MECHANICSBURG, Pa., Nov. 10 /PRNewswire/ -- Select Medical Corporation (“Select”) today announced results for its third quarter and nine months ended September 30, 2006.
On February 24, 2005, Select consummated a merger with a wholly-owned subsidiary of Select Medical Holdings Corporation (“Holdings”), pursuant to which Select became a wholly-owned subsidiary of Holdings. Holdings is owned by an investor group that includes Welsh, Carson, Anderson & Stowe IX, LP (“Welsh Carson”), Thoma Cressey Equity Partners, Inc. (“Thoma Cressey”) and members of Select’s senior management. As a result of the merger, Select’s assets and liabilities have been adjusted to their fair value as of the closing. Select also experienced an increase in aggregate outstanding indebtedness as a result of financing transactions associated with the merger. Accordingly, amortization expense and interest expense are higher in periods following the merger. Additionally, certain costs associated with the merger are reflected in the 2005 income statement periods. As a result, the financial statements for the periods before and after the merger are not comparable in certain respects.
For the third quarter ended September 30, 2006, net operating revenues decreased 3.6% to $443.9 million compared to $460.7 million for the same quarter, prior year. Income from operations was $54.3 million compared to $53.8 million for the same quarter, prior year. Net income was $16.1 million compared to $17.8 million for the same quarter, prior year. Net income before interest, income taxes, depreciation and amortization, other income, income from discontinued operations, loss on early retirement of debt, merger related charges, stock compensation expense, long-term incentive compensation and minority interest (“Adjusted EBITDA”) for the third quarter ended September 30, 2006 decreased 16.9% to $67.7 million compared to $81.5 million for the same quarter, prior year. A reconciliation of net income to Adjusted EBITDA is attached to this release.
For the nine months ended September 30, 2006, net operating revenues increased 0.4% to $1,405.8 million compared to $1,400.5 million for the same period, prior year. Income from operations was $198.8 million compared to $54.3 million for the same period, prior year. Net income was $85.4 million compared to a loss of $39.9 million for the same period, prior year. As a result of the merger, Select incurred substantial costs related to stock compensation expense, loss on early retirement of debt and merger related charges that contributed to the lower income from operations and net loss experienced for the combined nine months ended September 30, 2005. Adjusted EBITDA for the nine months ended September 30, 2006 declined 6.3% to $236.5 million compared to $252.5 million for the same period, prior year. A reconciliation of net income to Adjusted EBITDA is attached to this release.
On March 1, 2006, a subsidiary of Select sold all the issued and outstanding shares of Canadian Back Institute Limited (“CBIL”) for approximately C$89.8 million in cash (US $79.0 million). CBIL comprised Select’s entire Canadian operations. As a result of the sale, the operating results of CBIL have been reclassified and reported as discontinued operations for all reported periods, and its assets and liabilities have been reclassified as held for sale on Select’s December 31, 2005 balance sheet.
Specialty Hospitals
At September 30, 2006, Select operated 93 long-term acute care hospitals and four acute medical rehabilitation hospitals. This compares to 97 long- term acute care hospitals and four acute medical rehabilitation hospitals operated at September 30, 2005. For the third quarter of 2006, net operating revenues for all of Select’s hospitals decreased 3.7% to $329.3 million compared to $341.8 million for the same quarter, prior year. Total patient days for the third quarter of 2006 were 236,094, admissions were 9,485 and net revenue per patient day was $1,361. This compares to 242,850 patient days, 9,725 admissions and net revenue per patient day of $1,385 for the same quarter, prior year. For the hospitals opened or acquired as of January 1, 2005 and operated by Select throughout both periods, patient days in the third quarter of 2006 were 231,818 and admissions were 9,354, compared to 234,808 patient days and 9,453 admissions in the same quarter, prior year. Adjusted EBITDA for the segment for the third quarter decreased 21.6% to $60.8 million compared to $77.6 million for the same quarter, prior year. The Adjusted EBITDA margin for the segment was 18.5% for the third quarter of 2006, compared to 22.7% for the same quarter, prior year. The Adjusted EBITDA margin for the hospitals opened or acquired as of January 1, 2005 and operated by Select throughout both periods was 19.7% for the third quarter of 2006, compared to 23.1% for the same quarter, prior year. The decline in the Specialty Hospitals’ net operating revenues and Adjusted EBITDA is primarily a result of a decrease in Medicare net revenues due to LTACH regulatory changes that have reduced the payment rates and a decline in Medicare volume. See “LTACH Regulations” below for a description of these regulatory changes.
