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 September 30, 2014

 

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 Number:  001 – 34465 and 001 – 31441

 

SELECT MEDICAL HOLDINGS CORPORATION

 

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

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 such 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 September 30, 2014, Select Medical Holdings Corporation had outstanding 130,925,584 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 Holdings and Select.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Condensed consolidated balance sheets

3

 

 

 

 

Condensed consolidated statements of operations

4

 

 

 

 

Condensed consolidated statements of changes in equity and income

6

 

 

 

 

Condensed consolidated statements of cash flows

7

 

 

 

 

Notes to condensed consolidated financial statements

8

 

 

 

ITEM 2.

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

31

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

55

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

56

 

 

 

PART II

OTHER INFORMATION

56

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

56

 

 

 

ITEM 1A.

RISK FACTORS

58

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

58

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

58

 

 

 

ITEM 5.

OTHER INFORMATION

58

 

 

 

ITEM 6.

EXHIBITS

58

 

 

 

SIGNATURES

 

 

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,319

 

$

11,029

 

$

4,319

 

$

11,029

 

Accounts receivable, net of allowance for doubtful accounts of $40,815 and $43,827 at 2013 and 2014, respectively

 

391,319

 

411,502

 

391,319

 

411,502

 

Current deferred tax asset

 

17,624

 

13,366

 

17,624

 

13,366

 

Prepaid income taxes

 

 

4,220

 

 

4,220

 

Other current assets

 

41,140

 

43,955

 

41,140

 

43,955

 

Total Current Assets

 

454,402

 

484,072

 

454,402

 

484,072

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

509,102

 

524,843

 

509,102

 

524,843

 

Goodwill

 

1,642,633

 

1,641,228

 

1,642,633

 

1,641,228

 

Other identifiable intangibles

 

71,907

 

72,247

 

71,907

 

72,247

 

Other assets

 

139,578

 

139,687

 

139,578

 

139,687

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,817,622

 

$

2,862,077

 

$

2,817,622

 

$

2,862,077

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

12,506

 

$

22,810

 

$

12,506

 

$

22,810

 

Current portion of long-term debt and notes payable

 

17,565

 

9,289

 

17,565

 

9,289

 

Accounts payable

 

88,285

 

90,611

 

88,285

 

90,611

 

Accrued payroll

 

90,011

 

88,256

 

90,011

 

88,256

 

Accrued vacation

 

59,730

 

61,344

 

59,730

 

61,344

 

Accrued interest

 

12,297

 

22,034

 

12,297

 

22,034

 

Accrued other

 

90,508

 

81,190

 

90,508

 

81,190

 

Income taxes payable

 

622

 

 

622

 

 

Total Current Liabilities

 

371,524

 

375,534

 

371,524

 

375,534

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

1,427,710

 

1,525,730

 

1,427,710

 

1,525,730

 

Non-current deferred tax liability

 

96,287

 

94,873

 

96,287

 

94,873

 

Other non-current liabilities

 

91,875

 

91,530

 

91,875

 

91,530

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,987,396

 

2,087,667

 

1,987,396

 

2,087,667

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

11,584

 

10,704

 

11,584

 

10,704

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 140,260,968 shares and 130,925,584 shares issued and outstanding at 2013 and 2014, respectively

 

140

 

131

 

 

 

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

 

 

 

0

 

0

 

Capital in excess of par

 

474,729

 

413,349

 

869,576

 

884,104

 

Retained earnings (accumulated deficit)

 

311,365

 

313,626

 

(83,342

)

(156,998

)

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

 

786,234

 

727,106

 

786,234

 

727,106

 

Non-controlling interest

 

32,408

 

36,600

 

32,408

 

36,600

 

Total Equity

 

818,642

 

763,706

 

818,642

 

763,706

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

2,817,622

 

$

2,862,077

 

$

2,817,622

 

$

2,862,077

 

 

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

 

3



Table of Contents

 

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended September 30,

 

For the Three Months Ended September 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

722,845

 

$

758,069

 

$

722,845

 

$

758,069

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

617,281

 

644,392

 

617,281

 

644,392

 

General and administrative

 

17,740

 

19,719

 

17,740

 

19,719

 

Bad debt expense

 

9,262

 

10,357

 

9,262

 

10,357

 

Depreciation and amortization

 

16,163

 

17,584

 

16,163

 

17,584

 

Total costs and expenses

 

660,446

 

692,052

 

660,446

 

692,052

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

62,399

 

66,017

 

62,399

 

66,017

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Equity in earnings (losses) of unconsolidated subsidiaries

 

(179

)

1,988

 

(179

)

1,988

 

Interest expense

 

(21,252

)

(21,753

)

(21,252

)

