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Select Medical Holdings Corporation Announces Results For Its Third Quarter Ended September 30, 2017

MECHANICSBURG, Pa., Nov. 2, 2017 /PRNewswire/ -- Select Medical Holdings Corporation ("Select Medical") (NYSE: SEM) today announced results for its third quarter ended September 30, 2017.

For the third quarter ended September 30, 2017, net operating revenues increased 4.1% to $1,097.2 million, compared to $1,053.8 million for the same quarter, prior year. Income from operations increased 28.4% to $72.1 million for the third quarter ended September 30, 2017, compared to $56.2 million for the same quarter, prior year. Net income increased to $24.8 million for the third quarter ended September 30, 2017, compared to $4.0 million for the same quarter, prior year. Net income for the third quarter ended September 30, 2016 included a pre-tax loss on early retirement of debt of $10.9 million and a pre-tax non-operating loss of $1.0 million. Adjusted EBITDA increased 18.1% to $115.8 million for the third quarter ended September 30, 2017, compared to $98.1 million for the same quarter, prior year. Income per common share increased to $0.14 on a fully diluted basis for the third quarter ended September 30, 2017, compared to $0.05 for the same quarter, prior year. Excluding the loss on early retirement of debt, non-operating loss, and their related tax effects, adjusted income per common share was $0.06 per diluted share for the third quarter ended September 30, 2016. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table VIII of this release. A reconciliation of income per common share to adjusted income per common share is presented in table IX of this release.

For the nine months ended September 30, 2017, net operating revenues increased 2.8% to $3,329.2 million, compared to $3,239.8 million for the same period, prior year. Income from operations increased 14.5% to $279.5 million for the nine months ended September 30, 2017, compared to $244.1 million for the same period, prior year. Net income was $99.6 million for the nine months ended September 30, 2017, which includes a pre-tax loss on early retirement of debt of $19.7 million. Net income was $104.8 million for the nine months ended September 30, 2016, which included pre-tax non-operating gains of $37.1 million and pre-tax losses on early retirement of debt of $11.6 million. Adjusted EBITDA increased 12.3% to $413.4 million for the nine months ended September 30, 2017, compared to $368.1 million for the same period, prior year. Income per common share was $0.57 on a fully diluted basis for the nine months ended September 30, 2017, compared to $0.72 for the same period, prior year. Excluding the loss on early retirement of debt and its related tax effects, adjusted income per common share was $0.66 per diluted share for the nine months ended September 30, 2017. Excluding the non-operating gains, losses on early retirement of debt, and their related tax effects, adjusted income per common share was $0.49 per diluted share for the nine months ended September 30, 2016. A reconciliation of net income to Adjusted EBITDA is presented in table VIII of this release. A reconciliation of income per common share to adjusted income per common share is presented in table IX of this release.

Specialty Hospitals Segment

For the third quarter ended September 30, 2017, net operating revenues for the specialty hospitals segment increased 7.5% to $585.3 million, compared to $544.5 million for the same quarter, prior year. Adjusted EBITDA for the specialty hospitals segment increased 43.9% to $69.5 million for the third quarter ended September 30, 2017, compared to $48.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the specialty hospitals segment was 11.9% for the third quarter ended September 30, 2017, compared to 8.9% for the same quarter, prior year. The Adjusted EBITDA results for the specialty hospitals segment include start-up losses of approximately $1.5 million for the third quarter ended September 30, 2017, compared to $9.0 million for the same quarter, prior year. Certain specialty hospitals key statistics for both the third quarters ended September 30, 2017 and 2016 are presented in table VI of this release.

For the nine months ended September 30, 2017, net operating revenues for the specialty hospitals segment increased 3.2% to $1,785.0 million, compared to $1,729.3 million for the same period, prior year. Adjusted EBITDA for the specialty hospitals segment increased 17.7% to $256.3 million for the nine months ended September 30, 2017, compared to $217.8 million for the same period, prior year. The Adjusted EBITDA margin for the specialty hospitals segment was 14.4% for the nine months ended September 30, 2017, compared to 12.6% for the same period, prior year. The Adjusted EBITDA results for the specialty hospitals segment include start-up losses of approximately $4.7 million for the nine months ended September 30, 2017, compared to $19.4 million for the same period, prior year. Certain specialty hospitals key statistics for both the nine months ended September 30, 2017 and 2016 are presented in table VII of this release.

