Select Medical Holdings Corporation ("Select Medical") (NYSE: SEM) today announced results for its quarter ended March 31, 2014 and the declaration of a cash dividend.
For the quarter ended March 31, 2014, net operating revenues increased 1.7% to $762.6 million, compared to $750.0 million for the same quarter, prior year. The results for the quarter ended March 31, 2014 reflect Medicare changes that became effective on April 1, 2013, including (i) a 2% reduction in Medicare payments that was implemented as part of the automatic reduction in federal spending mandated under the Budget Control Act of 2011 (the "Sequestration Reduction"), and (ii) an increase from 25% to 50% in the multiple procedure payment reduction for therapy services as mandated by the American Taxpayer Relief Act of 2012 (the "MPPR Reduction"). For the quarter ended March 31, 2014, these changes reduced both net operating revenues and income from operations by approximately $7.6 million for the Sequestration Reduction and $2.1 million for the MPPR Reduction, respectively. Excluding the impact of these reductions, net operating revenues would have increased 3.0% for the quarter ended March 31, 2014, compared to the same quarter, prior year. Income from operations was $78.4 million for the quarter ended March 31, 2014, compared to $82.5 million for the same quarter, prior year. Net income attributable to Select Medical was $33.0 million for the quarter ended March 31, 2014, compared to $34.4 million for the same quarter, prior year. Net income attributable to Select Medical for the quarter ended March 31, 2014 and 2013 includes losses on early retirement of debt, net of tax, of $1.4 million and $0.9 million, respectively. 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) ("Adjusted EBITDA") for the quarter ended March 31, 2014 was $96.8 million, compared to $100.1 million for the same quarter, prior year. A reconciliation of net income to Adjusted EBITDA is presented in table V of this release. Excluding the effect of the Sequestration Reduction and MPPR Reduction, Adjusted EBITDA would have increased 6.5%, compared to the same quarter, prior year. Income per common share for the both the quarters ended March 31, 2014 and 2013 was $0.24 on a fully diluted basis. Excluding the loss related to the early retirement of debt in each period and their related tax affects, adjusted income per common share was $0.25 per diluted share for both the quarters ended March 31, 2014 and 2013. A reconciliation of net income per share to adjusted net income per share for both the quarters ended March 31, 2014 and 2013 is presented in table VI of this release.
Specialty Hospitals
For the quarter ended March 31, 2014, net operating revenues for the specialty hospital segment increased 1.2% to $564.6 million, compared to $557.8 million for the same quarter, prior year. The Sequestration Reduction reduced both net operating revenues and income from operations for the segment by approximately $7.2 million for the quarter ended March 31, 2014. Excluding the impact of this reduction, net operating revenues would have increased 2.5% for the first quarter ended March 31, 2014, compared to the same quarter, prior year. Adjusted EBITDA for the specialty hospital segment was $92.2 million for the quarter ended March 31, 2014, compared to $93.3 million for the same quarter, prior year. Excluding the effect of the Sequestration Reduction, Adjusted EBITDA would have increased 6.5%, compared to the same quarter, prior year. The Adjusted EBITDA margin for the segment was 16.3% for the quarter ended March 31, 2014, compared to 16.7% for the same quarter, prior year. Certain specialty hospital key statistics for both the quarters ended March 31, 2014 and 2013 are presented in table IV of this release.
Outpatient Rehabilitation
For the quarter ended March 31, 2014, net operating revenues for the outpatient rehabilitation segment increased 3.0% to $197.9 million, compared to $192.1 million for the same quarter, prior year. The Sequestration Reduction and MPPR Reduction reduced both net operating revenues and income from operations for the segment by approximately $0.4 million for the Sequestration Reduction and $2.1 million for the MPPR Reduction for the quarter ended March 31, 2014. Excluding the impact of these reductions, net operating revenues would have increased 4.3% for the quarter ended March 31, 2014, compared to the same quarter, prior year. In addition, our outpatient rehabilitation segment was adversely affected by the severe winter weather in several of our markets. Adjusted EBITDA for the segment for the quarter ended March 31, 2014 decreased 8.1% to $21.0 million, compared to $22.8 million for the same quarter, prior year. Excluding the effect of the Sequestration Reduction and MPPR Reduction, Adjusted EBITDA would have increased 3.1%, compared to the same quarter, prior year. The Adjusted EBITDA margin for the segment was 10.6% for the quarter ended March 31, 2014, compared to 11.9% for the same quarter, prior year. Certain outpatient rehabilitation key statistics for both the quarters ended March 31, 2014 and 2013 are presented in table IV of this release.
Stock Repurchase Program
On April 30, 2014, the board of directors of Select Medical authorized an increase of $150.0 million in the capacity of its common stock repurchase program from $350.0 million to $500.0 million and extended the program until December 31, 2016. 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 is funding this program with cash on hand and borrowings under its revolving credit facility. Select Medical repurchased a total of 10,000,000 shares at a total cost of $109.5 million, or $10.95 per share, during the quarter ended March 31, 2014. Since the inception of the program through March 31, 2014, Select Medical has repurchased 33,606,080 shares at a cost of approximately $283.1 million, or $8.42 per share, which includes transaction costs.
Refinancing
Senior Secured Credit Facilities
On March 4, 2014, Select Medical amended its existing senior secured credit facilities in order to, among other things:
- convert the remaining series B term loan to a new term loan tranche, which we refer to as the 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 term loan tranche, which we refer to as the 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 September 4, 2014 in the case of the series D term loans and 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.
Senior Notes
On March 11, 2014, Select Medical issued and sold $110.0 million aggregate principal amount of additional 6.375% senior notes due June 1, 2021, 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.
Dividends
On April 30, 2014, Select Medical's board of directors declared a cash dividend of $0.10 per share. The dividend will be payable on or about May 28, 2014 to stockholders of record as of the close of business on May 16, 2014.
There is no assurance that future dividends will be declared or the timing or amount of any future dividend. The declaration and payment of dividends in the future are at the sole discretion of our board of directors after taking into account various factors, including our financial condition, operating results, available cash and current and anticipated cash needs and applicable restrictions in our debt documents.
Business Outlook
Select Medical is reaffirming its prior business outlook provided in its January 10, 2014 press release for net operating revenues and Adjusted EBITDA. Select Medical continues to expect consolidated net operating revenues for the full year 2014 to be in the range of $3.05 billion to $3.15 billion. Select Medical continues to expect Adjusted EBITDA for the full year 2014 to be in the range of $365.0 million to $385.0 million. Select Medical is adjusting its prior business outlook for fully diluted income per common share and providing business outlook for adjusted income per common share for the estimated financial impact from its refinancing and share repurchase activity in the quarter ended March 31, 2014. Select Medical expects adjusted income per common share, which excludes the loss on retirement of debt and its related tax effects in the quarter ended March 31, 2014, for the full year 2014 to be in the range of $0.89 to $0.97. Select Medical now expects fully diluted income per common share for the full year 2014 to be in the range of $0.88 to $0.96.
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