(21,753

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

40,968

 

46,252

 

40,968

 

46,252

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

15,761

 

17,956

 

15,761

 

17,956

 

 

 

 

 

 

 

 

 

 

 

Net income

 

25,207

 

28,296

 

25,207

 

28,296

 

 

 

 

 

 

 

 

 

 

 

Less:  Net income attributable to non-controlling interests

 

1,935

 

1,766

 

1,935

 

1,766

 

 

 

 

 

 

 

 

 

 

 

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

 

$

23,272

 

$

26,530

 

$

23,272

 

$

26,530

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.20

 

 

 

 

 

Diluted

 

$

0.17

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.10

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

136,646

 

126,639

 

 

 

 

 

Diluted

 

136,793

 

127,029

 

 

 

 

 

 

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

 

4



Table of Contents

 

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

2,229,473

 

$

2,293,409

 

$

2,229,473

 

$

2,293,409

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

1,867,915

 

1,926,037

 

1,867,915

 

1,926,037

 

General and administrative

 

53,065

 

57,219

 

53,065

 

57,219

 

Bad debt expense

 

27,429

 

32,490

 

27,429

 

32,490

 

Depreciation and amortization

 

47,872

 

51,009

 

47,872

 

51,009

 

Total costs and expenses

 

1,996,281

 

2,066,755

 

1,996,281

 

2,066,755

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

233,192

 

226,654

 

233,192

 

226,654

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(18,747

)

(2,277

)

(17,788

)

(2,277

)

Equity in earnings of unconsolidated subsidiaries

 

1,447

 

4,135

 

1,447

 

4,135

 

Interest expense

 

(66,614

)

(64,032

)

(64,204

)

(64,032

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

149,278

 

164,480

 

152,647

 

164,480

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

57,391

 

63,823

 

58,570

 

63,823

 

 

 

 

 

 

 

 

 

 

 

Net income

 

91,887

 

100,657

 

94,077

 

100,657

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

6,417

 

5,742

 

6,417

 

5,742

 

 

 

 

 

 

 

 

 

 

 

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

 

$

85,470

 

$

94,915

 

$

87,660

 

$

94,915

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

$

0.71

 

 

 

 

 

Diluted

 

$

0.61

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.20

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

136,879

 

129,706

 

 

 

 

 

Diluted

 

137,040

 

130,177

 

 

 

 

 

 

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

 

5



Table of Contents

 

Condensed Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

 

 

Select Medical Holdings Corporation Stockholders

 

 

 

 

 

Comprehensive
Income

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Retained
Earnings

 

Non-
controlling
Interests

 

Balance at December 31, 2013

 

 

 

$

818,642

 

140,261

 

$

140

 

$

474,729

 

$

311,365

 

$

32,408

 

Net income

 

$

99,916

 

99,916

 

 

 

 

 

 

 

94,915

 

5,001

 

Net income - attributable to redeemable non-controlling interests

 

741

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

100,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid to common stockholders

 

 

 

(40,257

)

 

 

 

 

 

 

(40,257

)

 

 

Issuance and vesting of restricted stock

 

 

 

8,391

 

1,295

 

1

 

8,390

 

 

 

 

 

Repurchase of common shares

 

 

 

(129,057

)

(11,403

)

(11

)

(75,906

)

(53,140

)

 

 

Stock option expense

 

 

 

592

 

 

 

 

 

592

 

 

 

 

 

Exercise of stock options

 

 

 

5,545

 

773

 

1

 

5,544

 

 

 

 

 

Distributions to non-controlling interests

 

 

 

(2,241

)

 

 

 

 

 

 

 

 

(2,241

)

Sale of non-controlling interest in subsidiary

 

 

 

1,693

 

 

 

 

 

 

 

 

 

1,693

 

Other

 

 

 

482

 

 

 

 

 

 

 

743

 

(261

)

Balance at September 30, 2014

 

 

 

$

763,706

 

130,926

 

$

131

 

$

413,349

 

$

313,626

 

$

36,600

 

 

 

 

 

 

 

 

Select Medical Corporation Stockholders

 

 

 

 

 

Comprehensive 
Income

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Accumulated 
Deficit

 

Non-
controlling
Interests

 

Balance at December 31, 2013

 

 

 

$

818,642

 

0

 

$

0

 

$

869,576

 

$

(83,342

)

$

32,408

 

Net income

 

$

99,916

 

99,916

 

 

 

 

 

 

 

94,915

 

5,001

 

Net income - attributable to redeemable non-controlling interests

 

741

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

100,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional investment by Holdings

 

 

 

5,545

 

 

 

 

 

5,545

 

 

 

 

 

Dividends declared and paid to Holdings

 

 

 

(169,314

)