For the nine months ended September 30, 2006, net operating revenues for all of Select’s hospitals increased 1.8% to $1,049.8 million compared to $1,031.4 million for the same period, prior year. Total patient days for the nine months ended September 30, 2006 were 734,070, admissions were 30,122 and net revenue per patient day was $1,401. This compares to 739,860 patient days, 30,056 admissions and net revenue per patient day of $1,371 for the same period, prior year. For the hospitals opened or acquired as of January 1, 2005 and operated by Select throughout both periods, patient days for the nine months ended September 30, 2006 were 718,020 and admissions were 29,539, compared to 710,848 patient days and 29,045 admissions in the same period, prior year. Adjusted EBITDA for the segment decreased 7.3% to $218.2 million compared to $235.3 million for the same period, prior year. The Adjusted EBITDA margin for the segment was 20.8% for the nine months ended September 30, 2006, compared to 22.8% for the same period, prior year. The Adjusted EBITDA margin for the hospitals opened or acquired as of January 1, 2005 and operated by Select throughout both periods was 21.8% for the nine months ended September 30, 2006, compared to 23.3% for the same period, prior year. The decline in Adjusted EBITDA for the nine months ended September 30, 2006 is primarily the result of the decrease in the Adjusted EBITDA that occurred in the third quarter as described above.
Outpatient Rehabilitation
At September 30, 2006, Select operated 605 outpatient clinics. This compares to 621 outpatient clinics at September 30, 2005. Patient visits for the third quarter were 714,064 compared to 805,018 for the same quarter, prior year. For the third quarter of 2006, net operating revenues decreased 3.6% to $114.0 million compared to $118.3 million for the same quarter, prior year. The decline in net operating revenues and patient visits was principally related to a decline in the number of clinics we own and operate and a decline in the volume of visits per clinic. We are continuing to experience declines in our patient visits in a number of markets that result from physicians opening competing physical therapy practices. Adjusted EBITDA for the third quarter of 2006 increased 2.8% to $15.7 million compared to $15.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the quarter was 13.8% compared to 12.9% in the same quarter, prior year. Net revenue per visit was $95 for the third quarter of 2006 compared to $89 for the same quarter, prior year.
Patient visits for the nine months ended September 30, 2006 were 2,261,080 compared to 2,532,157 for the same period, prior year. For the nine months ended September 30, 2006, net operating revenues declined 2.9% to $354.0 million compared to $364.4 million for the same period, prior year. Adjusted EBITDA for the nine months ended September 30, 2006 declined 6.7% to $48.9 million compared to $52.4 million for the same period, prior year. The Adjusted EBITDA margin for the nine months ended September 30, 2006 was 13.8% compared to 14.4% in the same period, prior year. Net revenue per visit was $93 for the nine months ended September 30, 2006 compared to $89 for the same period, prior year.
LTACH Regulations
On May 2, 2006, CMS released its final annual payment rate updates for the 2007 LTCH-PPS rate year (affecting discharges and cost reporting periods beginning on or after July 1, 2006 and before July 1, 2007). The May 2006 final rule made several changes to LTCH-PPS payment methodologies and amounts.
For discharges occurring on or after July 1, 2006, the rule changes the payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for each LTC-DRG (referred to as “short-stay outlier” or “SSO” cases). Previously, payment for these patients was based on the lesser of (1) 120 percent of the cost of the case; (2) 120 percent of the LTC-DRG specific per diem amount multiplied by the patient’s length of stay; or (3) the full LTC-DRG payment. The final rule modifies the limitation in clause (1) above to reduce payment for SSO cases to 100 percent (rather than 120 percent) of the cost of the case. The final rule also adds a fourth limitation, capping payment for SSO cases at a per diem rate derived from blending 120 percent of the LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital inpatient prospective payment system (“IPPS”). Under this methodology, as a patient’s length of stay increases, the percentage of the per diem amount based upon the IPPS component will decrease and the percentage based on the LTC-DRG component will increase.
