On October 31, 2019 Select Medical Holdings Corporation ("Select Medical") (NYSE: SEM) reported results for its third quarter ended September 30, 2019 (Press release, Select Medical, OCT 31, 2019, View Source [SID1234550194]).
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For the third quarter ended September 30, 2019, net operating revenues increased 9.9% to $1,393.3 million, compared to $1,267.4 million for the same quarter, prior year. Income from operations increased 23.1% to $122.9 million for the third quarter ended September 30, 2019, compared to $99.8 million for the same quarter, prior year. Net income increased 3.2% to $44.0 million for the third quarter ended September 30, 2019, compared to $42.7 million for the same quarter, prior year. For the third quarter ended September 30, 2019, net income included pre-tax losses on early retirement of debt of $18.6 million. For the third quarter ended September 30, 2018, net income included a pre-tax gain on sale of businesses of $2.1 million. Adjusted EBITDA increased 16.6% to $182.7 million for the third quarter ended September 30, 2019, compared to $156.6 million for the same quarter, prior year. Earnings per common share was $0.23 on a fully diluted basis for the third quarter ended September 30, 2019, compared to $0.24 for the same quarter, prior year. Adjusted earnings per common share was $0.33 on a fully diluted basis for the third quarter ended September 30, 2019, compared to $0.23 for the same quarter, prior year. Adjusted earnings per common share excludes the losses on early retirement of debt and related costs, and their related tax effects for the third quarter ended September 30, 2019. Adjusted earnings per common share excludes the gain on sale of businesses and its related tax effects for the third quarter ended September 30, 2018. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table IX of this release. A reconciliation of earnings per common share to adjusted earnings per common share is presented in table X of this release.
For the nine months ended September 30, 2019, net operating revenues increased 6.9% to $4,079.3 million, compared to $3,816.6 million for the same period, prior year. Income from operations increased 9.3% to $359.5 million for the nine months ended September 30, 2019, compared to $329.0 million for the same period, prior year. Net income increased 6.9% to $157.4 million for the nine months ended September 30, 2019, compared to $147.2 million for the same period, prior year. For the nine months ended September 30, 2019, net income included pre-tax losses on early retirement of debt of $18.6 million and a pre-tax gain on sale of businesses of $6.5 million. For the nine months ended September 30, 2018, net income included pre-tax losses on early retirement of debt of $10.3 million, pre-tax gains on sales of businesses of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million. Adjusted EBITDA increased 8.2% to $539.0 million for the nine months ended September 30, 2019, compared to $498.1 million for the same period, prior year. Earnings per common share increased to $0.86 on a fully diluted basis for the nine months ended September 30, 2019, compared to $0.84 for the same period, prior year. Adjusted earnings per common share was $0.93 on a fully diluted basis for the nine months ended September 30, 2019, compared to $0.83 for the same period, prior year. Adjusted earnings per common share excludes the losses on early retirement of debt and related costs, gain on sale of businesses, and their related tax effects for the nine months ended September 30, 2019. Adjusted earnings per common share excludes the losses on early retirement of debt, gains on sales of businesses, U.S. HealthWorks acquisition costs, and their related tax effects for the nine months ended September 30, 2018. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table IX of this release. A reconciliation of income per common share to adjusted income per common share is presented in table X of this release.
Company Overview
Select Medical is one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. As of September 30, 2019, Select Medical operated 100 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and 1,707 outpatient rehabilitation clinics in 37 states and the District of Columbia. Select Medical’s joint venture subsidiary Concentra operated 523 occupational health centers in 41 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics. At September 30, 2019, Select Medical had operations in 47 states and the District of Columbia. Information about Select Medical is available at www.selectmedical.com.
Critical Illness Recovery Hospital Segment
For the third quarter ended September 30, 2019, net operating revenues for the critical illness recovery hospital segment increased 10.2% to $462.9 million, compared to $420.1 million for the same quarter, prior year. Adjusted EBITDA for the critical illness recovery hospital segment increased 7.4% to $57.2 million for the third quarter ended September 30, 2019, compared to $53.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.4% for the third quarter ended September 30, 2019, compared to 12.7% for the same quarter, prior year. Certain critical illness recovery hospital key statistics are presented in table VII of this release for both the third quarters ended September 30, 2019 and 2018.
For the nine months ended September 30, 2019, net operating revenues for the critical illness recovery hospital segment increased 4.1% to $1,381.6 million, compared to $1,327.2 million for the same period, prior year. Adjusted EBITDA for the critical illness recovery hospital segment increased 4.0% to $194.4 million for the nine months ended September 30, 2019, compared to $187.0 million for the same period, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.1% for both the nine months ended September 30, 2019 and 2018. Certain critical illness recovery hospital key statistics are presented in table VIII of this release for both the nine months ended September 30, 2019 and 2018.
Rehabilitation Hospital Segment
For the third quarter ended September 30, 2019, net operating revenues for the rehabilitation hospital segment increased 19.9% to $173.4 million, compared to $144.6 million for the same quarter, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 45.1% to $36.8 million for the third quarter ended September 30, 2019, compared to $25.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the third quarter ended September 30, 2019, compared to 17.5% for the same quarter, prior year. For the third quarter ended September 30, 2018, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $0.8 million. Certain rehabilitation hospital key statistics are presented in table VII of this release for both the third quarters ended September 30, 2019 and 2018.