 

 

 

 

 

 

(169,314

)

 

 

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

 

 

 

8,983

 

 

 

 

 

8,983

 

 

 

 

 

Distributions to non-controlling interests

 

 

 

(2,241

)

 

 

 

 

 

 

 

 

(2,241

)

Sale of non-controlling interest in subsidiary

 

 

 

1,693

 

 

 

 

 

 

 

 

 

1,693

 

Other

 

 

 

482

 

 

 

 

 

 

 

743

 

(261

)

Balance at September 30, 2014

 

 

 

$

763,706

 

0

 

$

0

 

$

884,104

 

$

(156,998

)

$

36,600

 

 

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

 

6



Table of Contents

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

91,887

 

$

100,657

 

$

94,077

 

$

100,657

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

47,872

 

51,009

 

47,872

 

51,009

 

Provision for bad debts

 

27,429

 

32,490

 

27,429

 

32,490

 

Equity in earnings of unconsolidated subsidiaries

 

(1,447

)

(4,135

)

(1,447

)

(4,135

)

Loss on early retirement of debt

 

18,747

 

2,277

 

17,788

 

2,277

 

Gain from sale of assets and businesses

 

(93

)

(1,236

)

(93

)

(1,236

)

Non-cash stock compensation expense

 

5,403

 

7,391

 

5,403

 

7,391

 

Amortization of debt discount, premium and issuance costs

 

6,507

 

5,651

 

6,418

 

5,651

 

Deferred income taxes

 

3,854

 

2,844

 

3,854

 

2,844

 

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

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(89,237

)

(52,924

)

(89,237

)

(52,924

)

Other current assets

 

(7,642

)

491

 

(7,642

)

491

 

Other assets

 

(3,211

)

(2,267

)

(3,211

)

(2,267

)

Accounts payable

 

6,798

 

2,276

 

6,798

 

2,276

 

Accrued expenses

 

7,678

 

(17

)

10,936

 

(17

)

Income taxes

 

560

 

(4,203

)

1,739

 

(4,203

)

Net cash provided by operating activities

 

115,105

 

140,304

 

120,684

 

140,304

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(45,331

)

(73,350

)

(45,331

)

(73,350

)

Proceeds from sale of assets

 

518

 

 

518

 

 

Investment in businesses

 

(32,430

)

(3,135

)

(32,430

)

(3,135

)

Distributions from unconsolidated subsidiaries

 

 

11,939

 

 

11,939

 

Acquisition of businesses, net of cash acquired

 

(848

)

(1,211

)

(848

)

(1,211

)

Net cash used in investing activities

 

(78,091

)

(65,757

)

(78,091

)

(65,757

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving credit facility

 

580,000

 

675,000

 

580,000

 

675,000

 

Payments on revolving credit facility

 

(645,000

)

(655,000

)

(645,000

)

(655,000

)

Borrowings on credit facility term loans, net of discount

 

298,500

 

 

298,500

 

 

Payments on credit facility term loans

 

(594,668

)

(33,994

)

(594,668

)

(33,994

)

Issuance of 6.375% senior notes, includes premium

 

600,000

 

111,650

 

600,000

 

111,650

 

Repurchase of senior floating rate notes

 

(167,300

)

 

 

 

Repurchase of 7 5/8% senior subordinated notes

 

(70,000

)

 

(70,000

)

 

Borrowings of other debt

 

9,238

 

7,036

 

9,238

 

7,036

 

Principal payments on other debt

 

(7,467

)

(11,696

)

(7,467

)

(11,696

)

Debt issuance costs

 

(18,820

)

(4,434

)

(18,820

)

(4,434

)

Dividends paid to common stockholders

 

(27,929

)

(40,257

)

 

 

Dividends paid to Holdings

 

 

 

(211,754

)

(169,314

)

Repurchase of common stock

 

(10,946

)

(129,057

)

 

 

Proceeds from issuance of common stock

 

 

5,545

 

 

 

Equity investment by Holdings

 

 

 

 

5,545

 

Proceeds from (repayment of) bank overdrafts

 

(10,401

)

10,304

 

(10,401

)

10,304

 

Proceeds from issuance of non-controlling interests

 

 

185

 

 

185

 

Distributions to non-controlling interests

 

(3,072

)

(3,119

)

(3,072

)

(3,119

)

Net cash used in financing activities

 

(67,865

)

(67,837

)

(73,444

)

(67,837

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(30,851

)

6,710

 

(30,851

)

6,710

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

40,144

 

4,319

 

40,144

 

4,319

 

Cash and cash equivalents at end of period

 

$

9,293

 

$

11,029

 

$

9,293

 

$

11,029

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

60,439

 

$

47,782

 

$

54,860

 

$

47,782

 

Cash paid for taxes

 

$

52,977

 

$

65,184

 

$

52,977

 

$

65,184

 

 

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

 

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SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              Basis of Presentation

 

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of September 30, 2014 and for the three and nine month periods ended September 30, 2013 and 2014 have been prepared in accordance with generally accepted accounting principles (“GAAP”).  In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods.  All significant intercompany transactions and balances have been eliminated.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2014.  Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed 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.