Outpatient Rehabilitation Segment

For the third quarter ended September 30, 2017, net operating revenues for the outpatient rehabilitation segment were $250.5 million, compared to $250.7 million for the same quarter, prior year. For the third quarter ended September 30, 2017, the outpatient rehabilitation segment experienced a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues. Adjusted EBITDA for the outpatient rehabilitation segment was $29.3 million for the third quarter ended September 30, 2017, compared to $32.0 million for the same quarter, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 11.7% for the third quarter ended September 30, 2017, compared to 12.8% for the same quarter, prior year. Certain outpatient rehabilitation key statistics for both the third quarters ended September 30, 2017 and 2016 are presented in table VI of this release.

For the nine months ended September 30, 2017, net operating revenues for the outpatient rehabilitation segment increased 2.5% to $764.5 million, compared to $745.7 million for the same period, prior year. Adjusted EBITDA for the outpatient rehabilitation segment increased 3.6% to $102.6 million for the nine months ended September 30, 2017, compared to $99.0 million for the same period, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.4% for the nine months ended September 30, 2017, compared to 13.3% for the same period, prior year. The results for the nine months ended September 30, 2016 include the contract therapy businesses through March 31, 2016 and Physiotherapy Associates Holdings, Inc. ("Physiotherapy") beginning March 4, 2016. Certain outpatient rehabilitation key statistics for both the nine months ended September 30, 2017 and 2016 are presented in table VII of this release.

Concentra Segment

For the third quarter ended September 30, 2017, net operating revenues for the Concentra segment increased 1.1% to $261.3 million, compared to $258.5 million for the same quarter, prior year. For the third quarter ended September 30, 2017, the Concentra segment experienced a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $1.2 million decrease in net operating revenues. Adjusted EBITDA for the Concentra segment was $40.0 million for the third quarter ended September 30, 2017, compared to $40.9 million for the same quarter, prior year. The Adjusted EBITDA margin for the Concentra segment was 15.3% for the third quarter ended September 30, 2017, compared to 15.8% for the same quarter, prior year. Certain Concentra key statistics for both the third quarters ended September 30, 2017 and 2016 are presented in table VI of this release.

For the nine months ended September 30, 2017, net operating revenues for the Concentra segment increased 1.9% to $779.0 million, compared to $764.3 million for the same period, prior year. Adjusted EBITDA for the Concentra segment increased 6.4% to $125.7 million for the nine months ended September 30, 2017, compared to $118.1 million for the same period, prior year. The Adjusted EBITDA margin for the Concentra segment was 16.1% for the nine months ended September 30, 2017, compared to 15.5% for the same period, prior year. Certain Concentra key statistics for both the nine months ended September 30, 2017 and 2016 are presented in table VII of this release.

Stock Repurchase Program

Select Medical did not repurchase shares during the nine months ended September 30, 2017 under its authorized $500.0 million stock repurchase program. The program has been extended until December 31, 2018, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Since the inception of the program through September 30, 2017, Select Medical has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.

Pending U.S. HealthWorks Acquisition

On October 23, 2017, Select Medical announced that Concentra Group Holdings, LLC ("Group Holdings") entered into an Equity Purchase and Contribution Agreement (the "Purchase Agreement") dated October 22, 2017 with Concentra Inc., Concentra Group Holdings Parent, LLC ("Group Holdings Parent"), U.S. HealthWorks, Inc. ("U.S. HealthWorks"), and Dignity Health Holdings Company ("DHHC"). Pursuant to the terms of the Purchase Agreement, Concentra Inc. will acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.

In connection with the closing of the transaction, it is expected that Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests of Group Holdings outstanding after the redemption described above will be exchanged for membership interests in Group Holdings Parent.

