UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2017~~

2019

o

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbers: 001-34465 ~~and 001-31441~~

SELECT MEDICAL HOLDINGS ~~CORPORATION~~

~~SELECT MEDICAL CORPORATION~~

CORPORATION

(Exact name of Registrant as specified in its Charter)

~~Delaware~~ ~~Delaware~~		~~20-1764048~~ ~~23-2872718~~

Delaware	20-1764048
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA17055

(Address of Principal Executive Offices and Zip code)

~~(717)~~

(717) 972-1100

(~~Registrants’~~Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SEM	New York Stock Exchange
		(NYSE)

Indicate by check mark whether the ~~Registrants~~Registrant (1) ~~have~~has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such ~~Registrants were~~Registrant was required to file such reports), and (2) ~~have~~has been subject to such filing requirements for the past 90 days. Yesx ☒ No o

☐

Indicate by check mark whether the ~~Registrants have~~Registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the ~~Registrants were~~Registrant was required to submit ~~and post~~ such files). Yesx ☒ No o

☐

Indicate by check mark whether the Registrant ~~Select Medical Holdings Corporation,~~ is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filerx	☒	Accelerated filero	☐

Non-accelerated filero	☐	Smaller reporting companyo	☐
~~(Do not check if a smaller reporting company)~~		Emerging Growth Companyo	☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

☐

Indicate by check mark whether the Registrant ~~Select Medical Corporation,~~ is a ~~large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting~~shell company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

~~Large accelerated filer~~ o		~~Accelerated filer~~ o

~~Non-accelerated filer~~ x		~~Smaller reporting company~~ o
~~(Do not check if a smaller reporting company)~~		~~Emerging Growth Company~~ o

~~Indicate by check mark whether the Registrants are shell companies~~ (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x

☒

As of October 31, ~~2017,~~2019, Select Medical Holdings Corporation had outstanding ~~133,824,559~~134,326,112 shares of common stock.

~~This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation.~~

Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra ~~Inc., the indirect operating subsidiary of Concentra~~ Group Holdings Parent, LLC (“Concentra Group ~~Holdings”~~Holdings Parent”), and its ~~subsidiaries.~~subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and ~~Concentra Group Holdings and its subsidiaries.~~

Concentra.

~~Table of Contents~~

TABLE OF CONTENTS

~~PART I~~			~~FINANCIAL INFORMATION~~	3

PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	7 8

	Notes to condensed consolidated financial statements	8 9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31 29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52 50

ITEM 4.	CONTROLS AND PROCEDURES	52 50

PART II	OTHER INFORMATION	53 51

ITEM 1.	LEGAL PROCEEDINGS	53 51

ITEM 1A.	RISK FACTORS	55 53

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57 53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57 53

ITEM 4.	MINE SAFETY DISCLOSURES	57 53

ITEM 5.	OTHER INFORMATION	57 53

ITEM 6.	EXHIBITS	57 54

SIGNATURES

~~Table of Contents~~

PART II: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

December 31,

September 30,

December 31,

September 30,

2016

2017

2016

2017

ASSETS

Current Assets:

Cash and cash equivalents

$
99,029

$
107,300

$
99,029

$
107,300

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively

573,752

716,426

573,752

716,426

Prepaid income taxes

12,423

—

12,423

—

Other current assets

77,699

80,324

77,699

80,324

Total Current Assets

762,903

904,050

762,903

904,050

Property and equipment, net

892,217

946,063

892,217

946,063

Goodwill

2,751,000

2,767,896

2,751,000

2,767,896

Identifiable intangible assets, net

340,562

331,036

340,562

331,036

Other assets

173,944

174,762

173,944

174,762

Total Assets

$
4,920,626

$
5,123,807

$
4,920,626

$
5,123,807

LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts

$
39,362

$
18,923

$
39,362

$
18,923

Current portion of long-term debt and notes payable

13,656

37,560

13,656

37,560

Accounts payable

126,558

133,321

126,558

133,321

Accrued payroll

146,397

139,402

146,397

139,402

Accrued vacation

83,261

89,171

83,261

89,171

Accrued interest

22,325

30,998

22,325

30,998

Accrued other

140,076

143,443

140,076

143,443

Income taxes payable

—

6,718

—

6,718

Total Current Liabilities

571,635

599,536

571,635

599,536

Long-term debt, net of current portion

2,685,333

2,752,742

2,685,333

2,752,742

Non-current deferred tax liability

199,078

191,441

199,078

191,441

Other non-current liabilities

136,520

138,118

136,520

138,118

Total Liabilities

3,592,566

3,681,837

3,592,566

3,681,837

Commitments and contingencies (Note 8)

Redeemable non-controlling interests

422,159

621,515

422,159

621,515

Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 shares issued and outstanding at 2016 and 2017, respectively