In addition, for discharges occurring on or after July 1, 2006, the final rule provides for (i) a zero-percent update for the 2007 LTCH-PPS rate year to the LTCH-PPS standard federal rate used as a basis for LTCH-PPS payments; (ii) the elimination of the surgical case exception to the three-day or less interruption of stay policy, under which surgical exception Medicare reimburses a general acute care hospital directly for surgical services furnished to a long-term acute care hospital patient during a brief interruption of stay from the long-term acute care hospital, rather than requiring the long-term acute care hospital to bear responsibility for such surgical services; and (iii) increasing the costs that a long-term acute care hospital must bear before Medicare will make additional payments for a case under its high-cost outlier policy for the 2007 LTCH-PPS rate year.
CMS estimates that the changes in the May 2006 final rule will result in an approximately 3.7 percent decrease in LTCH Medicare payments-per-discharge as compared to the 2006 rate year, largely attributable to the revised SSO payment methodology. Based upon Select’s historical Medicare patient volumes and revenues, Select expects that the May 2006 final rule will reduce Medicare revenues associated with SSO cases and high cost outlier cases to its long- term acute care hospitals by approximately $30.0 million on an annual basis. For the three months ended September 30, 2006, Select estimates the reduction in Medicare payments for discharges occurring during this period related to the rule change approximated $7.2 million.
Additionally, had CMS updated the LTCH-PPS standard federal rate by the 2007 estimated market basket index of 3.4 percent rather than applying the zero-percent update, Select estimates that it would have received approximately $31.0 million in additional annual Medicare revenues, based on Select’s historical Medicare patient volumes and revenues (such revenues would have been paid to Select’s hospitals for discharges beginning on or after July 1, 2006).
Conference Call
Select will host a conference call regarding the third quarter results on Monday, November 13, 2006, at 11:00am EST. The domestic dial-in number for the call is 1-866-261-2650. The international dial-in number is 1-703-639-1221.
For those unable to participate in the conference call, a replay will be available at Select Medical Corporation’s website, http://www.selectmedicalcorp.com.
Select Medical Corporation is a leading operator of specialty hospitals in the United States. Select currently operates 93 long-term acute care hospitals in 26 states. Select operates four acute medical rehabilitation hospitals in New Jersey. Select is also a leading operator of outpatient rehabilitation clinics in the United States, with approximately 605 locations. Select also provides medical rehabilitation services on a contract basis at nursing homes, hospitals, assisted living and senior care centers, schools and worksites. Information about Select is available at http://www.selectmedicalcorp.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. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to those discussed in filings made by Select with the Securities and Exchange Commission. Many of the factors that will determine Select’s future results are beyond the ability of management to control or predict. Readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. Select undertakes no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
I. Condensed Consolidated Statements of Operations (In thousands) (unaudited) For the Three Months Ended September 30, 2005 and 2006 % 2005 2006 Change Net operating revenues $460,658 $443,872 (3.6)% Costs and expenses: Cost of services 363,480 362,070 (0.4)% General and administrative 27,221 9,762 (64.1)% Bad debt expense 4,378 5,333 21.8% Depreciation and amortization 11,828 12,394 4.8% Income from operations 53,751 54,313 1.0% Other income (expense) 247 (3,124) N/M Interest income 241 319 32.4% Interest expense (25,467) (24,348) (4.4)% Income from continuing operations before minority interests and income taxes 28,772 27,160 (5.6)% Minority interests 494 369 (25.3)% Income from continuing operations before income taxes 28,278 26,791 (5.3)% Income tax expense 11,523 10,652 (7.6)% Income from continuing operations 16,755 16,139 (3.7)% Income from discontinued operations, net of tax 1,061 - (100.0)% Net income $17,816 $16,139 (9.4)% II. Condensed Consolidated Statements of Operations (in thousands) (unaudited) For the Nine Months Ended September 30, 2005 and 2006 Predecessor Successor (1) (1) Combined (2) Period from Period from January 1 February 25 Nine Months through through Ended February September September 24, 2005 30, 2005 30, 2005 Net operating revenues $277,736 $1,122,748 $1,400,484 Costs and expenses: Cost of services 244,321 875,566 1,119,887 General and administrative 122,509 48,960 171,469 Bad debt expense 6,588 14,244 20,832 Depreciation and amortization 5,933 28,110 34,043 Income (loss) from operations (101,615) 155,868 54,253 Loss on early retirement of debt (42,736) - (42,736) Merger related charges (12,025) - (12,025) Other income 267 658 925 Interest income 523 511 1,034 Interest expense (4,651) (60,121) (64,772) Income (loss) from continuing operations before minority interests, and income taxes (160,237) 96,916 (63,321) Minority interests 330 1,350 1,680 Income (loss) from continuing operations before income taxes (160,567) 95,566 (65,001) Income tax expense (benefit) (59,794) 38,623 (21,171) Income (loss) from continuing operations (100,773) 56,943 (43,830) Income from discontinued operations, net of tax (includes pretax gain of $13,950 in 2006) 522 3,367 3,889 Net income (loss) $(100,251) $60,310 $(39,941) Successor (1) Nine Months Ended September 30, 2006 % Change Net operating revenues $1,405,756 0.4% Costs and expenses: Cost of services 1,119,767 (0.0)% General and administrative 33,511 (80.5)% Bad debt expense 18,766 (9.9)% Depreciation and amortization 34,955 2.7% Income (loss) from operations 198,757 266.4% Loss on early retirement of debt - N/M Merger related charges - N/M Other income 918 (0.8)% Interest income 738 (28.6)% Interest expense (72,615) 12.1% Income (loss) from continuing operations before minority interests, and income taxes 127,798 N/M Minority interests 1,095 (34.8)% Income (loss) from continuing operations before income taxes 126,703 N/M Income tax expense (benefit) 51,278 342.2% Income (loss) from continuing operations 75,425 N/M Income from discontinued operations, net of tax (includes pretax gain of $13,950 in 2006) 10,018 157.6% Net income (loss) $85,443 N/M (1) On February 24, 2005, Select Medical Corporation (“Select”) merged with a subsidiary of Select Medical Holdings Corporation (“Holdings”) and became a wholly owned subsidiary of Holdings. Select’s financial position and results of operations prior to the Merger are presented separately in the consolidated financial statements as “Predecessor” financial statements, while the financial position and results of operations following the Merger are presented as “Successor” financial statements. Due to the revaluation of assets as a result of purchase accounting associated with the Merger, the pre-merger financial statements are not comparable with those after the Merger in certain respects. (2) Although the Predecessor and Successor results are not comparable by definition in certain respects due to the Merger and the resulting revaluation, for ease of comparison, the financial data for the period after the merger, February 25, 2005 through September 30, 2005 (Successor period), has been added to the financial data for the period from January 1, 2005 through February 24, 2005 (Predecessor period), to arrive at the combined nine months ended September 30, 2005. III. Condensed Consolidated Balance Sheets (In thousands) (unaudited) December 31, September 30, 2005 2006 Assets Cash $35,861 $5,040 Restricted cash 6,345 5,247 Accounts receivable, net 256,798 247,972 Current deferred tax asset 59,135 57,892 Prepaid taxes 4,110 - Other assets held for sale 13,876 - Other current assets 19,725 16,847 Total Current Assets 395,850 332,998 Property and equipment, net 248,541 330,106 Goodwill 1,305,210 1,319,018 Other identifiable intangibles 86,789 81,456 Other assets held for sale 61,388 - Other assets 65,591 62,518 Total Assets $2,163,369 $2,126,096 Liabilities and Stockholder’s Equity Payables and accruals $296,765 $264,288 Income taxes payable - 22,346 Current liabilities held for sale 4,215 - Current portion of long term debt 6,516 6,309 Total Current Liabilities 307,496 292,943 Long term debt, net of current portion 1,315,764 1,231,039 Non-current deferred tax liability 25,771 39,198 Non-current liabilities held for sale 3,817 - Minority interests 4,356 2,285 Stockholder’s equity 506,165 