 

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, 2013 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2014.

 

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.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue recognition requirements.  The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for the Company in the first quarter of 2017 and early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance,

 

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a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The revised guidance is effective for annual fiscal periods beginning after December 15, 2014. Early adoption is permitted and the Company intends to prospectively adopt ASU No. 2014-08, as applicable.

 

3.  Intangible Assets

 

The gross carrying amounts of the Company’s indefinite-lived intangible assets consist of the following:

 

 

 

December 31,
2013

 

September 30,
2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Goodwill

 

$

1,642,633

 

$

1,641,228

 

Trademarks

 

57,709

 

57,709

 

Certificates of need

 

12,115

 

12,455

 

Accreditations

 

2,083

 

2,083

 

Total

 

$

1,714,540

 

$

1,713,475

 

 

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At September 30, 2014, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 5.7 years, respectively.

 

The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, 2014 are as follows:

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Total

 

 

 

(in thousands)

 

Balance as of December 31, 2013

 

$

1,334,615

 

$

308,018

 

$

1,642,633

 

Goodwill acquired during the period

 

 

1,011

 

1,011

 

Goodwill allocated to contributed business

 

 

(2,406

)

(2,406

)

Purchase accounting adjustment

 

(10

)

 

(10

)

Balance as of September 30, 2014

 

$

1,334,605

 

$

306,623

 

$

1,641,228

 

 

4. Share Repurchase

 

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock.  The program will remain in effect until December 31, 2016, unless extended by the board of directors.  Holdings repurchased 11,285,714 shares of common stock at a total cost of $127.5 million, or an average of $11.30 per share, during the nine months ended September 30, 2014.  The shares were repurchased from Welsh, Carson, Anderson & Stowe IX, L.P. and WCAS Capital Partners IV, L.P. pursuant to stock purchase agreements dated February 26, 2014 and May 5, 2014.  The common stock repurchase program has available capacity of $198.9 million as of September 30, 2014.

 

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5.  Indebtedness

 

The components of long-term debt and notes payable are as follows:

 

 

 

December 31,
2013

 

September 30,
2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

6.375% senior notes (1)

 

$

600,000

 

$

711,522

 

Senior secured credit facilities:

 

 

 

 

 

Revolving loan

 

20,000

 

40,000

 

Term loans (2) 

 

807,815

 

775,662

 

Other

 

17,460

 

7,835

 

Total debt

 

1,445,275

 

1,535,019

 

Less: current maturities

 

17,565

 

9,289

 

Total long-term debt

 

$

1,427,710

 

$

1,525,730

 

 


(1)         Includes unamortized premium of $1.5 million at September 30, 2014.

(2)         Includes unamortized discounts of $6.3 million and $4.5 million at December 31, 2013 and September 30, 2014, respectively.

 

Senior Secured Credit Facilities

 

On June 1, 2011, Select entered into its existing senior secured credit agreement that provided for $1.15 billion in senior secured credit facilities.  The following discussion summarizes amendments and significant transactions affecting its senior secured credit facilities.

 

On August 13, 2012, Select entered into an additional credit extension amendment to its senior secured credit facilities providing for a $275.0 million series A term loan at the same interest rate and with the same term as the original term loan.

 

On February 20, 2013, Select entered into a credit extension amendment to its senior secured credit facilities providing for a $300.0 million series B term loan.  Select used the borrowings under the series B term loan to redeem all of its outstanding 7 5/8% senior subordinated notes due 2015 on March 22, 2013, to finance Holdings’ redemption of all of its senior floating rate notes due 2015 on March 22, 2013 and to repay a portion of the balance outstanding under Select’s revolving credit facility.

 

On May 28, 2013, Select issued and sold $600.0 million aggregate principal amount of 6.375% senior notes due June 1, 2021.  Select used the proceeds of the 6.375% senior notes to pay a portion of the amounts then outstanding on the original term loan and the series A term loan and to pay related fees and expenses.