The transaction values U.S. HealthWorks at $753.0 million, subject to certain customary adjustments for working capital, cash, debt, transaction expenses and other items in accordance with the terms of the Purchase Agreement. DHHC, a subsidiary of Dignity Health, will be issued a 20% equity interest in Group Holdings Parent, which is valued at $238.0 million. The remainder of the purchase price will be paid in cash. Select Medical will retain a majority voting interest in Group Holdings Parent following the closing of the transaction.

Concentra Inc. expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility, for which JP Morgan Chase, N.A. has provided Concentra Inc. with a debt commitment letter.

The transaction, which is expected to close in the first quarter of 2018, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Business Outlook

Select Medical is updating its business outlook following the reporting of its third quarter results. Select Medical now expects for the full year of 2017 consolidated net operating revenues to be in the range of $4.4 billion to $4.5 billion and Adjusted EBITDA for the full year of 2017 to be in the range of $530.0 million to $550.0 million. Select Medical now expects fully diluted income per common share for the full year 2017 to be in the range of $0.72 to $0.82 and fully diluted adjusted income per common share for the full year 2017 to be in the range of $0.81 to $0.91. Fully diluted adjusted income per common share excludes the non-operating loss and loss on early retirement of debt and their related tax effects.

Conference Call

Select Medical will host a conference call regarding its third quarter results, as well as its business outlook, on Friday, November 3, 2017, at 9:00am EDT. The domestic dial in number for the call is 1-877-430-7741. The international dial in number is 1-615-247-0054. The conference ID for the call is 99499558. The conference call will be webcast simultaneously and can be accessed at Select Medical Holdings Corporation's website www.selectmedicalholdings.com.

For those unable to participate in the conference call, a replay will be available until 11:59pm EST, November 10, 2017. The replay number is 1-855-859-2056 (domestic) or 1-404-537-3406 (international). The passcode for the replay will be 99499558. The replay can also be accessed at Select Medical Holdings Corporation's website, www.selectmedicalholdings.com.

* * * * *

Select Medical began operations in 1997 and has grown to be one of the largest operators of specialty hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States based on the number of facilities. As of September 30, 2017, Select Medical operated 101 long term acute care hospitals and 22 acute medical rehabilitation hospitals in 28 states and 1,604 outpatient rehabilitation clinics in 37 states and the District of Columbia. Select Medical's joint venture subsidiary Concentra operated 312 centers in 38 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics. At September 30, 2017, Select Medical had operations in 46 states and the District of Columbia. Information about Select Medical is available at www.selectmedical.com.

Certain statements contained herein that are not descriptions of historical facts are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements due to factors including the following:

  • changes in government reimbursement for our services due to the implementation of healthcare reform legislation, deficit reduction measures, and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a long term acute care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability;
  • the impact of the Bipartisan Budget Act of 2013, which established payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and profitability of our long term acute care hospitals;
  • 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;
  • our plans and expectations related to the pending acquisition of U.S. HealthWorks and our ability to realize anticipated synergies;
  • private third-party payors for our services may adopt payment policies that could 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, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;
  • competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
  • the loss of key members of our management team could significantly disrupt our operations;
  • the effect of claims asserted against us could subject us to substantial uninsured liabilities; and
  • 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" of our quarterly reports on Form 10-Q and of the annual report on Form 10-K for the year ended December 31, 2016.

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.

