XNYS:SEM Select Medical Holdings Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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
(State or other jurisdiction of
incorporation or organization)

 

20-1764048

23-2872718
(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 July 31, 2012, Select Medical Holdings Corporation had outstanding 139,866,719 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

 

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated balance sheets

3

 

 

 

 

Consolidated statements of operations

4

 

 

 

 

Consolidated statements of changes in stockholders’ equity and income

6

 

 

 

 

Consolidated statements of cash flows

7

 

 

 

 

Notes to consolidated financial statements

8

 

 

 

ITEM 2.

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

27

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

52

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

52

 

 

 

PART II

OTHER INFORMATION

52

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

52

 

 

 

ITEM 1A.

RISK FACTORS

54

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

54

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

54

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

54

 

 

 

ITEM 5.

OTHER INFORMATION

54

 

 

 

ITEM 6.

EXHIBITS

55

 

 

 

SIGNATURES

 

 

2



Table of Contents

 

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

December 31,

 

June 30,

 

December 31,

 

June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,043

 

$

21,520

 

$

12,043

 

$

21,520

 

Accounts receivable, net of allowance for doubtful accounts of $47,469 and $44,783 in 2011 and 2012, respectively

 

413,743

 

423,859

 

413,743

 

423,859

 

Current deferred tax asset

 

18,305

 

15,533

 

18,305

 

15,533

 

Prepaid income taxes

 

9,497

 

4,061

 

9,497

 

4,061

 

Other current assets

 

29,822

 

31,383

 

29,822

 

31,383

 

Total Current Assets

 

483,410

 

496,356

 

483,410

 

496,356

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

510,028

 

492,781

 

510,028

 

492,781

 

Goodwill

 

1,631,716

 

1,631,461

 

1,631,716

 

1,631,461

 

Other identifiable intangibles

 

72,123

 

71,783

 

72,123

 

71,783

 

Assets held for sale

 

2,742

 

2,742

 

2,742

 

2,742

 

Other assets

 

72,128

 

84,514

 

70,719

 

83,291

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,772,147

 

$

2,779,637

 

$

2,770,738

 

$

2,778,414

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

16,609

 

$

20,348

 

$

16,609

 

$

20,348

 

Current portion of long-term debt and notes payable

 

10,848

 

11,785

 

10,848

 

11,785

 

Accounts payable

 

95,618

 

90,132

 

95,618

 

90,132

 

Accrued payroll

 

82,888

 

73,712

 

82,888

 

73,712

 

Accrued vacation

 

51,250

 

56,208

 

51,250

 

56,208

 

Accrued interest

 

15,096

 

26,945

 

11,980

 

23,746

 

Accrued restructuring

 

5,027

 

3,038

 

5,027

 

3,038

 

Accrued other

 

101,076

 

99,583

 

106,316

 

104,823

 

Due to third party payors

 

5,526

 

7,264

 

5,526

 

7,264

 

Total Current Liabilities

 

383,938

 

389,015

 

386,062

 

391,056

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

1,385,950

 

1,342,134

 

1,218,650

 

1,174,834

 

Non-current deferred tax liability

 

82,028

 

82,911

 

82,028

 

82,911

 

Other non-current liabilities

 

64,905

 

68,649

 

64,905

 

68,649

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,916,821

 

1,882,709

 

1,751,645

 

1,717,450

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 145,268,190 shares and 139,863,119 shares issued and outstanding in 2011 and 2012, respectively

 

145

 

140

 

 

 

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

 

 

 

0

 

0

 

Capital in excess of par

 

493,828

 

469,410

 

848,844

 

853,506

 

Retained earnings

 

328,882

 

393,961

 

137,778

 

174,041

 

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

 

822,855

 

863,511

 

986,622

 

1,027,547

 

Non-controlling interest

 

32,471

 

33,417

 

32,471

 

33,417

 

Total Equity

 

855,326

 

896,928

 

1,019,093

 

1,060,964

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

2,772,147

 

$

2,779,637

 

$

2,770,738

 

$

2,778,414

 

 

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

 

3



Table of Contents

 

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended June 30,

 

For the Three Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

698,749

 

$

750,193

 

$

698,749

 

$

750,193

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

569,666

 

612,669

 

569,666

 

612,669

 

General and administrative

 

16,115

 

18,554

 

16,115

 

18,554

 

Bad debt expense

 

13,943

 

10,029

 

13,943

 

10,029

 

Depreciation and amortization

 

17,999

 

15,428

 

17,999

 

15,428

 

Total costs and expenses

 

617,723

 

656,680

 

617,723

 

656,680

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

81,026

 

93,513

 

81,026

 

93,513

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(31,018

)

 

(20,385

)

 

Equity in earnings (losses) of unconsolidated subsidiaries

 