132

133

—

—

Common stock of Select, $0.01 par value, 100 shares issued and outstanding

—

—

0

0

Capital in excess of par

443,908

459,004

925,111

942,142

Retained earnings (accumulated deficit)

371,685

262,505

(109,386
)
(220,500
)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

815,725

721,642

815,725

721,642

Non-controlling interests

90,176

98,813

90,176

98,813

Total Equity

905,901

820,455

905,901

820,455

Total Liabilities and Equity

$
4,920,626

$
5,123,807

$
4,920,626

$
5,123,807

December 31, 2018 September 30, 2019
ASSETS

Current Assets:

Cash and cash equivalents $ 175,178
$ 135,963

Accounts receivable 706,676
798,805

Prepaid income taxes 20,539
18,804

Other current assets 90,131
96,721

Total Current Assets 992,524
1,050,293

Operating lease right-of-use assets —
986,519

Property and equipment, net 979,810
997,467

Goodwill 3,320,726
3,382,656

Identifiable intangible assets, net 437,693
415,763

Other assets 233,512
322,058

Total Assets $ 5,964,265
$ 7,154,756

LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts $ 25,083
$ —

Current operating lease liabilities —
204,936

Current portion of long-term debt and notes payable 43,865
15,656

Accounts payable 146,693
136,801

Accrued payroll 172,386
170,294

Accrued vacation 110,660
119,286

Accrued interest 12,137
10,112

Accrued other 190,691
209,887

Income taxes payable 3,671
2,815

Total Current Liabilities 705,186
869,787

Non-current operating lease liabilities —
836,205

Long-term debt, net of current portion 3,249,516
3,336,506

Non-current deferred tax liability 153,895
147,567

Other non-current liabilities 158,940
105,251

Total Liabilities 4,267,537
5,295,316

Commitments and contingencies (Note 13)

Redeemable non-controlling interests 780,488
953,697

Stockholders’ Equity:

Common stock, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,171,529 shares issued and outstanding at 2018 and 2019, respectively 135
134

Capital in excess of par 482,556
485,415

Retained earnings 320,351
269,169

Total Stockholders’ Equity 803,042
754,718

Non-controlling interests 113,198
151,025

Total Equity 916,240
905,743

Total Liabilities and Equity $ 5,964,265
$ 7,154,756

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

For the Three Months Ended September 30,

For the Three Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

$
1,053,795

$
1,097,166

$
1,053,795

$
1,097,166

Costs and expenses:

Cost of services

915,703

938,910

915,703

938,910

General and administrative

27,088

27,065

27,088

27,065

Bad debt expense

17,677

20,321

17,677

20,321

Depreciation and amortization

37,165

38,772

37,165

38,772

Total costs and expenses

997,633

1,025,068

997,633

1,025,068

Income from operations

56,162

72,098

56,162

72,098

Other income and expense:

Loss on early retirement of debt

(10,853
)
—

(10,853
)
—

Equity in earnings of unconsolidated subsidiaries

5,268

4,431

5,268

4,431

Non-operating loss

(1,028
)
—

(1,028
)
—

Interest expense

(44,482
)
(37,688
)
(44,482
)
(37,688
)

Income before income taxes

5,067

38,841

5,067

38,841

Income tax expense

1,075

14,017

1,075

14,017

Net income

3,992

24,824

3,992

24,824

Less: Net income (loss) attributable to non-controlling interests

(2,479
)
6,362

(2,479
)
6,362

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

$
6,471

$
18,462

$
6,471

$
18,462

Income per common share:

Basic

$
0.05

$
0.14

Diluted

$
0.05

$
0.14

Weighted average shares outstanding:

Basic

127,848

129,142

Diluted

127,989

129,322

For the Three Months Ended September 30,
2018 2019
Net operating revenues $ 1,267,401
$ 1,393,343

Costs and expenses:

Cost of services, exclusive of depreciation and amortization 1,087,062
1,183,111

General and administrative 29,975
34,385

Depreciation and amortization 50,527
52,941

Total costs and expenses 1,167,564
1,270,437

Income from operations 99,837
122,906

Other income and expense:

Loss on early retirement of debt —
(18,643 )
Equity in earnings of unconsolidated subsidiaries 5,432
6,950

Gain on sale of businesses (Note 5) 2,139
—

Interest expense (50,669 ) (54,336 )
Income before income taxes 56,739
56,877

Income tax expense 14,060
12,847

Net income 42,679
44,030

Less: Net income attributable to non-controlling interests 9,762
13,298

Net income attributable to Select Medical Holdings Corporation $ 32,917
$ 30,732

Earnings per common share (Note 12):

Basic $ 0.24
$ 0.23

Diluted $ 0.24
$ 0.23

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

For the Nine Months Ended September 30,

For the Nine Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

$
3,239,756

$
3,329,202

$
3,239,756

$
3,329,202

Costs and expenses:

Cost of services

2,754,950

2,787,497

2,754,950

2,787,497

General and administrative

81,226

83,415

81,226

83,415

Bad debt expense

51,591

59,120

51,591

59,120

Depreciation and amortization

107,887

119,644

107,887

119,644

Total costs and expenses

2,995,654

3,049,676

2,995,654

3,049,676

Income from operations

244,102

279,526

244,102

279,526

Other income and expense:

Loss on early retirement of debt

(11,626
)
(19,719
)
(11,626
)
(19,719
)
Equity in earnings of unconsolidated subsidiaries

14,466

15,618

14,466

15,618

Non-operating gain (loss)

37,094

(49
)
37,094

(49
)
Interest expense

(127,662
)
(116,196
)
(127,662
)
(116,196
)

Income before income taxes

156,374

159,180

156,374

159,180

Income tax expense

51,585

59,593

51,585

59,593

Net income

104,789

99,587

104,789

99,587

Less: Net income attributable to non-controlling interests

9,550

23,200

9,550

23,200

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

$
95,239

$
76,387

$
95,239

$
76,387

Income per common share:

Basic

$
0.72

$
0.57

Diluted

$
0.72

$
0.57

Weighted average shares outstanding:

Basic

127,659

128,745

Diluted

127,804

128,916

For the Nine Months Ended September 30,
2018 2019
Net operating revenues $ 3,816,575
$ 4,079,338

Costs and expenses:

Cost of services, exclusive of depreciation and amortization 3,247,606
3,465,353

General and administrative 90,951
94,401

Depreciation and amortization 149,022
160,072

Total costs and expenses 3,487,579
3,719,826

Income from operations 328,996
359,512

Other income and expense:

Loss on early retirement of debt (10,255 ) (18,643 )
Equity in earnings of unconsolidated subsidiaries 14,914
18,710

Gain on sale of businesses (Note 5) 9,016
6,532

Interest expense (147,991 ) (156,611 )
Income before income taxes 194,680
209,500

Income tax expense 47,460
52,140

Net income 147,220
157,360

Less: Net income attributable to non-controlling interests 34,053
40,978

Net income attributable to Select Medical Holdings Corporation $ 113,167
$ 116,382

Earnings per common share (Note 12):

Basic $ 0.84
$ 0.86

Diluted $ 0.84
$ 0.86

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

Select Medical Holdings Corporation Stockholders

Redeemable
Non-controlling
interests

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings

Total
Stockholders’
Equity

Non-controlling
Interests

Total
Equity

Balance at December 31, 2016

$
422,159

132,597

$
132

$
443,908

$
371,685

$
815,725

$
90,176

$
905,901

Net income attributable to Select Medical Holdings Corporation

76,387

76,387

76,387

Net income attributable to non-controlling interests

18,519

—

4,681

4,681

Issuance and vesting of restricted stock

1,323

1

13,445

13,446

13,446

Repurchase of common shares

(220
)
0

(1,934
)
(1,669
)
(3,603
)

(3,603
)
Exercise of stock options

185

0

1,634

1,634

1,634

Issuance of non-controlling interests

1,951

1,951

8,944

10,895

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(4,003
)

—

(5,153
)
(5,153
)
Redemption adjustment on non-controlling interests

184,294

(184,294
)
(184,294
)

(184,294
)
Other

673

389

389

165

554

Balance at September 30, 2017

$
621,515

133,885

$
133

$
459,004

$
262,505

$
721,642

$
98,813

$
820,455

Select Medical Corporation Stockholders

Redeemable
Non-controlling
interests

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings

Total
Stockholders’
Equity

Non-controlling
Interests

Total
Equity

Balance at December 31, 2016

$
422,159

0

$
0

$
925,111

$
(109,386
)
$
815,725

$
90,176

$
905,901

Net income attributable to Select Medical Corporation

76,387

76,387

76,387

Net income attributable to non-controlling interests

18,519

—

4,681

4,681

Additional investment by Holdings

1,634

1,634

1,634

Dividends declared and paid to Holdings

(3,603
)
(3,603
)

(3,603
)
Contribution related to restricted stock awards and stock option issuances by Holdings

13,446

13,446

13,446

Issuance of non-controlling interests

1,951

1,951

8,944

10,895

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(4,003
)

—

(5,153
)
(5,153
)
Redemption adjustment on non-controlling interests

184,294

(184,294
)
(184,294
)

(184,294
)
Other

673

389

389

165

554

Balance at September 30, 2017

$
621,515

0

$
0

$
942,142

$
(220,500
)
$
721,642

$
98,813

$
820,455

For the Nine Months Ended September 30, 2019

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2018 135,266
$ 135
$ 482,556
$ 320,351
$ 803,042
$ 113,198
$ 916,240
Net income attributable to Select Medical Holdings Corporation