Investor inquiries:
Joel T. Veit
Senior Vice President and Treasurer
717-972-1100
ir@selectmedical.com

SOURCE: Select Medical Holdings Corporation

I. Condensed Consolidated Statements of Operations

For the Three Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)










2016


2017


% Change








Net operating revenues


$ 1,053,795


$ 1,097,166


4.1%








Costs and expenses:







Cost of services


915,703


938,910


2.5

General and administrative


27,088


27,065


(0.1)

Bad debt expense


17,677


20,321


15.0

Depreciation and amortization


37,165


38,772


4.3








Income from operations


56,162


72,098


28.4








Loss on early retirement of debt


(10,853)



N/M

Equity in earnings of unconsolidated subsidiaries


5,268


4,431


(15.9)

Non-operating loss


(1,028)



N/M

Interest expense


(44,482)


(37,688)


(15.3)








Income before income taxes


5,067


38,841


666.5








Income tax expense


1,075


14,017


1,203.9








Net income


3,992


24,824


521.8








Less: Net income (loss) attributable to
non-controlling interests


(2,479)


6,362


(356.6)








Net income attributable to Select Medical
Holdings Corporation


$ 6,471


$ 18,462


185.3%








Weighted average shares outstanding(1):







Basic


127,848


129,142



Diluted


127,989


129,322










Income per common share(1):







Basic


$ 0.05


$ 0.14



Diluted


$ 0.05


$ 0.14










(1) Under the two-class method for calculating income per common share, unvested restricted stock is a separate,
participating class. Income per common share and weighted average common shares outstanding exclude
amounts attributed to the unvested restricted class of stockholders. Net income allocated to the unvested
restricted stockholders was $0.6 million and $0.2 million for the three months ended September 30, 2017 and
2016, respectively. Unvested restricted weighted average shares were 4,395 thousand and 4,270 thousand for the
three months ended September 30, 2017 and 2016, respectively.


N/M = Not Meaningful

II. Condensed Consolidated Statements of Operations

For the Nine Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)










2016


2017


% Change








Net operating revenues


$ 3,239,756


$ 3,329,202


2.8%








Costs and expenses:







Cost of services


2,754,950


2,787,497


1.2

General and administrative


81,226


83,415


2.7

Bad debt expense


51,591


59,120


14.6

Depreciation and amortization


107,887


119,644


10.9








Income from operations


244,102


279,526


14.5








Loss on early retirement of debt


(11,626)


(19,719)


N/M

Equity in earnings of unconsolidated subsidiaries


14,466


15,618


8.0

Non-operating gain (loss)


37,094


(49)


N/M

Interest expense


(127,662)


(116,196)


(9.0)








Income before income taxes


156,374


159,180


1.8








Income tax expense


51,585


59,593


15.5








Net income


104,789


99,587


(5.0)








Less: Net income attributable to
non-controlling interests


9,550


23,200


142.9








Net income attributable to Select Medical
Holdings Corporation


$ 95,239


$ 76,387


(19.8)%








Weighted average shares outstanding(1):







Basic


127,659


128,745



Diluted


127,804


128,916










Income per common share(1):







Basic


$ 0.72


$ 0.57



Diluted


$ 0.72


$ 0.57










(1) Under the two-class method for calculating income per common share, unvested restricted stock is a separate,
participating class. Income per common share and weighted average common shares outstanding exclude
amounts attributed to the unvested restricted class of stockholders. Net income allocated to the unvested
restricted stockholders was $2.5 million and $2.9 million for the nine months ended September 30, 2017 and
2016, respectively. Unvested restricted weighted average shares were 4,291 thousand and 3,941 thousand for the
nine months ended September 30, 2017 and 2016, respectively.


N/M = Not Meaningful

III. Condensed Consolidated Balance Sheets

(In thousands, unaudited)



December 31,
2016


September 30,
2017

Assets










Cash


$ 99,029


$ 107,300






Accounts receivable, net


573,752


716,426






Other current assets


90,122


80,324






Total Current Assets


762,903


904,050






Property and equipment, net


892,217


946,063






Goodwill


2,751,000


2,767,896






Identifiable intangible assets, net


340,562


331,036






Other assets


173,944


174,762






Total Assets


$ 4,920,626


$ 5,123,807






Liabilities and Equity










Payables and accruals


$ 557,979


$ 561,976






Current portion of long-term debt and notes payable


13,656


37,560






Total Current Liabilities


571,635


599,536






Long-term debt, net of current portion


2,685,333


2,752,742






Non-current deferred tax liability


199,078


191,441






Other non-current liabilities


136,520


138,118






Total Liabilities


3,592,566


3,681,837






Redeemable non-controlling interests


422,159


621,515






Total equity


905,901


820,455






Total Liabilities and Equity


$ 4,920,626


$ 5,123,807
















IV. Condensed Consolidated Statements of Cash Flows


For the Three Months Ended September 30, 2016 and 2017


(In thousands, unaudited)