 

On June 3, 2013, Select amended its existing senior secured credit facilities in order to, among other things:

 

·            extend the maturity date on $293.3 million of its $300.0 million revolving credit facility from June 1, 2016 to March 1, 2018;

·            convert the remaining original term loan and series A term loan to a new series C term loan, and lower the interest rate payable on the series C term loan from Adjusted LIBO plus 3.75%, or Alternate Base Rate plus 2.75%, to Adjusted LIBO plus 3.00%, or Alternate Base Rate plus 2.00%, and amend the

 

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provision of the series C term loan from providing that Adjusted LIBO will at no time be less than 1.75% to providing that Adjusted LIBO will at no time be less than 1.00%;

·            lower the interest rate payable on the series B term loan from Adjusted LIBO plus 3.75%, or Alternate Base Rate plus 2.75%, to Adjusted LIBO plus 3.25%, or Alternate Base Rate plus 2.25%;

·            amend the restrictive covenants governing the senior secured credit facilities in order to allow for unlimited restricted payments so long as there is no event of default under the senior secured credit facilities and the total pro forma ratio of total indebtedness to Consolidated EBITDA (as defined in the senior secured credit facilities) is less than or equal to 2.75 to 1.00; and

·            amend the definition of ‘‘Available Amount’’ in a manner the effect of which was to increase the amount available for investments, restricted payments and payment of specified indebtedness.

 

On March 4, 2014, Select made a principal prepayment of $34.0 million associated with its term loans in accordance with the provision in its senior secured credit facilities agreement that requires mandatory prepayments of term loans resulting from excess cash flow as defined in the senior secured credit facilities.

 

On March 4, 2014, Select amended its senior secured credit facilities in order to, among other things:

 

·                  convert the remaining series B term loan to a new series D term loan, and lower the interest rate payable on the series D term loan from Adjusted LIBO plus 3.25%, or Alternate Base Rate plus 2.25%, to Adjusted LIBO plus 2.75%, or Alternate Base Rate plus 1.75%;

·                  set the maturity date of the series D term loan at December 20, 2016;

·                  convert the remaining series C term loan to a new series E term loan, and lower the interest rate payable on the series E term loan from Adjusted LIBO plus 3.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternate Base Rate plus 2.00%, to Adjusted LIBO plus 2.75% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternate Base Rate plus 1.75%;

·                  set the maturity date of the series E term loan at June 1, 2018;

·                  beginning with the quarter ending March 31, 2014, increase the quarterly compliance threshold set forth in the leverage ratio financial maintenance covenant to a level of 5.00 to 1.00 from 4.50 to 1.00;

·                  provide for a prepayment premium of 1.00% if the senior secured credit facilities are amended at any time prior to March 4, 2015 in the case of the series E term loans and such amendment reduces the yield applicable to such loans; and

·                  amend the definition of “Available Amount” in a manner the effect of which was to increase the amount available for investments, restricted payments and the payment of specified indebtedness.

 

At September 30, 2014, Select’s senior secured credit facilities provide for senior secured financing consisting of:

 

·                  a $300.0 million, revolving credit facility, $293.3 million of which matures on March 1, 2018 and the remaining $6.7 million maturing on June 1, 2016, including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for swingline loans;

·                  a $284.6 million series D term loan, maturing on December 20, 2016; and

·                  a $495.6 million series E term loan, maturing on June 1, 2018.

 

All borrowings under Select’s senior secured credit facilities are subject to the satisfaction of required conditions, including the absence of a default at the time of and after giving effect to such borrowing and the accuracy of the representations and warranties of the borrowers.

 

The interest rates per annum applicable to borrowings under Select’s senior secured credit facilities are, at its option, equal to either an Alternate Base Rate or an Adjusted LIBO rate for a one, two, three or six month

 

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interest period, or a nine or twelve month period if available, in each case, plus an applicable margin percentage. The Alternate Base Rate is the greatest of (1) JPMorgan Chase Bank, N.A.’s prime rate, (2) one-half of 1% over the weighted average of rates on overnight Federal funds as published by the Federal Reserve Bank of New York and (3) the Adjusted LIBO rate from time to time for an interest period of one month, plus 1.00%.  The Adjusted LIBO rate is, with respect to any interest period, the London interbank offered rate for such interest period, adjusted for any applicable statutory reserve requirements.

 

Borrowings under the series D term loan bear interest at a rate equal to Adjusted LIBO plus 2.75%, or Alternate Base Rate plus 1.75%. Borrowings under the series E term loan bear interest at a rate equal to Adjusted LIBO plus 2.75%, or Alternate Base Rate plus 1.75%. The Adjusted LIBO for the series E term loan will at no time be less than 1.00%.

 

Borrowings under the revolving credit facility bear interest at a rate equal to Adjusted LIBO plus a percentage ranging from 2.75% to 3.75%, or Alternate Base Rate plus a percentage ranging from 1.75% to 2.75%, in each case based on Select’s ratio of total indebtedness to Consolidated EBITDA (as defined in the senior secured credit facilities).