560,631 Total Liabilities and Stockholder’s Equity $2,163,369 $2,126,096 IV. Key Statistics (unaudited) For the Three Months Ended September 30, 2005 and 2006 % 2005 2006 Change Specialty Hospitals (a) Number of hospitals - end of period 101 97 (4.0)% Net operating revenues (,000) $341,835 $329,324 (3.7)% Number of patient days 242,850 236,094 (2.8)% Number of admissions 9,725 9,485 (2.5)% Net revenue per patient day (b) $1,385 $1,361 (1.7)% Adjusted EBITDA (,000) $77,571 $60,812 (21.6)% Adjusted EBITDA margin - all hospitals 22.7% 18.5% (18.5)% Adjusted EBITDA margin - same store hospitals (c) 23.1% 19.7% (14.7)% Outpatient Rehabilitation (d) Number of clinics - end of period 621 605 (2.6)% Net operating revenues (,000) $118,263 $114,043 (3.6)% Number of visits 805,018 714,064 (11.3)% Revenue per visit (e) $89 $95 6.7% Adjusted EBITDA (,000) $15,302 $15,737 2.8% Adjusted EBITDA margin 12.9% 13.8% 7.0% (a) Specialty hospitals consist of long-term acute care hospitals and acute medical rehabilitation hospitals. (b) Net revenue per patient day is calculated by dividing specialty hospital patient service revenue by the total number of patient days. (c) Adjusted EBITDA margin - same store hospitals represents the Adjusted EBITDA margin for those hospitals opened or acquired on or before January 1, 2005 and operated throughout both periods. (d) Outpatient rehabilitation information for 2005 has been restated to remove the clinics operated by CBIL, which is being reported as discontinued operations. Occupational health clinics have been reclassified as managed clinics. (e) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include managed clinics or contract services revenue. V. Key Statistics (unaudited) For the Nine Months Ended September 30, 2005 and 2006 % 2005 2006 Change Specialty Hospitals (a) Number of hospitals - end of period 101 97 (4.0)% Net operating revenues (,000) $1,031,387 $1,049,768 1.8% Number of patient days 739,860 734,070 (0.8)% Number of admissions 30,056 30,122 0.2% Net revenue per patient day (b) $1,371 $1,401 2.2% Adjusted EBITDA (,000) $235,311 $218,203 (7.3)% Adjusted EBITDA margin - all hospitals 22.8% 20.8% (8.8)% Adjusted EBITDA margin - same store hospitals (c) 23.3% 21.8% (6.4)% Outpatient Rehabilitation (d) Number of clinics - end of period 621 605 (2.6)% Net operating revenues (,000) $364,363 $353,974 (2.9)% Number of visits 2,532,157 2,261,080 (10.7)% Revenue per visit (e) $89 $93 4.5% Adjusted EBITDA (,000) $52,414 $48,920 (6.7)% Adjusted EBITDA margin 14.4% 13.8% (4.2)% (a) Specialty hospitals consist of long-term acute care hospitals and acute medical rehabilitation hospitals. (b) Net revenue per patient day is calculated by dividing specialty hospital patient service revenue by the total number of patient days. (c) Adjusted EBITDA margin - same store hospitals represents the Adjusted EBITDA margin for those hospitals opened or acquired on or before January 1, 2005 and operated throughout both periods. (d) Outpatient rehabilitation information for 2005 has been restated to remove the clinics operated by CBIL, which is being reported as discontinued operations. Occupational health clinics have been reclassified as managed clinics. (e) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include managed clinics or contract services revenue. VI. Net Income to Adjusted EBITDA Reconciliation (In thousands) (unaudited) For the Three and Nine Months Ended September 30, 2005 and 2006 The following table reconciles net income (loss) to Adjusted EBITDA for Select. Adjusted EBITDA is used by Select to report its segment performance in accordance with SFAS No. 131. Adjusted EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization, other income, income from discontinued operations, loss on early retirement of debt, merger related charges, stock compensation expense, long-term incentive compensation and minority interest. We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. Successor (1) Three Months Ended Predecessor September 30, (1) Period from January 1 through February 24, 2005 2006 2005 Net income (loss) $17,816 $16,139 $(100,251) Income from discontinued operations, net of tax (1,061) - (522) Income tax expense (benefit) 11,523 10,652 (59,794) Minority interest 494 369 330 Interest expense, net 25,226 24,029 4,128 Other expense (income) (247) 3,124 (267) Loss on early retirement of debt - - 42,736 Merger related charges - - 12,025 Stock compensa