2016


2017

Operating activities





Net income


$ 3,992


$ 24,824

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





Distributions from unconsolidated subsidiaries


4,106


3,609

Depreciation and amortization


37,165


38,772

Provision for bad debts


17,677


20,321

Equity in earnings of unconsolidated subsidiaries


(5,268)


(4,431)

Loss on extinguishment of debt


10,853


Loss on sale or disposal of assets and businesses


1,496


24

Gain on sale of equity investment


(241)


Stock compensation expense


4,750


4,957

Amortization of debt discount, premium and issuance costs


4,768


2,572

Deferred income taxes


198


(4,652)

Changes in operating assets and liabilities, net of effects of business
combinations:





Accounts receivable


3,320


(22,511)

Other current assets


1,083


2,880

Other assets


638


(3,214)

Accounts payable and accrued expenses


30,464


26,739

Due to third party payors


11,065


Income taxes


(23,543)


(258)

Net cash provided by operating activities


102,523


89,632






Investing activities





Purchases of property and equipment


(38,002)


(68,498)

Investment in businesses


(1,550)


(1,500)

Business combinations, net of cash acquired


7,288


(863)

Proceeds from sale of assets, businesses, and equity investment


1,263


3

Net cash used in investing activities


(31,001)


(70,858)






Financing activities





Borrowings on revolving facilities


100,000


175,000

Payments on revolving facilities


(165,000)


(155,000)

Proceeds from term loans


195,217


Payments on term loans


(205,193)


(2,875)

Borrowings of other debt


1,719


18,127

Principal payments on other debt


(5,551)


(4,675)

Repurchase of common stock


(1,433)


(3,003)

Proceeds from exercise of stock options


831


671

Repayments of overdrafts


(6,326)


(15,211)

Proceeds from issuance of non-controlling interests


8,743


5,433

Purchase of non-controlling interests


(236)


Distributions to non-controlling interests


(4,490)


(3,740)

Net cash provided by (used in) financing activities


(81,719)


14,727






Net increase (decrease) in cash and cash equivalents


(10,197)


33,501






Cash and cash equivalents at beginning of period


78,420


73,799

Cash and cash equivalents at end of period


$ 68,223


$ 107,300






Supplemental Information





Cash paid for interest


$ 23,613


$ 24,691

Cash paid for taxes


$ 24,419


$ 18,927


V. Condensed Consolidated Statements of Cash Flows


For the Nine Months Ended September 30, 2016 and 2017


(In thousands, unaudited)




2016


2017

Operating activities





Net income


$ 104,789


$ 99,587

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





Distributions from unconsolidated subsidiaries


16,145


14,542

Depreciation and amortization


107,887


119,644

Provision for bad debts


51,591


59,120

Equity in earnings of unconsolidated subsidiaries


(14,466)


(15,618)

Loss on extinguishment of debt


11,626


6,527

Gain on sale or disposal of assets and businesses


(41,910)


(9,499)

Gain on sale of equity investment


(241)


Impairment of equity investment


5,339


Stock compensation expense


12,924


14,227

Amortization of debt discount, premium and issuance costs


11,845


8,546

Deferred income taxes


(13,088)


(6,126)

Changes in operating assets and liabilities, net of effects of business
combinations:





Accounts receivable


(40,776)


(201,514)

Other current assets


12,094


(2,677)

Other assets


5,146


1,407

Accounts payable and accrued expenses


35,244


22,665

Due to third party payors


11,065


Income taxes


5,547


19,141

Net cash provided by operating activities


280,761


129,972






Investing activities





Purchases of property and equipment


(118,260)


(173,800)

Investment in businesses


(3,140)


(11,374)