For the nine months ended September 30, 2019, net operating revenues for the rehabilitation hospital segment increased 12.9% to $488.3 million, compared to $432.7 million for the same period, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 15.2% to $92.5 million for the nine months ended September 30, 2019, compared to $80.3 million for the same period, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 19.0% for the nine months ended September 30, 2019, compared to 18.6% for the same period, prior year. The Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $8.8 million for the nine months ended September 30, 2019, compared to approximately $3.8 million for the same period, prior year. Certain rehabilitation hospital key statistics are presented in table VIII of this release for both the nine months ended September 30, 2019 and 2018.
Outpatient Rehabilitation Segment
For the third quarter ended September 30, 2019, net operating revenues for the outpatient rehabilitation segment increased 8.2% to $265.3 million, compared to $245.2 million for the same quarter, prior year. Adjusted EBITDA for the outpatient rehabilitation segment increased 16.0% to $40.0 million for the third quarter ended September 30, 2019, compared to $34.5 million for the same quarter, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 15.1% for the third quarter ended September 30, 2019, compared to 14.1% for the same quarter, prior year. Certain outpatient rehabilitation key statistics are presented in table VII of this release for both the third quarters ended September 30, 2019 and 2018.
For the nine months ended September 30, 2019, net operating revenues for the outpatient rehabilitation segment increased 4.1% to $774.1 million, compared to $743.4 million for the same period, prior year. Adjusted EBITDA for the outpatient rehabilitation segment increased 4.3% to $111.6 million for the nine months ended September 30, 2019, compared to $107.0 million for the same period, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.4% for both the nine months ended September 30, 2019 and 2018. Certain outpatient rehabilitation key statistics are presented in table VIII of this release for both the nine months ended September 30, 2019 and 2018.
Concentra Segment
The financial results for the Concentra segment include U.S. HealthWorks beginning February 1, 2018.
For the third quarter ended September 30, 2019, net operating revenues for the Concentra segment increased 4.3% to $421.9 million, compared to $404.5 million for the same quarter, prior year. Adjusted EBITDA for the Concentra segment increased 13.0% to $77.7 million for the third quarter ended September 30, 2019, compared to $68.8 million for the same quarter, prior year. The Adjusted EBITDA margin for the Concentra segment was 18.4% for the third quarter ended September 30, 2019, compared to 17.0% for the same quarter, prior year. Certain Concentra key statistics are presented in table VII of this release for both the third quarters ended September 30, 2019 and 2018.
For the nine months ended September 30, 2019, net operating revenues for the Concentra segment increased 5.0% to $1,231.7 million, compared to $1,173.4 million for the same period, prior year. Adjusted EBITDA for the Concentra segment increased 10.5% to $220.0 million for the nine months ended September 30, 2019, compared to $199.1 million for the same period, prior year. The Adjusted EBITDA margin for the Concentra segment was 17.9% for the nine months ended September 30, 2019, compared to 17.0% for the same period, prior year. Certain Concentra key statistics are presented in table VIII of this release for both the nine months ended September 30, 2019 and 2018.
Stock Repurchase Program
The board of directors of Select Medical has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2020, and will remain in effect until then, unless further extended or earlier terminated 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 Medical deems appropriate. Select Medical funds this program with cash on hand and borrowings under its revolving credit facility.
During the nine months ended September 30, 2019, Select Medical repurchased 2,165,221 shares at a cost of approximately $33.2 million, an average cost per share of $15.32, which includes transaction costs. Since the inception of the program through September 30, 2019, Select Medical has repurchased 38,089,349 shares at a cost of approximately $347.9 million, or $9.13 per share, which includes transaction costs.
Redemption of 6.375% Senior Notes
On August 30, 2019, Select Medical redeemed its $710.0 million 6.375% senior notes due June 1, 2021 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest. Select Medical funded the redemption price with a portion of the net proceeds from the issuance and sale of $550.0 million 6.250% senior notes due August 15, 2026 and a portion of the proceeds from an incremental $500.0 million term loan borrowing under its senior secured credit agreement.
The redemption of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019. As a result, Select Medical recognized interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019.
Business Outlook
Select Medical is updating its business outlook following the reporting of its third quarter 2019 results. Select Medical now expects for the full year of 2019 consolidated net operating revenues to be in the range of $5.375 billion to $5.425 billion and Adjusted EBITDA for the full year of 2019 to be in the range of $685.0 million to $700.0 million. Select Medical now expects fully diluted earnings per common share for the full year 2019 to be in the range of $1.00 to $1.06 and adjusted earnings per common share for the full year 2019 to be in the range of $1.07 to $1.13. Adjusted earnings per common share excludes the loss on early retirement of debt and related costs, gain on sale of businesses, and their related tax effects.
Conference Call
Select Medical will host a conference call regarding its third quarter results, as well as its business outlook, on Friday, November 1, 2019, at 9:00am ET. The domestic dial in number for the call is 1-866-440-2669. The international dial in number is 1-409-220-9844. The conference ID for the call is 9264899. The conference call will be webcast simultaneously and can be accessed at Select Medical Holdings Corporation’s website www.selectmedicalholdings.com.
For those unable to participate in the conference call, a replay will be available until 12:00pm ET, November 8, 2019. The replay number is 1-855-859-2056 (domestic) or 1-404-537-3406 (international). The conference ID for the replay will be 9264899. The replay can also be accessed at Select Medical Holdings Corporation’s website, 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:
changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;
the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as "hospitals within hospitals" to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;
our plans and expectations related to our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;
private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
the loss of key members of our management team could significantly disrupt our operations;
the effect of claims asserted against us could subject us to substantial uninsured liabilities;
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
other factors discussed from time to time in our filings with the Securities and Exchange Commission (the "SEC"), including factors discussed under the heading "Risk Factors" of the quarterly reports on Form 10-Q and of the annual report on Form 10-K for the year ended December 31, 2018.