(251

)

2,752

 

(251

)

2,752

 

Interest income

 

111

 

 

111

 

 

Interest expense

 

(25,296

)

(23,798

)

(19,694

)

(20,957

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

24,572

 

72,467

 

40,807

 

75,308

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

10,915

 

27,651

 

16,597

 

28,646

 

 

 

 

 

 

 

 

 

 

 

Net income

 

13,657

 

44,816

 

24,210

 

46,662

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

1,938

 

1,644

 

1,938

 

1,644

 

 

 

 

 

 

 

 

 

 

 

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

 

$

11,719

 

$

43,172

 

$

22,272

 

$

45,018

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.31

 

 

 

 

 

Diluted

 

$

0.08

 

$

0.31

 

 

 

 

 

 

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

 

4



Table of Contents

 

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,391,935

 

$

1,494,214

 

$

1,391,935

 

$

1,494,214

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

1,127,082

 

1,224,288

 

1,127,082

 

1,224,288

 

General and administrative

 

32,681

 

32,778

 

32,681

 

32,778

 

Bad debt expense

 

28,293

 

20,404

 

28,293

 

20,404

 

Depreciation and amortization

 

35,221

 

31,627

 

35,221

 

31,627

 

Total costs and expenses

 

1,223,277

 

1,309,097

 

1,223,277

 

1,309,097

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

168,658

 

185,117

 

168,658

 

185,117

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(31,018

)

 

(20,385

)

 

Equity in earnings (losses) of unconsolidated subsidiaries

 

(324

)

5,217

 

(324

)

5,217

 

Interest income

 

167

 

 

167

 

 

Interest expense

 

(50,960

)

(47,720

)

(38,356

)

(42,207

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

86,523

 

142,614

 

109,760

 

148,127

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

37,479

 

55,226

 

45,611

 

57,156

 

 

 

 

 

 

 

 

 

 

 

Net income

 

49,044

 

87,388

 

64,149

 

90,971

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

3,653

 

2,674

 

3,653

 

2,674

 

 

 

 

 

 

 

 

 

 

 

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

 

$

45,391

 

$

84,714

 

$

60,496

 

$

88,297

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.60

 

 

 

 

 

Diluted

 

$

0.29

 

$

0.59

 

 

 

 

 

 

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

 

5



Table of Contents

 

Select Medical Holdings Corporation

Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

Select Medical Holdings Corporation Stockholders

 

 

 

 

 

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

 

87,388

 

 

 

 

 

 

 

84,714

 

2,674

 

Issuance and vesting of restricted stock

 

1,998

 

194

 

0

 

1,998

 

 

 

 

 

Exercise of stock options

 

547

 

127

 

0

 

547

 

 

 

 

 

Stock option expense

 

601

 

 

 

 

 

601

 

 

 

 

 

Repurchase of common shares

 

(46,790

)

(5,726

)

(5

)

(27,150

)

(19,635

)

 

 

Distributions to non-controlling interests

 

(1,681

)

 

 

 

 

 

 

 

 

(1,681

)

Other

 

(461

)

 

 

 

 

(414

)

 

 

(47

)

Balance at June 30, 2012

 

$

896,928

 

139,863

 

$

140

 

$

469,410

 

$

393,961

 

$

33,417

 

 

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

 

90,971

 

 

 

 

 

 

 

88,297

 

2,674

 

Federal tax benefit of losses contributed by Holdings

 

1,930

 

 

 

 

 

1,930

 

 

 

 

 

Additional investment by Holdings

 

547

 

 

 

 

 

547

 

 

 

 

 

Dividends declared and paid to Holdings

 

(52,034

)

 

 

 

 

 

 

(52,034

)

 

 

Distributions to non-controlling interests

 

(1,681

)

 

 

 

 

 

 

 

 

(1,681

)

Other

 

(461

)

 

 

 

 

(414

)

 

 

(47

)

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

 

2,599

 

 

 

 

 

2,599

 

 

 

 

 

Balance at June 30, 2012

 

$

1,060,964

 

0

 

$

0

 

$

853,506

 

$

174,041

 

$

33,417

 

 

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

 

6



Table of Contents

 

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

49,044

 

$

87,388

 

$

64,149

 

$

90,971

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

35,221

 

31,627

 

35,221

 

31,627

 

Provision for bad debts

 

28,293

 

20,404

 

28,293

 

20,404

 

Loss on early retirement of debt

 

31,018

 

 

20,385

 

 

Gain from disposal or sale of assets

 

(5,201

)

(3,604

)

(5,201

)

(3,604

)

Non-cash stock compensation expense

 

1,780

 

2,599

 

1,780

 

2,599

 

Amortization of debt discount

 

962

 

622

 

103

 

622

 

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

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(81,240

)