Business combinations, net of cash acquired


(414,231)


(19,371)

Proceeds from sale of assets, businesses, and equity investment


72,629


34,555

Net cash used in investing activities


(463,002)


(169,990)






Financing activities





Borrowings on revolving facilities


420,000


805,000

Payments on revolving facilities


(545,000)


(705,000)

Proceeds from term loans


795,344


1,139,487

Payments on term loans


(434,842)


(1,176,567)

Debt issuance costs



(4,392)

Borrowings of other debt


23,801


27,571

Principal payments on other debt


(15,477)


(15,112)

Repurchase of common stock


(1,939)


(3,603)

Proceeds from exercise of stock options


1,488


1,634

Repayments of overdrafts


(8,464)


(20,439)

Proceeds from issuance of non-controlling interests


11,846


8,986

Purchase of non-controlling interests


(1,530)


(120)

Distributions to non-controlling interests


(9,198)


(9,156)

Net cash provided by financing activities


236,029


48,289






Net increase in cash and cash equivalents


53,788


8,271






Cash and cash equivalents at beginning of period


14,435


99,029

Cash and cash equivalents at end of period


$ 68,223


$ 107,300






Supplemental Information





Cash paid for interest


$ 92,928


$ 101,341

Cash paid for taxes


$ 59,937


$ 46,553







VI. Key Statistics

For the Three Months Ended September 30, 2016 and 2017

(unaudited)






2016


2017


% Change

Specialty Hospitals







Number of hospitals – end of period:







Long term acute care hospitals (a)


104


101



Rehabilitation hospitals (a)


19


22



Total specialty hospitals


123


123










Net operating revenues (,000)


$ 544,491


$ 585,288


7.5%








Number of patient days (b)


296,202


316,170


6.7%








Number of admissions (b)


12,586


13,728


9.1%








Net revenue per patient day (b)(c)


$ 1,642


$ 1,676


2.1%








Adjusted EBITDA (,000)


$ 48,264


$ 69,454


43.9%








Adjusted EBITDA margin


8.9%


11.9%










Outpatient Rehabilitation







Number of clinics – end of period (d)


1,603


1,604










Net operating revenues (,000)


$ 250,710


$ 250,527


(0.1)%








Number of visits (e)


2,052,678


1,986,213


(3.2)%








Revenue per visit (e)(f)


$ 102


$ 104


2.0%








Adjusted EBITDA (,000)


$ 31,995


$ 29,298


(8.4)%








Adjusted EBITDA margin


12.8%


11.7%










Concentra







Number of centers – end of period (g)


301


312










Net operating revenues (,000)


$ 258,507


$ 261,295


1.1%








Number of visits (g)


1,906,242


1,979,481


3.8%








Revenue per visit (g)(h)


$ 119


$ 116


(2.5)%








Adjusted EBITDA (,000)


$ 40,888


$ 40,003


(2.2)%








Adjusted EBITDA margin


15.8%


15.3%










(a) Includes managed hospitals.

(b) Excludes managed hospitals.

(c) Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenue by
the total number of patient days.

(d) Includes managed clinics.

(e) Excludes managed clinics.

(f) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue
by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic direct
patient service revenue does not include managed clinics or contract therapy revenue.

(g) Excludes onsite clinics and community-based outpatient clinics.

(h) Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of
center visits.

VII. Key Statistics

For the Nine Months Ended September 30, 2016 and 2017

(unaudited)






2016


2017


% Change

Specialty Hospitals







Number of hospitals – end of period:







Long term acute care hospitals (a)


104


101



Rehabilitation hospitals (a)


19


22



Total specialty hospitals


123


123










Net operating revenues (,000)


$ 1,729,261


$ 1,785,035


3.2%








Number of patient days (b)


951,292


950,419


(0.1)%








Number of admissions (b)


39,541


41,314


4.5%








Net revenue per patient day (b)(c)


$ 1,651


$ 1,707


3.4%








Adjusted EBITDA (,000)