 

On the last day of each calendar quarter Select is required to pay each lender a commitment fee in respect of any unused commitments under the revolving credit facility, which is currently 0.50% per annum subject to adjustment based upon the ratio of Select’s total indebtedness to Consolidated EBITDA (as defined in the senior secured credit facilities).

 

Subject to exceptions, Select’s senior secured credit facilities require mandatory prepayments of term loans in amounts equal to:

 

·                  50% (as may be reduced based on Select’s ratio of total indebtedness to Consolidated EBITDA (as defined in the senior secured credit facilities)) of Select’s annual excess cash flow;

·                  100% of the net cash proceeds from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation event, subject to reinvestment rights and certain other exceptions; and

·                  100% of the net cash proceeds from certain incurrences of debt.

 

Beginning on March 31, 2015, the senior secured credit facilities principal amount will amortize as follows:

 

·                  the series D term loan has quarterly principal repayment requirements of $0.7 million until maturity, at which time the remaining balance of $279.5 million is due on December 20, 2016; and

·                  the series E term loan has quarterly principal repayment requirements of $1.3 million until maturity, at which time the remaining balance of $479.2 million is due on June 1, 2018.

 

Select’s senior secured credit facilities are guaranteed by Holdings, Select and substantially all of its current subsidiaries, and will be guaranteed by substantially all of Select’s future subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of its capital stock and the capital stock of its subsidiaries.

 

Select’s senior secured credit facilities require that it comply on a quarterly basis with certain financial covenants, including a maximum leverage ratio test.

 

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In addition, Select’s senior secured credit facilities include negative covenants, subject to significant exceptions, restricting or limiting its ability and the ability of Holdings and Select’s restricted subsidiaries, to, among other things:

 

·                  incur, assume, permit to exist or guarantee additional debt and issue or sell or permit any subsidiary to issue or sell preferred stock;

·                  amend, modify or waiver any rights under the certificate of indebtedness, credit agreements, certificate of incorporation, bylaws or other organizational documents which would be materially adverse to the creditors;

·                  pay dividends or other distributions on, redeem, repurchase, retire or cancel capital stock;

·                  purchase or acquire any debt or equity securities of, make any loans or advances to, guarantee any obligation of, or make any other investment in, any other company;

·                  incur or permit to exist certain liens on property or assets owned or accrued or assign or sell any income or revenues with respect to such property or assets;

·                  sell or otherwise transfer property or assets to, purchase or otherwise receive property or assets from, or otherwise enter into transactions with affiliates;

·                  merge, consolidate or amalgamate with another company or permit any subsidiary to merge, consolidate or amalgamate with another company;

·                  sell, transfer, lease or otherwise dispose of assets, including any equity interests;

·                  repay, redeem, repurchase, retire or cancel any subordinated debt;

·                  incur capital expenditures;

·                  engage to any material extent in any business other than business of the type currently conducted by Select or reasonably related businesses; and

·                  incur obligations that restrict the ability of its subsidiaries to incur or permit to exist any liens on Select’s property or assets or to make dividends or other payments to Select.

 

Select’s senior secured credit facilities also contain certain representations and warranties, affirmative covenants and events of default. The events of default include payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting Select’s senior secured credit facilities to be in full force and effect and any change of control. If such an event of default occurs, the lenders under Select’s senior secured credit facilities will be entitled to take various actions, including the acceleration of amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor.

 

At September 30, 2014, Select had outstanding borrowings of $780.2 million (excluding unamortized original issue discounts of $4.5 million) under the term loans and borrowings of $40.0 million (excluding letters of credit) under the revolving loan portion of the senior secured credit facilities.  Select had $219.7 million of availability under its revolving credit facility (after giving effect to $40.3 million of outstanding letters of credit) at September 30, 2014.

 

The applicable margin percentage for borrowings under Select’s revolving loan is subject to change based upon the ratio of Select’s leverage ratio (as defined in the senior secured credit facility).  The applicable interest rate for revolving loans as of September 30, 2014 was (1) Alternate Base plus 2.75% for alternate base rate loans and (2) LIBO plus 3.75% for adjusted LIBO rate loans.

 

Select’s senior secured credit facility requires it to maintain certain leverage ratios (as defined in the senior secured credit facility). For the four consecutive fiscal quarters ended September 30, 2014, Select was

 

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required to maintain its leverage ratio (its ratio of total indebtedness to consolidated EBITDA) at less than 5.00 to 1.00. Select’s leverage ratio was 4.03 to 1.00 as of September 30, 2014.