40,834
40,834

40,834
Net income attributable to non-controlling interests

—
4,810
4,810
Issuance of restricted stock 21
0
0

—

—
Forfeitures of unvested restricted stock (24 ) 0
0
—
—
Vesting of restricted stock 5,488
5,488
5,488
Issuance of non-controlling interests —
6,837
6,837
Distributions to and purchases of non-controlling interests

259

259
(2,739 ) (2,480 )
Redemption adjustment on non-controlling interests

(47,470 ) (47,470 )

(47,470 )
Other

(122 ) (122 ) 413
291
Balance at March 31, 2019 135,263
$ 135
$ 488,303
$ 313,593
$ 802,031
$ 122,519
$ 924,550
Net income attributable to Select Medical Holdings Corporation 44,816
44,816
44,816
Net income attributable to non-controlling interests —
3,663
3,663
Issuance of restricted stock 187
0
0
—
—
Vesting of restricted stock 5,591
5,591
5,591
Repurchase of common shares (936 ) 0
(8,164 ) (5,456 ) (13,620 ) (13,620 )
Exercise of stock options 50
0
459
459
459
Issuance of non-controlling interests 6,366
6,366
24,761
31,127
Distributions to and purchases of non-controlling interests 14
14
(1,430 ) (1,416 )
Redemption adjustment on non-controlling interests 270
270
270
Other 82
82
428
510
Balance at June 30, 2019 134,564
$ 135
$ 492,569
$ 353,305
$ 846,009
$ 149,941
$ 995,950
Net income attributable to Select Medical Holdings Corporation 30,732
30,732
30,732
Net income attributable to non-controlling interests —
7,202
7,202
Issuance of restricted stock 1,069
1
(1 ) —
—
Forfeitures of unvested restricted stock (12 ) 0
0
—
—
Vesting of restricted stock 6,050
6,050
6,050
Repurchase of common shares (1,494 ) (2 ) (13,616 ) (10,071 ) (23,689 ) (23,689 )
Exercise of stock options 45
0
413
413
413
Distributions to and purchases of non-controlling interests

—
(6,538 ) (6,538 )
Redemption adjustment on non-controlling interests (104,553 ) (104,553 ) (104,553 )
Other (244 ) (244 ) 420
176
Balance at September 30, 2019 134,172
$ 134
$ 485,415
$ 269,169
$ 754,718
$ 151,025
$ 905,743

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of ~~Cash Flows~~

Changes in Equity and Income

(unaudited)

(in thousands)

Select Medical Holdings Corporation

Select Medical Corporation

For the Nine Months Ended September 30,

For the Nine Months Ended September 30,

2016

2017

2016

2017

Operating activities

Net income

$
104,789

$
99,587

$
104,789

$
99,587

Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries

16,145

14,542

16,145

14,542

Depreciation and amortization

107,887

119,644

107,887

119,644

Provision for bad debts

51,591

59,120

51,591

59,120

Equity in earnings of unconsolidated subsidiaries

(14,466
)
(15,618
)
(14,466
)
(15,618
)
Loss on extinguishment of debt

11,626

6,527

11,626

6,527

Gain on sale or disposal of assets and businesses

(41,910
)
(9,499
)
(41,910
)
(9,499
)
Gain on sale of equity investment

(241
)
—

(241
)
—

Impairment of equity investment

5,339

—

5,339

—

Stock compensation expense

12,924

14,227

12,924

14,227

Amortization of debt discount, premium and issuance costs

11,845

8,546

11,845

8,546

Deferred income taxes

(13,088
)
(6,126
)
(13,088
)
(6,126
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

(40,776
)
(201,514
)
(40,776
)
(201,514
)
Other current assets

12,094

(2,677
)
12,094

(2,677
)
Other assets

5,146

1,407

5,146

1,407

Accounts payable

(17,752
)
3,913

(17,752
)
3,913

Accrued expenses

52,996

18,752

52,996

18,752

Due to third party payors

11,065

—

11,065

—

Income taxes

5,547

19,141

5,547

19,141

Net cash provided by operating activities

280,761

129,972

280,761

129,972

Investing activities

Business combinations, net of cash acquired

(414,231
)
(19,371
)
(414,231
)
(19,371
)
Purchases of property and equipment

(118,260
)
(173,800
)
(118,260
)
(173,800
)
Investment in businesses

(3,140
)
(11,374
)
(3,140
)
(11,374
)
Proceeds from sale of assets, businesses, and equity investment

72,629

34,555

72,629

34,555

Net cash used in investing activities

(463,002
)
(169,990
)
(463,002
)
(169,990
)

