Select Medical Holdings Corporation Announces Results for Fourth Quarter and Year Ended December 31, 2010

MECHANICSBURG, Pa., March 3, 2011 /PRNewswire/ -- Select Medical Holdings Corporation ("Select") (NYSE: SEM), today announced results for its fourth quarter and year ended December 31, 2010.

For the fourth quarter ended December 31, 2010, net operating revenues increased 11.1% to $637.4 million compared to $573.5 million for the same quarter, prior year.  Income from operations decreased 30.0% to $49.0 million compared to $69.9 million for the same quarter, prior year.  Net income attributable to Select decreased to $20.9 million compared to $29.9 million for the same quarter, prior year.   Net income before interest, income taxes, depreciation and amortization, gain on early retirement of debt, stock compensation expense, other income (expense), equity in losses of unconsolidated subsidiaries and long-term incentive compensation ("Adjusted EBITDA") for the fourth quarter decreased 23.6% to $67.2 million compared to $87.9 million for the same quarter, prior year. Our Adjusted EBITDA in the fourth quarter was adversely affected principally by (1) one time charges and integration issues of approximately $12.8 million related to the Regency Hospital Company, L.L.C. ("Regency") transaction, (2) a decrease in the specialty hospital per patient day rates from the same period in the prior year of $57 per patient day, and (3) a decline of $5.6 million in the Adjusted EBITDA of the contract services business portion of Select's outpatient operations from the same period in the prior year.  A reconciliation of net income to Adjusted EBITDA is attached to this release. Income per common share for the fourth quarter ended December 31, 2010 was $0.13 on a fully diluted basis compared to income per common share for the quarter ended December 31, 2009 of $0.19.

For the year ended December 31, 2010, net operating revenues increased 6.7% to $2,390.3 million compared to $2,239.9 million for the prior year. Income from operations increased 0.1% to $236.1 million compared to $235.8 million for the prior year. Net income attributable to Select increased 3.1% to $77.6 million compared to $75.3 million for the prior year.  Adjusted EBITDA for the year ended December 31, 2010 decreased 7.0% to $307.1 million compared to $330.2 million for the prior year.  A reconciliation of net income to Adjusted EBITDA is attached to this release.

Income per common share for the year ended December 31, 2010 was $0.48 on a fully diluted basis.  Income per common share for the year ended December 31, 2009 was $0.61 on a fully diluted basis, which included non-recurring charges related to Select's IPO for long-term incentive compensation and stock compensation expense and gains related to the early retirement of debt.  Excluding the early retirement of debt and the expenses related to the IPO, on an adjusted basis income available to common stockholders was $0.67 per diluted share for the year ended December 31, 2009.  A reconciliation of net income per share to adjusted net income per share is attached to this release.

For the year ended December 31, 2010, Select's weighted average diluted common shares outstanding were 159,442,000, compared to 86,045,000 for the prior year. This increase in common share count was primarily due to the completion of Select's IPO on September 30, 2009.

Specialty Hospitals

The specialty hospital key statistics are presented on a schedule attached to this release.  For the fourth quarter of 2010, net operating revenues for all of Select's hospitals increased 16.5% to $467.6 million compared to $401.4 million for the same quarter, prior year.   Adjusted EBITDA for the specialty hospital segment decreased 10.5% to $70.0 million compared to $78.2 million for the same quarter, prior year.  The Adjusted EBITDA margin for the segment was 15.0% for the fourth quarter of 2010 compared to 19.5% for the same quarter, prior year.  The principal reason for the decline in Adjusted EBITDA and Adjusted EBITDA margin was a reduction in both Medicare and non-Medicare payment rates.  This decline was due to a reduction in the severity of the patients treated in the fourth quarter of 2010 compared to the same quarter, prior year and additional reimbursement that was realized during the fourth quarter of 2009 on outlier cases principally related to higher costs incurred at the free-standing hospitals developed and opened during 2007 and 2008.  Additionally, on April 1, 2010 and October 1, 2010 reductions in the standard federal rate per case of 0.25% and 0.5%, respectively, mandated by the Patients Protection and Affordable Care Act or "PPACA" were implemented.