 

Senior Notes

 

On March 11, 2014, Select issued and sold $110.0 million aggregate principal amount of additional 6.375% senior notes due June 1, 2021 (the “Additional Notes”), at 101.50% of the aggregate principal amount resulting in gross proceeds of $111.7 million.  The notes were issued as additional notes under the indenture pursuant to which it previously issued $600.0 million of 6.375% senior notes due June 1, 2021 (the “Existing Notes” and, together with the Additional notes, the “Notes”).  The Additional Notes are treated as a single series with the Existing Notes and have the same terms as those of the Existing Notes.

 

Interest on the Notes accrues at the rate of 6.375% per annum and is payable semi-annually in cash in arrears on June 1 and December 1 of each year. The Notes are Select’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The Notes are fully and unconditionally guaranteed by all of Select’s wholly owned subsidiaries. The Notes are guaranteed, jointly and severally, by Select’s direct or indirect existing and future domestic restricted subsidiaries other than certain non-guarantor subsidiaries.

 

Select may redeem some or all of the Notes prior to June 1, 2016 by paying a “make-whole” premium. Select may redeem some or all of the Notes on or after June 1, 2016 at specified redemption prices. In addition, prior to June 1, 2016, Select may redeem up to 35% of the Notes with the net proceeds of certain equity offerings at a price of 106.375% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.

 

The indenture relating to the Notes contains covenants that, among other things, limit Select’s ability and the ability of certain of its subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. In addition, the Indenture requires, among other things, Select to provide financial and current reports to holders of the Notes or file such reports electronically with the SEC. These covenants are subject to a number of exceptions, limitations and qualifications set forth in the Indenture.

 

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Maturities of Long-Term Debt and Notes Payable

 

Maturities of the Company’s long-term debt for the period from October 1, 2014 through December 31, 2014 and the years after 2014 are approximately as follows and are presented including the discounts on the senior secured credit facility term loans and premium on the senior notes (in thousands):

 

October 1, 2014 – December 31, 2014

 

$

1,967

 

2015

 

9,603

 

2016

 

287,025

 

2017

 

4,277

 

2018

 

520,216

 

2019 and beyond

 

711,931

 

 

Loss on Early Retirement of Debt

 

On March 4, 2014, Select amended its term loans under its senior secured credit facilities.  During the nine months ended September 30, 2014, the Company recognized a loss of $2.3 million for unamortized debt issuance costs, unamortized original issue discount, and certain fees incurred related to term loan modifications.

 

On May 28, 2013, Select repaid a portion of its original term loan and series A term loan under its senior secured credit facilities, and on June 3, 2013, Select amended its existing senior secured credit facilities.  During the nine months ended September 30, 2013, the Company recognized a loss of $17.3 million for unamortized debt issuance costs, unamortized original issue discount and certain debt issuance costs associated with refinancing activities.

 

On March 22, 2013, the Company redeemed Select’s 7 5/8% senior subordinated notes due 2015 and redeemed Holdings’ senior floating rate notes due 2015.  During the three months ended March 31, 2013, the Company recognized a loss on early retirement of debt of $1.5 million for unamortized debt issuance costs of which approximately $0.5 million was associated with Select’s redemption of its 7 5/8% senior subordinated notes due 2015 and approximately $1.0 million was associated with Holdings’ redemption of its senior floating rate notes due 2015.

 

6.  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 facilities was $827.8 million and $815.7 million at December 31, 2013 and September 30, 2014, respectively.  The fair value of Select’s senior secured credit facilities was $834.7 million and $807.6 million at December 31, 2013 and September 30, 2014, respectively.  The fair value of Select’s senior secured credit facilities was based on quoted market prices for this debt in the syndicated loan market.

 

The carrying value of Select’s 6.375% senior notes was $600.0 million and $711.5 million at December 31, 2013 and September 30, 2014, respectively.  The fair value of Select’s 6.375% senior notes was $586.5 million and $713.3 million at December 31, 2013 and September 30, 2014, respectively.  The fair value of this debt was based on quoted market prices.

 

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The Company considers the inputs in the valuation process of its senior secured credit facility and 6.375% senior notes to be Level 2 in the fair value hierarchy.  Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly which includes quoted prices for identical assets or liabilities in markets that are not active.

 

7.  Segment Information

 

The Company’s reportable segments consist of (i) specialty hospitals and (ii) outpatient rehabilitation. Other activities include the Company’s corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. 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. The segment results of Holdings are identical to those of Select.