$ 217,759


$ 256,291


17.7%








Adjusted EBITDA margin


12.6%


14.4%










Outpatient Rehabilitation







Number of clinics – end of period (d)


1,603


1,604










Net operating revenues (,000)


$ 745,720


$ 764,450


2.5%








Number of visits (e)


5,751,562


6,168,763


7.3%








Revenue per visit (e)(f)


$ 102


$ 103


1.0%








Adjusted EBITDA (,000)


$ 99,006


$ 102,575


3.6%








Adjusted EBITDA margin


13.3%


13.4%










Concentra







Number of centers – end of period (g)


301


312










Net operating revenues (,000)


$ 764,252


$ 779,030


1.9%








Number of visits (g)


5,642,305


5,848,551


3.7%








Revenue per visit (g)(h)


$ 118


$ 117


(0.8)%








Adjusted EBITDA (,000)


$ 118,080


$ 125,656


6.4%








Adjusted EBITDA margin


15.5%


16.1%










(a) Includes managed hospitals.

(b) Excludes managed hospitals.

(c) Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenue by
the total number of patient days.

(d) Includes managed clinics.

(e) Excludes managed clinics.

(f) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue
by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic direct
patient service revenue does not include managed clinics or contract therapy revenue.

(g) Excludes onsite clinics and community-based outpatient clinics.

(h) Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of
center visits.

VIII. Net Income to Adjusted EBITDA Reconciliation

For the Three and Nine Months Ended September 30, 2016 and 2017

(In thousands, unaudited)


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
to evaluate financial performance and determine resource allocation for each of Select Medical's operating
segments. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting
principles ("GAAP"). Items excluded from Adjusted EBITDA are significant components in understanding and
assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or
substitute for, net income, income from operations, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with
GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to
other similarly titled measures of other companies.


The following table reconciles net income to Adjusted EBITDA for Select Medical. Adjusted EBITDA is
used by Select Medical to report its segment performance. Adjusted EBITDA is defined as earnings excluding
interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation
expense, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of
unconsolidated subsidiaries.


Three Months Ended September 30,


Nine Months Ended September 30,


2016


2017


2016


2017

Net income

$ 3,992


$ 24,824


$ 104,789


$ 99,587

Income tax expense

1,075


14,017


51,585


59,593

Interest expense

44,482


37,688


127,662


116,196

Non‑operating loss (gain)

1,028



(37,094)


49

Equity in earnings of unconsolidated subsidiaries

(5,268)


(4,431)


(14,466)


(15,618)

Loss on early retirement of debt

10,853



11,626


19,719

Income from operations

56,162


72,098


244,102


279,526

Stock compensation expense:








Included in general and administrative

3,932


4,079


10,771


11,603

Included in cost of services

818


878


2,153


2,624

Depreciation and amortization

37,165


38,772


107,887


119,644

Physiotherapy acquisition costs



3,236


Adjusted EBITDA

$ 98,077


$ 115,827


$ 368,149


$ 413,397









Specialty hospitals

$ 48,264


$ 69,454


$ 217,759


$ 256,291

Outpatient rehabilitation

31,995


29,298


99,006


102,575

Concentra

40,888


40,003


118,080


125,656

Other (a)

(23,070)


(22,928)


(66,696)


(71,125)

Adjusted EBITDA

$ 98,077


$ 115,827


$ 368,149


$ 413,397









(a) Other primarily includes general and administrative costs.







IX. Reconciliation of Income per Common Share to Adjusted Income per Common Share

For the Three and Nine Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)


Adjusted net income available to common stockholders and adjusted income per common share – diluted
shares are not measures of financial performance under GAAP. Items excluded from adjusted net income available
to common stockholders and adjusted income per common share – diluted shares are significant components in
understanding and assessing financial performance. Select Medical believes that the presentation of adjusted net
income available to common stockholders and adjusted income per common share – diluted shares are important to
investors because they are reflective of the financial performance of our ongoing operations and provide better
comparability of our results of operations between periods. Adjusted net income available to common stockholders
and adjusted income per common share – diluted shares should not be considered in isolation or as alternatives to, or
substitutes 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 net income available to common stockholders and adjusted income per common share – diluted
shares are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations,
adjusted net income available to common stockholders and adjusted income per common share – diluted shares as
presented may not be comparable to other similarly titled measures of other companies.