(30,520

)

(81,240

)

(30,520

)

Other current assets

 

(1,511

)

(1,612

)

(1,511

)

(1,612

)

Other assets

 

2,724

 

(653

)

2,469

 

(839

)

Accounts payable

 

8,107

 

(5,486

)

8,107

 

(5,486

)

Due to third-party payors

 

(464

)

1,738

 

(464

)

1,738

 

Accrued expenses

 

6,775

 

6,423

 

13,008

 

6,340

 

Income and deferred taxes

 

8,019

 

9,879

 

16,151

 

11,809

 

Net cash provided by operating activities

 

83,527

 

118,805

 

101,250

 

124,049

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(23,696

)

(27,934

)

(23,696

)

(27,934

)

Proceeds from sale of assets

 

7,879

 

16,511

 

7,879

 

16,511

 

Investment in business

 

(13,514

)

(10,014

)

(13,514

)

(10,014

)

Acquisition of businesses, net of cash acquired

 

1,921

 

(206

)

1,921

 

(206

)

Net cash used in investing activities

 

(27,410

)

(21,643

)

(27,410

)

(21,643

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

435,000

 

340,000

 

435,000

 

340,000

 

Payments on revolving credit facilities

 

(395,000

)

(380,000

)

(395,000

)

(380,000

)

Borrowings on 2011 credit facility term loan, net of discount

 

841,500

 

 

841,500

 

 

Payments on 2011 credit facility term loan

 

 

(4,250

)

 

(4,250

)

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

 

5,496

 

5,835

 

5,496

 

5,835

 

Principal payments on other debt

 

(3,480

)

(5,085

)

(3,480

)

(5,085

)

Debt issuance costs

 

(18,556

)

 

(18,556

)

 

Dividends paid to Holdings

 

 

 

(171,008

)

(52,034

)

Repurchase of common stock

 

(3,285

)

(46,790

)

 

 

Proceeds from issuance of common stock

 

169

 

547

 

 

 

Equity investment by Holdings

 

 

 

169

 

547

 

Proceeds from bank overdrafts

 

2,102

 

3,739

 

2,102

 

3,739

 

Distributions to non-controlling interests

 

(2,270

)

(1,681

)

(2,270

)

(1,681

)

Net cash used in financing activities

 

(46,898

)

(87,685

)

(64,621

)

(92,929

)

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

9,219

 

9,477

 

9,219

 

9,477

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

4,365

 

12,043

 

4,365

 

12,043

 

Cash and cash equivalents at end of period

 

$

13,584

 

$

21,520

 

$

13,584

 

$

21,520

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

59,289

 

$

32,378

 

$

41,572

 

$

27,136

 

Cash paid for taxes

 

$

29,435

 

$

45,344

 

$

29,435

 

$

45,344

 

 

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

 

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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 June 30, 2012 and for the three and six month periods ended June 30, 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 and six months ended June 30, 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.

 

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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 and six months ended June 30, 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 June 30, 2012

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

(in thousands)

 

Amortized intangible assets:

 

 

 

 

 

Non-compete agreements

 

$

25,909

 

$

(25,909

)

 

 

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

Goodwill

 

$

1,631,461

 

 

 

Trademarks

 

57,709

 

 

 

Certificates of need

 

11,914

 

 

 

Accreditations

 

2,160

 

 

 

Total

 

$

1,703,244

 

 

 

 

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At June 30, 2012, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 8.0 years, respectively.

 

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Table of Contents

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

(in thousands)

 

(in thousands)

 

Amortization expense

 

$

327

 

$

85

 

$

653

 

$

340

 

 

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 was five years.

 

The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 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

)

Goodwill acquired during the period

 

 

78

 

78

 

Balance as of June 30, 2012

 

$

1,333,220

 

$

298,241

 

$

1,631,461

 

 

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.

 

The following summarizes the Company’s restructuring activity:

 

 

 

Lease Termination
Costs

 

 

 

(in thousands)

 

Balance as of December 31, 2011

 

$

5,027

 

Amounts paid in 2012

 

(845

)

Accretion expense

 

157

 

Revision of estimate

 

(1,301

)

Balance as of June 30, 2012

 

$

3,038

 

 

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Table of Contents

 

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 $834.3 million at December 31, 2011 and June 30, 2012, respectively.  The fair value of Select’s senior secured credit facility was $823.3 million and $815.6 million at December 31, 2011 and June 30, 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 June 30, 2012.  The fair value of Select’s 7 5/8% senior subordinated notes was $326.4 million and $346.3 million at December 31, 2011 and June 30, 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 June 30, 2012.  The fair value of Holdings’ senior floating rate notes was $143.9 million and $160.6 million at December 31, 2011 and June 30, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

 