 

 

 

Three Months Ended September 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

532,610

 

$

190,223

 

$

12

 

$

722,845

 

Adjusted EBITDA

 

75,280

 

21,619

 

(16,471

)

80,428

 

Total assets

 

2,232,756

 

502,815

 

106,853

 

2,842,424

 

Capital expenditures

 

14,157

 

2,802

 

410

 

17,369

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

556,335

 

$

201,720

 

$

14

 

$

758,069

 

Adjusted EBITDA

 

80,950

 

23,012

 

(17,162

)

86,800

 

Total assets

 

2,223,808

 

531,285

 

106,984

 

2,862,077

 

Capital expenditures

 

18,167

 

3,430

 

1,260

 

22,857

 

 

16



Table of Contents

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,649,747

 

$

579,404

 

$

322

 

$

2,229,473

 

Adjusted EBITDA

 

265,020

 

70,506

 

(49,059

)

286,467

 

Total assets

 

2,232,756

 

502,815

 

106,853

 

2,842,424

 

Capital expenditures

 

35,257

 

8,646

 

1,428

 

45,331

 

 

 

 

Nine Months Ended September 30, 2014

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,678,793

 

$

614,368

 

$

248

 

$

2,293,409

 

Adjusted EBITDA

 

261,788

 

74,433

 

(51,239

)

284,982

 

Total assets

 

2,223,808

 

531,285

 

106,984

 

2,862,077

 

Capital expenditures

 

59,465

 

9,606

 

4,279

 

73,350

 

 

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

 

 

 

Three Months Ended September 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

75,280

 

$

21,619

 

$

(16,471

)

 

 

 

 

Depreciation and amortization

 

(12,267

)

(2,979

)

(917

)

 

 

 

 

Stock compensation expense

 

 

 

(1,866

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

63,013

 

$

18,640

 

$

(19,254

)

$

62,399

 

$

62,399

 

Equity in losses of unconsolidated subsidiaries

 

 

 

 

 

 

 

(179

)

(179

)

Interest expense

 

 

 

 

 

 

 

(21,252

)

(21,252

)

Income before income taxes

 

 

 

 

 

 

 

$

40,968

 

$

40,968

 

 

17



Table of Contents

 

 

 

Three Months Ended September 30, 2014

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

80,950

 

$

23,012

 

$

(17,162

)

 

 

 

 

Depreciation and amortization

 

(13,445

)

(3,210

)

(929

)

 

 

 

 

Stock compensation expense

 

 

 

(3,199

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

67,505

 

$

19,802

 

$

(21,290

)

$

66,017

 

$

66,017

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

1,988

 

1,988

 

Interest expense

 

 

 

 

 

 

 

(21,753

)

(21,753

)

Income before income taxes

 

 

 

 

 

 

 

$

46,252

 

$

46,252

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

265,020

 

$

70,506

 

$

(49,059

)

 

 

 

 

Depreciation and amortization

 

(36,061

)

(8,949

)

(2,862

)

 

 

 

 

Stock compensation expense

 

 

 

(5,403

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
 Corporation

 

Income (loss) from operations

 

$

228,959

 

$

61,557

 

$

(57,324

)

$

233,192

 

$

233,192

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(18,747

)

(17,788

)

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

1,447

 

1,447

 

Interest expense

 

 

 

 

 

 

 

(66,614

)

(64,204

)

Income before income taxes

 

 

 

 

 

 

 

$

149,278

 

$

152,647

 

 

18



Table of Contents

 

 

 

Nine Months Ended September 30, 2014

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

261,788

 

$

74,433

 

$

(51,239

)

 

 

 

 

Depreciation and amortization

 

(38,607

)

(9,647

)

(2,755

)

 

 

 

 

Stock compensation expense

 

 

 

(7,319

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select 
Medical 
Holdings 
Corporation

 

Select 
Medical 
Corporation

 

Income (loss) from operations

 

$

223,181

 

$

64,786

 

$

(61,313

)

$

226,654

 

$

226,654

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(2,277

)

(2,277

)

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

4,135

 

4,135

 

Interest expense

 

 

 

 

 

 

 

(64,032

)

(64,032

)

Income before income taxes

 

 

 

 

 

 

 

$

164,480

 

$

164,480

 

 

8.  Income per Common Share

 

Holdings 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. The following table sets forth for the periods indicated the calculation of income per common share in Holdings’ 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 income per common share, respectively:

 

 

 

For the Three Months 
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation

 

$

23,272

 

$

26,530

 

$

85,470

 

$

94,915

 

Less: Earnings allocated to unvested restricted stockholders

 

497

 

808

 

1,802

 

2,519

 

Net income available to common stockholders

 

$

22,775

 

$

25,722

 

$

83,668

 

$

92,396

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares — basic

 

136,646

 

126,639

 

136,879

 

129,706

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

147

 

390

 

161

 

471

 

Weighted average shares — diluted

 

136,793

 

127,029

 

137,040

 

130,177

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

$

0.17

 

$

0.20

 

$

0.61