Financing activities

Borrowings on revolving facilities

420,000

805,000

420,000

805,000

Payments on revolving facilities

(545,000
)
(705,000
)
(545,000
)
(705,000
)
Proceeds from term loans

795,344

1,139,487

795,344

1,139,487

Payments on term loans

(434,842
)
(1,176,567
)
(434,842
)
(1,176,567
)
Revolving facility debt issuance costs

—

(4,392
)
—

(4,392
)
Borrowings of other debt

23,801

27,571

23,801

27,571

Principal payments on other debt

(15,477
)
(15,112
)
(15,477
)
(15,112
)
Repurchase of common stock

(1,939
)
(3,603
)
—

—

Dividends paid to Holdings

—

—

(1,939
)
(3,603
)
Proceeds from exercise of stock options

1,488

1,634

—

—

Equity investment by Holdings

—

—

1,488

1,634

Repayments of overdrafts

(8,464
)
(20,439
)
(8,464
)
(20,439
)
Proceeds from issuance of non-controlling interests

11,846

8,986

11,846

8,986

Purchase of non-controlling interests

(1,530
)
(120
)
(1,530
)
(120
)
Distributions to non-controlling interests

(9,198
)
(9,156
)
(9,198
)
(9,156
)
Net cash provided by financing activities

236,029

48,289

236,029

48,289

Net increase in cash and cash equivalents

53,788

8,271

53,788

8,271

Cash and cash equivalents at beginning of period

14,435

99,029

14,435

99,029

Cash and cash equivalents at end of period

$
68,223

$
107,300

$
68,223

$
107,300

Supplemental Information

Cash paid for interest

$
92,928

$
101,341

$
92,928

$
101,341

Cash paid for taxes

$
59,937

$
46,553

$
59,937

$
46,553

For the Nine Months Ended September 30, 2018

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2017 134,115
$ 134
$ 463,499
$ 359,735
$ 823,368
$ 109,236
$ 932,604
Net income attributable to Select Medical Holdings Corporation

33,739
33,739
33,739
Net income attributable to non-controlling interests

—
4,500
4,500
Issuance of restricted stock 4
0
0

—
—
Forfeitures of unvested restricted stock (88 ) 0
0
—
—
Vesting of restricted stock 4,717
4,717
4,717
Repurchase of common shares (7 ) 0
(69 ) (53 ) (122 ) (122 )
Exercise of stock options 80
0
738

738
738
Issuance and exchange of non-controlling interests 74,341
74,341
74,341
Distributions to and purchases of non-controlling interests

(83,233 ) (83,233 ) (1,094 ) (84,327 )
Redemption adjustment on non-controlling interests

(1,051 ) (1,051 ) (1,051 )
Other

103
103
35
138
Balance at March 31, 2018 134,104
$ 134
$ 468,885
$ 383,581
$ 852,600
$ 112,677
$ 965,277
Net income attributable to Select Medical Holdings Corporation 46,511
46,511
46,511
Net income attributable to non-controlling interests —
3,139
3,139
Issuance of restricted stock 170
0
0
—
—
Vesting of restricted stock 4,845
4,845
4,845
Repurchase of common shares (42 ) 0
(421 ) (346 ) (767 ) (767 )
Exercise of stock options 95
0
882
882
882
Issuance and exchange of non-controlling interests 1,553
1,553
1,921
3,474
Distributions to and purchases of non-controlling interests (932 ) (384 ) (1,316 ) (1,958 ) (3,274 )
Redemption adjustment on non-controlling interests (8,500 ) (8,500 ) (8,500 )
Other (337 ) (337 ) 677
340
Balance at June 30, 2018 134,327
$ 134
$ 474,812
$ 420,525
$ 895,471
$ 116,456
$ 1,011,927
Net income attributable to Select Medical Holdings Corporation 32,917
32,917
32,917
Net income attributable to non-controlling interests —
518
518
Issuance of restricted stock 1,048
1
(1 ) —
—
Vesting of restricted stock 5,497

5,497
5,497
Repurchase of common shares (236 ) 0
(2,499 ) (2,252 ) (4,751 ) (4,751 )
Exercise of stock options 1
0
13
13
13
Distributions to and purchases of non-controlling interests

—
(4,419 ) (4,419 )
Redemption adjustment on non-controlling interests (154,514 ) (154,514 ) (154,514 )
Other (41 ) (41 ) 421
380
Balance at September 30, 2018 135,140
$ 135
$ 477,822
$ 296,635
$ 774,592
$ 112,976
$ 887,568

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

For the Nine Months Ended September 30,
2018 2019
Operating activities

Net income $ 147,220
$ 157,360

Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries 10,734
13,609

Depreciation and amortization 149,022
160,072

Provision for bad debts (373 ) 2,344

Equity in earnings of unconsolidated subsidiaries (14,914 ) (18,710 )
Loss on extinguishment of debt 484
10,160

