Select Medical Slips on Q2 Earnings Miss, Guidance Intact

Select Medical Holdings Corporation (SEM) reported second-quarter 2014 earnings of 27 cents a share, missing the Zacks Consensus Estimate by a penny. Earnings were unchanged from the year-ago number.

Though revenues improved, increase in expenses weighed on the results. Nonetheless, a lower count limited the downside. Results accounted for a 2% reduction in Medicare payments that were implemented as part of the automatic reduction in federal spending mandated under the Budget Control Act of 2011 (the "Sequestration Reduction") and 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").

The underperformance was also reflected in the share price that lost 12.5% to close at $13.79 on Friday.

Operational Activities

Operating revenues of Select Medical grossed $722.8 million during the quarter, up 2.1% year over year. The upside can be attributed to the impact of both sequestration and MPPR reductions. The top line too missed the Zacks Consensus Estimate of $783 million.

Total expenses amounted to $673.4 million, 3.2% higher year over year. The increase was primarily due to 2.7% year over year higher cost of services, 8.1% increase in general and administrative expenses and 25.7% rise in bad debt expenses.

The total adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) of Select Medical for the second quarter amounted to $101.4 million, down 4.3% year over year. Adjusted EBITDA contracted 100 basis points to 13%.

Segment Update

Specialty Hospitals: Operating revenues at the segment slid 0.3% year over year to $557.8 million.

Adjusted EBITDA was $88.7 million, up 8% year over year.

Number of patient admissions decreased 2.2% year over year to 13,796.

Outpatient Rehabilitation: Operating revenues improved 9% year over year to $214.8 million, driven by higher patient visits, addition of new clinics as well as the expansion of contract management services in clinics and increase in contract therapy operations. Number of visits to clinics under this segment also increased 5.9% year over year.

Adjusted EBITDA also increased 16.8% year over year to $30.4 million.

Share Repurchase and Dividend Update

Select Medical repurchased 1.3 million shares for $18 million in the quarter. The company bought back 34.9 million shares for $301.1 million since the inception of the program through Jun 30.

The board of directors also announced a cash dividend of 10 cents per share, payable Aug 29, to stockholders of record on Aug 20.

The board of directors of Select Medical approved a $500.0 million stock buyback program that will remain in effect until Dec 31, 2016.

Financial Update

Cash balance of Select Medical as of second-quarter end was $3.1 million, declining from $4.3 million as of 2013 end.

Long-term debt as of Jun 30 increased to $1.5 billion from $1.4 billion at the end of 2013.

Cash flow from operations declined 71% year over year to $58.2 million in the quarter.

2014 Guidance

Select Medical continues to expect 2014 operating earnings between 89 cents and 97 cents a share and net income between 88 cents and 96 cents per share.

Select Medical also reiterated its operating revenues guidance of $3.05 billion to $3.15 billion. Also, adjusted EBITDA is expected between $365 million and $385 million.

Zacks Rank

Select Medical presently carries a Zacks Rank #3 (Hold).

Performance of Other HMOs

While earnings of WellPoint Inc. (WLP) and Molina Healthcare Inc. (MOH) surpassed their respective Zacks Consensus Estimate, Humana Inc.’s (HUM) second-quarter earnings were in line.

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