For the year ended December 31, 2010, net operating revenues for all of Select's hospitals increased 9.3% to $1,702.2 million compared to $1,557.8 million for the prior year.   The Adjusted EBITDA for specialty hospitals for the year ended December 31, 2010 was $284.6 million compared to $290.4 million for the prior year and Adjusted EBITDA margins were 16.7% and 18.6% respectively.  The principal reasons for the decline in Adjusted EBITDA was a reduction in net revenue per patient day and an increase in operating expenses.   The reduction in net revenue per patient day resulted from a decline in Medicare net revenue per patient day associated with the June 3, 2009 interim final rule in which CMS adopted a new table of MS-LTC-DRG relative weights that had the effect of reducing reimbursement for Medicare cases.  Additionally, further reductions occurred in the standard federal rate per case as mandated by PPACA of 0.25% effective April 1, 2010 and 0.5% effective October 1, 2010.  These reductions in Medicare payments were partially offset by the annual payment update that became effective October 1, 2009.  During 2009 additional reimbursement was recognized related to outlier cases principally due to higher costs incurred at the free-standing hospitals developed and opened during 2007 and 2008 that had the effect of increasing the net revenue per patient day for 2009.  The labor costs in these same store hospitals were 73 basis points higher and the other operating costs were 22 basis points higher than in the prior year.  The labor costs were primarily higher due to increased patient care hours that resulted from a generally higher acuity patient population during 2010.  Additionally, the labor costs included a $4.0 million charge due to an increase in the workers compensation program costs incurred during the quarter ended September 30, 2010.

Outpatient Rehabilitation

The outpatient rehabilitation key statistics are presented on a schedule attached to this release. For the fourth quarter of 2010, net operating revenues for the outpatient rehabilitation segment decreased 1.4% to $169.7 million compared to $172.1 million for the same quarter, prior year.  Adjusted EBITDA for the segment for the fourth quarter decreased 21.5% to $17.0 million compared to $21.6 million for the same quarter, prior year.  The Adjusted EBITDA margin for the segment for the quarter was 10.0% compared to 12.5% in the same quarter, prior year.  The decline in the Adjusted EBITDA and Adjusted EBITDA margin for the quarter was primarily due to the termination during 2010 of a significant therapy services contract resulting from a change in ownership and higher labor costs in the therapy services business that resulted from the adjustment of treatment models to adapt to RUGS IV / MDS 3.0 that became effective on October 1, 2010.

For the year ended December 31, 2010, net operating revenues were $688.0 million compared to $681.9 million for the prior year. Adjusted EBITDA for the outpatient rehabilitation segment for the year ended December 31, 2010 decreased 6.0% to $83.8 million compared to $89.1 million for the prior year. The Adjusted EBITDA margin for the year ended December 31, 2010 was 12.2% compared to 13.1% in the prior year.   The decline in the Adjusted EBITDA and Adjusted EBITDA margin for the year resulted primarily from the factors that caused the decline in Adjusted EBITDA in the fourth quarter, which are described above.

General and Administrative Costs

For the fourth quarter ended December 31, 2010, general and administrative costs were $20.3 million compared to $12.1 million for the same quarter, prior year.  The 2010 period includes approximately $6.8 million of costs related to the transition of management functions and closing of the Regency corporate office.  Additionally, there was approximately $0.9 million in severance expenses incurred at Select's corporate office in the fourth quarter of 2010.  The 2010 increase was partially offset by a reduction in incentive compensation for executive officers of $1.8 million.  The remaining increase was primarily related to increased labor costs to support the additional Regency hospitals.

For the year ended December 31, 2010, general and administrative costs were $62.1 million compared to $72.4 million for the prior year.  The decrease was related to a number of factors.  The 2009 period includes non-recurring charges related to Select's IPO of $18.3 million in long-term incentive compensation and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with the Select's IPO.  The 2010 period includes approximately $9.0 million of costs related to the transition of management functions and closing of the Regency corporate office and a $4.8 million charge due to an increase in Select's self insurance heath program costs.  These 2010 increases were offset by a reduction in incentive compensation for executive officers of $7.0 million for 2010 compared to 2009.

Purchase of Regency Hospital Company, L.L.C.