Gain on sale of assets and businesses (9,129 ) (6,349 )
Stock compensation expense 17,175
19,431

Amortization of debt discount, premium and issuance costs 9,845
9,469

Deferred income taxes (2,092 ) (7,247 )
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable 23,495
(93,425 )
Other current assets (10,274 ) (6,016 )
Other assets 4,828
1,259

Accounts payable (3,507 ) 1,369

Accrued expenses 49,391
22,396

Income taxes 9,072
918

Net cash provided by operating activities 380,977
266,640

Investing activities

Business combinations, net of cash acquired (519,258 ) (86,269 )
Purchases of property and equipment (121,039 ) (123,956 )
Investment in businesses (12,936 ) (60,668 )
Proceeds from sale of assets and businesses 6,691
183

Net cash used in investing activities (646,542 ) (270,710 )
Financing activities

Borrowings on revolving facilities 420,000
700,000

Payments on revolving facilities (585,000 ) (720,000 )
Proceeds from term loans 779,904
593,683

Payments on term loans (8,625 ) (375,084 )
Proceeds from 6.250% senior notes —
539,176

Payment on 6.375% senior notes —
(710,000 )
Revolving facility debt issuance costs (1,333 ) (310 )
Borrowings of other debt 30,134
19,282

Principal payments on other debt (17,971 ) (22,628 )
Repurchase of common stock (5,640 ) (37,309 )
Proceeds from exercise of stock options 1,633
872

Decrease in overdrafts (6,172 ) (25,083 )
Proceeds from issuance of non-controlling interests 2,926
18,288

Distributions to and purchases of non-controlling interests (306,427 ) (16,032 )
Net cash provided by (used in) financing activities 303,429
(35,145 )
Net increase (decrease) in cash and cash equivalents 37,864
(39,215 )
Cash and cash equivalents at beginning of period 122,549
175,178

Cash and cash equivalents at end of period $ 160,413
$ 135,963

Supplemental Information

Cash paid for interest $ 134,378
$ 149,090

Cash paid for taxes 40,460
58,472

Non-cash equity exchange for acquisition of U.S. HealthWorks 238,000
—

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECT MEDICAL HOLDINGS CORPORATION ~~AND SELECT MEDICAL CORPORATION~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.~~Basis of Presentation~~


1.	Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, ~~2017,~~2019, and for the three and nine month periods ended September 30, ~~2016~~2018 and ~~2017,~~2019, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and nine months ended September 30, ~~2017~~2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2017.~~2019. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2016~~2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~23, 2017.~~

2.~~Accounting Policies~~

21, 2019.


2.	Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and trade receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage or receives authorization from the patient’s employer prior to the patient’s visit.

Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% and 15% of the Company’s accounts receivable is from Medicare at December 31, 2018, and September 30, 2019, respectively.

Leases

The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.

Balance Sheet

For both operating and finance leases, the Company recognizes a right-of-use asset and lease liability at lease commencement. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents an obligation to make lease payments arising from a lease which are measured on a discounted basis. The Company elected the short-term lease exemption for its equipment leases; accordingly, equipment leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.

The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.

Statement of Operations

For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the subleases. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.

For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.

The Company elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.

The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.

Recent Accounting Pronouncements

Financial Instruments

In ~~January 2017,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2017-01,~~ ~~Business Combinations (Topic 805),~~ ~~Clarifying the Definition~~2016-13, Financial Instruments — Credit Losses: Measurement of ~~a Business~~, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output.Credit Losses on Financial Instruments. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 will be applied prospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~Income~~ ~~Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~ ~~Current GAAP prohibits~~current standard delays the recognition of ~~current and deferred income taxes for an intra-entity~~a credit loss on a financial asset ~~transfer~~ until the ~~asset has been sold~~loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to ~~an outside party.~~be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The financial instruments subject to ASU ~~requires an entity to recognize~~2016-13 are the ~~income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.~~ Company’s accounts receivable and notes receivable.

The standard will be effective for fiscal years beginning after December 15, 2017. The Company plans to adopt the guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

~~The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018,~~2019, including interim periods within those fiscal years. ~~Earlier application is permitted as of the beginning of an interim or annual reporting period. A~~The guidance must be applied using a modified retrospective approach ~~is required for leases that exist or are entered into after~~through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements.

~~Upon adoption,~~ Given the ~~Company will recognize significant assets and liabilities on the consolidated balance sheets as a result~~very high rate of collectability of the ~~operating lease obligations~~Company’s financial instruments, the impact of ASU 2016-13 will not be material to the ~~Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the~~Company’s consolidated ~~statements of operations.~~

~~The Company will implement the new standard beginning January 1, 2019.~~ financial statements.

