On April 30, 2020 Select Medical Holdings Corporation reported results for its first quarter ended March 31, 2020 (Press release, Select Medical, APR 30, 2020, View Source [SID1234556872]).
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For the first quarter ended March 31, 2020, net operating revenues increased 6.8% to $1,414.6 million, compared to $1,324.6 million for the same quarter, prior year. Income from operations increased 15.2% to $128.7 million for the first quarter ended March 31, 2020, compared to $111.7 million for the same quarter, prior year. Net income increased 32.1% to $70.4 million for the first quarter ended March 31, 2020, compared to $53.3 million for the same quarter, prior year. For both the first quarters ended March 31, 2020 and 2019, net income included pre-tax gains on sales of businesses of $7.2 million and $6.5 million, respectively. Adjusted EBITDA increased 10.1% to $187.3 million for the first quarter ended March 31, 2020, compared to $170.1 million for the same quarter, prior year. Earnings per common share increased to $0.40 on a fully diluted basis for the first quarter ended March 31, 2020, compared to $0.30 for the same quarter, prior year. Adjusted earnings per common share was $0.37 on a fully diluted basis for the first quarter ended March 31, 2020, compared to $0.27 for the same quarter, prior year. Adjusted earnings per common share excludes the gains on sales of businesses and their related tax effects for both of the quarters ended March 31, 2020 and 2019. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table VI of this release. A reconciliation of earnings per common share to adjusted earnings per common share is presented in table VII of this release.
Please refer to "Effects of the COVID-19 Pandemic on Select Medical’s Results of Operations" for further discussion regarding the impact of the coronavirus disease 2019 ("COVID-19") pandemic on Select Medical’s operating results for the first quarter ended March 31, 2020.
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 number of facilities. Select Medical’s reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. As of March 31, 2020, Select Medical operated 101 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and 1,753 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 March 31, 2020, 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 first quarter ended March 31, 2020, net operating revenues for the critical illness recovery hospital segment increased 9.4% to $500.5 million, compared to $457.5 million for the same quarter, prior year. Adjusted EBITDA for the critical illness recovery hospital segment increased 21.3% to $88.6 million for the first quarter ended March 31, 2020, compared to $73.0 million for the same quarter, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.7% for the first quarter ended March 31, 2020, compared to 16.0% for the same quarter, prior year. Certain critical illness recovery hospital key statistics are presented in table V of this release for both the first quarters ended March 31, 2020 and 2019.
Rehabilitation Hospital Segment
For the first quarter ended March 31, 2020, net operating revenues for the rehabilitation hospital segment increased 17.8% to $182.0 million, compared to $154.6 million for the same quarter, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 49.5% to $38.6 million for the first quarter ended March 31, 2020, compared to $25.8 million for the same quarter, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the first quarter ended March 31, 2020, compared to 16.7% for the same quarter, prior year. For the first quarter ended March 31, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $2.8 million. Certain rehabilitation hospital key statistics are presented in table V of this release for both the first quarters ended March 31, 2020 and 2019.
Outpatient Rehabilitation Segment
For the first quarter ended March 31, 2020, net operating revenues for the outpatient rehabilitation segment increased 3.4% to $255.2 million, compared to $246.9 million for the same quarter, prior year. Adjusted EBITDA for the outpatient rehabilitation segment was $27.1 million for the first quarter ended March 31, 2020, compared to $29.0 million for the same quarter, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.6% for the first quarter ended March 31, 2020, compared to 11.7% for the same quarter, prior year. Certain outpatient rehabilitation key statistics are presented in table V of this release for both the first quarters ended March 31, 2020 and 2019.
Concentra Segment
For the first quarter ended March 31, 2020, net operating revenues for the Concentra segment increased 0.6% to $398.5 million, compared to $396.3 million for the same quarter, prior year. Adjusted EBITDA for the Concentra segment was $61.5 million for the first quarter ended March 31, 2020, compared to $66.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the Concentra segment was 15.4% for the first quarter ended March 31, 2020, compared to 16.7% for the same quarter, prior year. Certain Concentra key statistics are presented in table V of this release for both the first quarters ended March 31, 2020 and 2019.
Effects of the COVID-19 Pandemic on Select Medical’s Results of Operations
The broader implications of the COVID-19 pandemic on Select Medical’s results of operations and overall financial performance remain uncertain. Select Medical is a healthcare service provider that provides patient care services in both inpatient and outpatient settings. Select Medical has provided certain additional performance metrics to assist readers in understanding how the COVID-19 pandemic impacted each of its segments during the one month ended March 31, 2020, including its (i) net operating revenues and Adjusted EBITDA for the two months ended February 29, 2020 and February 28, 2019, (ii) net operating revenues and Adjusted EBITDA for the one month ended March 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the quarters ended March 31, 2020 and 2019, and (iv) certain operating statistics for each of the aforementioned periods.
