

8

 

 

 

Intercompany management fees

 

29,374

 

(25,083

)

(4,291

)

 

 

Equity in earnings of unconsolidated subsidiaries

 

 

2,455

 

10

 

 

2,465

 

Interest expense

 

(12,974

)

(7,198

)

(1,078

)

 

(21,250

)

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

387

 

67,693

 

4,739

 

 

72,819

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(235

)

28,527

 

218

 

 

28,510

 

Equity in earnings of subsidiaries

 

42,657

 

3,499

 

 

(46,156

)(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

43,279

 

42,665

 

4,521

 

(46,156

)

44,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

 

 

1,030

 

 

1,030