The Company’s implementation efforts are focused on ~~designing~~finalizing the accounting processes ~~disclosure processes,~~ and ~~internal~~related controls ~~in order to account~~associated with accounting for its ~~leases~~financial instruments under the new standard.

~~In May 2014, March 2016, April 2016,~~

Recently Adopted Accounting Pronouncements

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and ~~December 2016, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~~~, ASU 2016-08,~~ ~~Revenue from Contracts with Customers, Principal versus Agent Considerations~~~~, ASU 2016-10,~~ ~~Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing~~~~, ASU 2016-12,~~ ~~Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients~~~~, and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer~~ (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectscontinue to be ~~entitled~~reported in ~~exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts~~accordance with ~~customers are also required. The standards require the selection of a retrospective or cumulative effect transition method.~~

ASC Topic 840, Leases.

The Company ~~will implement~~elected the ~~new standard beginning January 1, 2018 using~~package of practical expedients, which permitted the ~~retrospective transition method. Adoption of~~Company not to reassess under ASC Topic 842 the ~~new standard will result in material changes~~Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income is not expected to materially change uponCompany.

The adoption of the ~~new standards. The principal change is how the new~~ standard ~~requires healthcare providers to estimate the amount of variable consideration to be included~~resulted in the ~~transaction price up~~recognition of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to ~~an amount which is~~ ~~probable that a significant reversal will not occur.~~ retained earnings upon adoption.


3.	Redeemable Non-Controlling Interests

The ~~most common form of variable consideration~~ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company ~~experiences~~ are ~~amounts for services provided that are ultimately not realizable from a customer. Under the current standards,~~classified as non-controlling interests. Some of the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially allnon-controlling ownership interests consist of ~~the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when~~outside parties that have certain redemption rights that, if exercised, require the Company ~~retrospectively applies~~to purchase the ~~guidance in the standards on January 1, 2018.~~

~~The Company’s remaining implementation efforts~~parties’ ownership interests. These interests are ~~focused principally on refining the accounting processes, disclosure processes,~~classified and ~~internal controls.~~

~~Recently Adopted Accounting Pronouncements~~

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes~~~~, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities~~reported as redeemable non-controlling interests and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

December 31, 2016

As Reported

As Adjusted

(in thousands)

Current deferred tax asset

$
45,165

$
—

Total current assets

808,068

762,903

Other assets

152,548

173,944

Total assets

4,944,395

4,920,626

Non-current deferred tax liability

222,847

199,078

Total liabilities

3,616,335

3,592,566

Total liabilities and equity

4,944,395

4,920,626

~~Reclassifications~~

~~Certain reclassifications~~ have been ~~made~~adjusted to ~~prior year amounts~~their approximate redemption values.

The changes in order to conform to current year presentation. As discussed above, the condensed consolidated balance sheet at December 31, 2016 has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, ~~Balance Sheet Classification of Deferred Taxes.~~

~~3. Acquisitions~~

~~Physiotherapy~~redeemable non-controlling interests are as follows (in thousands):

Nine Months Ended September 30,
2018 2019
Balance as of January 1 $ 640,818
$ 780,488
Net income attributable to redeemable non-controlling interests 5,743
7,700
Issuance and exchange of redeemable non-controlling interests 163,659
—
Distributions to and purchases of redeemable non-controlling interests (203,972 ) (2,771 )
Redemption adjustment on redeemable non-controlling interests 1,051
47,470
Other 175
354
Balance as of March 31 $ 607,474
$ 833,241
Net income attributable to redeemable non-controlling interests 10,909
11,507
Distributions to and purchases of redeemable non-controlling interests (11,112 ) (395 )
Redemption adjustment on redeemable non-controlling interests 8,500
(270 )
Other 461
339
Balance as of June 30 $ 616,232
$ 844,422
Net income attributable to redeemable non-controlling interests 9,244
6,096
Distributions to and purchases of redeemable non-controlling interests (763 ) (1,721 )
Redemption adjustment on redeemable non-controlling interests 154,514
104,553
Other 347
347
Balance as of September 30 $ 779,574
$ 953,697


4.	Acquisitions

U.S. HealthWorks Acquisition

On ~~March 4, 2016, Select~~February 1, 2018, Concentra Inc. acquired ~~100%~~all of the issued and outstanding ~~equity securities~~shares of ~~Physiotherapy Associates Holdings,~~stock of U.S. HealthWorks, Inc. (“~~Physiotherapy”~~U.S. HealthWorks”), an occupational medicine and urgent care service provider, from Dignity Health Holding Corporation (“DHHC”).

U.S. HealthWorks was acquired for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) ~~for $406.3 million, net~~which was valued at $238.0 million. The remainder of ~~$12.3 million~~the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of ~~cash acquired.~~

the transaction.