Critical Illness Recovery Hospital Segment. Select Medical’s critical illness recovery hospitals are a key part of the inpatient hospital continuum of care. Both the Centers for Medicare & Medicaid Services ("CMS") and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which impact Select Medical’s critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals. This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where it operates, Select Medical has admitted patients with COVID-19 and has faced the challenging task of treating them while attempting to protect its patients and staff members who do not have COVID-19. The hospitals have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in Select Medical’s critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor.
Rehabilitation Hospital Segment. Select Medical’s rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into rehabilitation hospitals to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals. This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where it operates, Select Medical has admitted patients with COVID-19 and has faced the challenging task of treating them while attempting to protect its patients and staff members who do not have COVID-19. The hospitals have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in Select Medical’s rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. Additionally, elective surgeries at hospitals and other facilities have been suspended which is reducing the need for inpatient rehabilitation services.
Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. These actions continued to expand throughout March and by the end of March, most states implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits combined with recommendations of social distancing and the other items noted above have had significant effects on patient visit volumes. As a result, Select Medical has temporarily consolidated the operations of some of its clinics by transferring staff and patients.
Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. These actions have continued to expand throughout March. By the end of March, most states implemented significant restrictions on businesses. These actions have had significant effects on patient visit volumes as employers have furloughed workforces and temporarily ceased operations or have significantly reduced their operations. As a result, Select Medical has temporarily consolidated the operations of some of its centers by transferring staff and patients.
Select Medical provided below certain performance measures and operating statistics used by management to help illustrate the impact of the COVID-19 pandemic on its operating results. For the quarter ended March 31, 2020, Select Medical defined the pre-COVID-19 outbreak period as the two months ended February 29, 2020, and the post-COVID-19 outbreak period as the one month ended March 31, 2020. Select Medical provided prior year comparative data for the pre-COVID-19 and post-COVID-19 outbreak periods presented. The following performance measures and operating statistics should be considered in conjunction with the operating results for the full quarter ended March 31, 2020. The performance measures and operating statistics presented for the two months ended February 29, 2020 and the one month ended March 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter ended March 31, 2020. The same is true for the prior year comparative data.
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 quarter ended March 31, 2020, Select Medical repurchased 491,559 shares at a cost of approximately $8.7 million, an average cost per share of $17.68, which includes transaction costs. Since the inception of the program through March 31, 2020, Select Medical has repurchased 38,580,908 shares at a cost of approximately $356.6 million, or $9.24 per share, which includes transaction costs.
Conference Call
Select Medical will host a conference call regarding its first quarter results, as well as its business outlook and the impact of the COVID-19 pandemic on each of its reportable segments, on Friday, May 1, 2020, 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 2296334. 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, May 8, 2020. The replay number is 1-855-859-2056 (domestic) or 1-404-537-3406 (international). The conference ID for the replay will be 2296334. 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:
developments related to the COVID-19 pandemic including, but not limited to, the duration and severity of the pandemic, additional measures taken by government authorities and the private sector to limit the spread of COVID-19, and further legislative and regulatory actions which impact healthcare providers, including actions that may impact the Medicare program;
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 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, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, 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, 2019.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
II. Earnings per Share
For the Three Months Ended March 31, 2019 and 2020
(In thousands, except per share amounts, unaudited)
Select Medical’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share ("EPS"), Select Medical applies the two-class method because its unvested restricted stock awards are participating securities which are entitled to participate equally with its common stock in undistributed earnings.
III. Condensed Consolidated Balance Sheets
IV. Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2019 and 2020
(In thousands, unaudited)
V. Key Statistics
For the Three Months Ended March 31, 2019 and 2020
VI. Net Income to Adjusted EBITDA Reconciliation
For the Three Months Ended March 31, 2019 and 2020
(In thousands, unaudited)
The presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used to evaluate financial performance and determine resource allocation for each of Select Medical’s operating segments. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles ("GAAP"). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
VII. Reconciliation of Earnings per Common Share to Adjusted Earnings per Common Share
For the Three Months Ended March 31, 2019 and 2020
(In thousands, except per share amounts, unaudited)
Adjusted net income attributable to common shares and adjusted earnings per common share are not measures of financial performance under GAAP. Items excluded from adjusted net income attributable to common shares and adjusted earnings per common share are significant components in understanding and assessing financial performance. Select Medical believes that the presentation of adjusted net income attributable to common shares and adjusted earnings per common share are important to investors because they are reflective of the financial performance of Select Medical’s ongoing operations and provide better comparability of its results of operations between periods. Adjusted net income attributable to common shares and adjusted earnings per common share should not be considered in isolation or as alternatives to, or substitutes for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because adjusted net income attributable to common shares and adjusted earnings per common share are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, adjusted net income attributable to common shares and adjusted earnings per common share as presented may not be comparable to other similarly titled measures of other companies.