The Company considers the inputs in the valuation process of its debt instruments to be Level 2 in the fair value hierarchy.  Level 2 in the fair value hierarchy is defined as inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

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Table of Contents

 

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 and six months ended June 30, 2011 and 2012.  The segment results of Holdings are identical to those of Select with the exception of total assets:

 

 

 

Three Months Ended June 30, 2011

 

 

 

Specialty
Hospitals

 

Outpatient
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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All
Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

 

$

557,130

 

$

193,050

 

$

13

 

$

750,193

 

Adjusted EBITDA

 

102,166

 

25,837

 

(17,724

)

110,279

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,184,743

 

437,591

 

156,080

 

2,778,414

 

Select Medical Holdings Corporation

 

2,184,743

 

437,591

 

157,303

 

2,779,637

 

Capital expenditures

 

12,631

 

2,922

 

630

 

16,183

 

 

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Table of Contents

 

 

 

Six Months Ended June 30, 2011

 

 

 

Specialty
Hospitals

 

Outpatient
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

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

 

$

1,110,168

 

$

383,949

 

$

97

 

$

1,494,214

 

Adjusted EBITDA

 

202,120

 

48,315

 

(31,092

)

219,343

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,184,743

 

437,591

 

156,080

 

2,778,414

 

Select Medical Holdings Corporation

 

2,184,743

 

437,591

 

157,303

 

2,779,637

 

Capital expenditures

 

19,682

 

6,713

 

1,539

 

27,934

 

 

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

 

 

 

Three Months Ended June 30, 2011

 

 

 

(in thousands)

 

 

 

Specialty
Hospitals

 

Outpatient
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
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

78,034

 

$

20,240

 

$

(17,248

)

$

81,026

 

$

81,026

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(31,018

)

(20,385

)

Equity in losses of unconsolidated subsidiaries

 

 

 

 

 

 

 

(251

)

(251

)

Interest expense, net

 

 

 

 

 

 

 

(25,185

)

(19,583

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

24,572

 

$

40,807

 

 

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Table of Contents

 

 

 

Three Months Ended June 30, 2012

 

 

 

(in thousands)

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

 

 

 

 

Adjusted EBITDA

 

$

102,166

 

$

25,837

 

$

(17,724

)

 

 

 

 

Depreciation and amortization

 

(11,479

)

(3,232

)

(717

)

 

 

 

 

Stock compensation expense

 

 

 

(1,338

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

90,687

 

$

22,605

 

$

(19,779

)

$

93,513

 

$

93,513

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

2,752

 

2,752

 

Interest expense, net

 

 

 

 

 

 

 

(23,798

)

(20,957

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

72,467

 

$

75,308

 

 

 

 

Six Months Ended June 30, 2011

 

 

 

(in thousands)

 

 

 

Specialty
Hospitals

 

Outpatient
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
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

166,341

 

$

37,187

 

$

(34,870

)

$

168,658

 

$

168,658

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(31,018

)

(20,385

)

Equity in losses of unconsolidated subsidiaries

 

 

 

 

 

 

 

(324

)

(324

)

Interest expense, net

 

 

 

 

 

 

 

(50,793

)

(38,189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

86,523

 

$

109,760

 

 

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Table of Contents

 

 

 

Six Months Ended June 30, 2012

 

 

 

(in thousands)

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

All Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

202,120

 

$

48,315

 

$

(31,092

)

 

 

 

 

Depreciation and amortization

 

(23,322

)

(6,882

)

(1,423

)

 

 

 

 

Stock compensation expense

 

 

 

(2,599

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

178,798

 

$

41,433

 

$

(35,114

)

$

185,117

 

$

185,117

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

5,217

 

5,217

 

Interest expense, net

 

 

 

 

 

 

 

(47,720

)

(42,207

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

$

142,614

 

$

148,127

 

 

7.  Income per Common Share

 

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

 

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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

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June, 30

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation

 

$

11,719

 

$

43,172

 

$

45,391

 

$

84,714

 

Less: Earnings allocated to unvested restricted stockholders

 

125

 

707

 

486

 

1,338

 

Net income available to common stockholders

 

$

11,594

 

$

42,465

 

$

44,905

 

$

83,376

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

152,603

 

138,456

 

152,720

 

139,941

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

278

 

229

 

231

 

221

 

Weighted average shares – diluted

 

152,881

 

138,685

 

152,951

 

140,162

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

$

0.08

 

$

0.31

 

$

0.29

 

$

0.60

 

Diluted income per common share

 

$

0.08

 

$

0.31

 

$

0.29

 

$

0.59

 

 

 

 

 

 

 

 

 

 

 

 

The following share amounts are shown here for informational and comparative purposes only since their inclusion would be anti-dilutive:

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2011

 

2012

 

2011

 

2012