On September 1, 2010, Select completed the acquisition of all the issued and outstanding equity securities of Regency, an operator of long term acute care hospitals, for $210.0 million, including certain assumed liabilities.  The amount paid at closing was reduced by $33.1 million for certain assumed liabilities, payments to employees, payments for the repurchase of non-controlling interests and an estimated working capital adjustment.  The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long term acute care hospitals, located in nine states.  

Stock Repurchase Program

The board of directors has authorized a program to repurchase up to $100.0 million worth of shares of Select's common stock.  The program will remain in effect until January 31, 2012, unless extended by the board of directors.  Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Select deems appropriate.  The timing of purchases of stock will be based upon market conditions and other factors.  Select is funding this program with cash on hand or borrowings under its revolving credit facility.  Select anticipates that it will have sufficient borrowing capacity to continue executing its growth strategy.  Through December 31, 2010, Select has repurchased 6,905,700 shares at a cost of $44.1 million which includes transaction costs.

Indebtedness

Included in Select's indebtedness is a senior secured credit facility which at December 31, 2010 consisted of $191.3 million in term loans that mature on February 24, 2012, a $300.0 million revolving loan facility that will terminate on August 22, 2013 and $290.6 million of term loans that mature on August 22, 2014.  As of December 31, 2010 Select also had outstanding $611.5 million in aggregate principal amount of 7 5/8% senior subordinated notes due 2015.  Select has begun discussions with its financial advisors regarding refinancing both its senior secured credit facility and 7 5/8% senior subordinated notes during the second quarter of 2011.  These discussions are preliminary, and Select can provide no assurance that it will be able to successfully refinance either its current senior secured credit facility or the 7 5/8% senior subordinated notes, or that the refinancing, if it occurs, will not be delayed beyond the second quarter of 2011, or that the terms of any new indebtedness will be as favorable as the terms of Select's existing indebtedness. 

Business Outlook

Select reaffirms the guidance it provided in its January 20, 2011 press release.  Select expects consolidated revenue for full year 2011 to be in the range of $2.65 billion to $2.75 billion.  Select expects net income before interest, income taxes, depreciation and amortization, stock compensation expense, other income/(expense), and equity in income/(losses) of unconsolidated subsidiaries, or Adjusted EBITDA for full year 2011 to be in the range of $365 million to $385 million.  Select expects income per common share for full year 2011 to be in the range of $0.67 to $0.72.

Conference Call

Select will host a conference call regarding its fourth quarter and year end results and its business outlook on Friday, March 4, 2011, at 9:00am EST. The domestic dial in number for the call is 1-866-314-9013. The international dial in number is 1-617-213-8053. The passcode for the call is 32872006. The conference call will be webcast simultaneously and can be accessed at Select Medical Holdings Corporation's website http://www.selectmedicalholdings.com.

For those unable to participate in the conference call, a replay will be available until 11:59pm EST, March 11, 2011. The replay number is 1-888-286-8010 (domestic) or 1-617-801-6888 (international). The passcode for the replay will be 76841502. The replay can also be accessed at Select Medical Holdings Corporation's website, http://www.selectmedicalholdings.com.

Select Medical Holdings Corporation is a leading operator of specialty hospitals in the United States.  As of December 31, 2010, Select operated 111 long term acute care hospitals and seven acute medical rehabilitation hospitals in 28 states.  Select is also a leading operator of outpatient rehabilitation clinics in the United States, with approximately 944 locations in 36 states and the District of Columbia.  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.selectmedicalholdings.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:

• additional changes in government reimbursement for our services, including changes that will result from the expiration of the moratorium for long term acute care hospitals established by the SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act, and the Patient Protection and Affordable Care Act may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability;
• the failure of our specialty hospitals to maintain their Medicare certifications as such may cause our net operating revenues and profitability to decline;
• the failure of our facilities operated as "hospitals within hospitals" or HIHs, 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;
• private third-party payors for our services may undertake future cost containment initiatives that 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 or therapists could increase our operating costs significantly;
• 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 in the future we may not be able to obtain insurance at a reasonable price; and
• other factors discussed from time to time in our filings with the Securities and Exchange Commission, including factors under the heading "Risk Factors" in our annual report on Form 10-K.

SOURCE Select Medical Holdings Corporation