The following tables reconcile net income available to common stockholders and income per common
share to adjusted net income available to common stockholders and adjusted income per common share – diluted
shares for Select Medical. Adjusted net income available to common stockholders is defined as net income
available to common shareholders before non-operating gain (loss) and gain (loss) on early retirement of debt.


Three Months Ended September 30,


2016

Per share (a)


2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$ 6,471



$ 18,462


Earnings allocated to unvested restricted stockholders

(209)



(608)


Net income available to common stockholders

6,262

$ 0.05


17,854

$ 0.14







Adjustments:






Non-operating losses:






Other non-operating losses

1,049




Loss on early retirement of debt (b)

5,437




Estimated income tax benefit (c)

(5,405)




Earnings allocated to unvested restricted stockholders

(35)




Adjusted net income available to common stockholders

$ 7,308

$ 0.06


$ 17,854

$ 0.14

Adjustment for dilution


(0.00)



(0.00)

Adjusted income per common share – diluted shares


$ 0.06



$ 0.14







Weighted average common shares outstanding:






Basic


127,848



129,142

Diluted


127,989



129,322







(a) Per share amounts for each period presented are basic weighted average common shares outstanding for all amounts except
adjusted income per common share - diluted shares, which is based on diluted shares outstanding.

(b) For the three months ended September 30, 2016, the loss on early retirement of Concentra's debt is net of non-controlling
interest.

(c) Represents the estimated tax benefit on the adjustments to net income.


Nine Months Ended September 30,


2016

Per share (a)


2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$ 95,239



$ 76,387


Earnings allocated to unvested restricted stockholders

(2,852)



(2,464)


Net income available to common stockholders

92,387

$ 0.72


73,923

$ 0.57







Adjustments:






Non-operating losses (gains):






Gain on sale of contract therapy

(33,933)




Other non-operating losses (gains)

(3,148)



49


Loss on early retirement of debt (b)

6,211



19,719


Estimated income tax expense (benefit) (c)

330



(7,796)


Earnings allocated to unvested restricted stockholders

915



(385)


Adjusted net income available to common stockholders

$ 62,762

$ 0.49


$ 85,510

$ 0.66

Adjustment for dilution


(0.00)



(0.00)

Adjusted income per common share – diluted shares


$ 0.49



$ 0.66







Weighted average common shares outstanding:






Basic


127,659



128,745

Diluted


127,804



128,916







(a) Per share amounts for each period presented are basic weighted average common shares outstanding for all amounts except
adjusted income per common share - diluted shares, which is based on diluted shares outstanding.

(b) For the nine months ended September 30, 2016, the loss on early retirement of Concentra's debt is net of non-controlling
interest.

(c) Represents the estimated tax expense (benefit) on the adjustments to net income.

X. Net Income to Adjusted EBITDA Reconciliation

Business Outlook for the Year Ending December 31, 2017

(In millions, unaudited)


The following is a reconciliation of full year 2017 Adjusted EBITDA expectations as computed at the low
and high points of the range to the closest comparable GAAP financial measure. Refer to table VIII for the
definition of Adjusted EBITDA and a discussion of Select Medical's use of Adjusted EBITDA in evaluating financial
performance and determining resource allocation. Each item of expense presented in the table is an
estimation of full year 2017 expectations.



Range

Non-GAAP Measure Reconciliation


Low


High

Net income


$ 124


$ 136

Income tax expense


76


84

Interest expense


155


155

Equity in earnings of unconsolidated subsidiaries


(22)


(22)

Loss on early retirement of debt


20


20

Income from operations


353


373

Stock compensation expense


19


19

Depreciation and amortization


158


158

Adjusted EBITDA


$ 530


$ 550






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SOURCE Select Medical Holdings Corporation