For the ~~Physiotherapy~~U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair ~~value~~values in accordance with the provisions of ~~Accounting Standards Codification (“ASC”)~~ASC Topic 805, Business Combinations. During the ~~quarter~~year ended ~~March~~December 31, ~~2017,~~2018, the Company finalized the purchase ~~price allocation.~~

accounting related to this acquisition.

The following table reconciles the ~~allocation~~fair values of ~~the consideration given for~~ identifiable net assets and goodwill ~~acquired~~ to the ~~net cash paid~~consideration given for the acquired business (in thousands):

Cash and cash equivalents

$
12,340

Identifiable tangible assets, excluding cash and cash equivalents

87,832

Identifiable intangible assets

32,484

Goodwill

343,187

Total assets

475,843

Total liabilities

54,685

Acquired non-controlling interests

2,514

Net assets acquired

418,644

Less: Cash and cash equivalents acquired

(12,340
)
Net cash paid

$
406,304

~~Goodwill~~



Accounts receivable	$	68,934
Other current assets	10,810
Property and equipment	69,712
Identifiable intangible assets	140,406
Other assets	25,435
Goodwill	540,067
Total assets	855,364
Accounts payable and other current liabilities	49,925
Deferred income taxes and other long-term liabilities	51,851
Total liabilities	101,776
Consideration given	$	753,588

For the three months ended September 30, 2018, U.S. HealthWorks contributed net operating revenues of ~~$343.2~~$133.3 million ~~has been recognized~~which is reflected in the ~~business combination, representing~~Company’s consolidated statement of operations. For the ~~excess~~period February 1, 2018 through September 30, 2018, U.S. HealthWorks contributed net operating revenues of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from Physiotherapy’s future earnings potential and its assembled workforce. Goodwill has been assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8$362.7 million which is reflected in the ~~Company will deduct through 2030.~~

Company’s consolidated statement of operations for the nine months ended September 30, 2018. Due to the ~~integration~~integrated nature of ~~Physiotherapy into our outpatient rehabilitation~~the Company’s operations, the Company believes that it is not practicable to separately identify ~~net revenue and~~ earnings of ~~Physiotherapy~~U.S. HealthWorks on a stand-alone basis.

Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisition of ~~Physiotherapy~~U.S. HealthWorks occurred on January 1, ~~2015.~~2017. These results are not necessarily indicative of the results of future operations nor of the results that would have ~~actually~~ occurred had the acquisition been consummated on the aforementioned date. ~~The Company’s results of operations for the three months ended September 30, 2016 and for~~For the three and nine months ended September 30, ~~2017~~2019, the Company’s results of operations include ~~Physiotherapy~~U.S. HealthWorks for the entire ~~period. There were~~period and no pro forma adjustments ~~during these periods; therefore, no~~were made.



	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
	(in thousands)
Net operating revenues	$	1,267,401	$	3,864,155
Net income attributable to Select Medical Holdings Corporation	34,441		116,135

The Company’s pro forma ~~information is presented.~~

Nine Months Ended
September 30, 2016

(in thousands, except per
share amounts)

Net revenue

$
3,293,286

Net income attributable to Holdings

93,418

Income per common share:

Basic

$
0.71

Diluted

$
0.71

~~The net income tax impact was calculated at a statutory rate, as if Physiotherapy had been a subsidiary of the Company~~results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, ~~2015. Pro forma results~~2017. Accordingly, for the nine months ended September 30, ~~2016~~2018, pro forma results were adjusted to exclude ~~approximately $3.2~~$2.9 million of ~~Physiotherapy~~U.S. HealthWorks acquisition costs.

~~Other Acquisitions~~

~~The Company completed acquisitions within our specialty hospitals, outpatient rehabilitation, and Concentra segments during~~


5.	Sale of Businesses

During the nine months ended September 30, ~~2017.~~2019, the Company recognized a gain of $6.5 million which resulted from the sale of 22 wholly owned outpatient rehabilitation clinics to a non-consolidating subsidiary. During the nine months ended September 30, 2018, the Company recognized a gain of $9.0 million. The ~~Company provided~~gain resulted principally from the sale of 41 wholly owned outpatient rehabilitation clinics to non-consolidating subsidiaries.


6.	Variable Interest Entities

Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.

The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.

The total ~~consideration~~assets of ~~$21.7 million, consisting principally of $19.4 million of cash and the issuance of non-controlling interests. The assets received in these acquisitions consisted~~Concentra’s variable interest entities, which are comprised principally of accounts receivable, ~~property and equipment, identifiable intangible assets, and goodwill, of which $0.8 million, $1.8~~were $166.2 million and ~~$14.5~~$202.3 million at December 31, 2018, and September 30, 2019, respectively. The total liabilities of ~~goodwill was recognized in our specialty~~Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $164.4 million and $200.9 million at December 31, 2018, and September 30, 2019, respectively.


7.	Leases

The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.

The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with 2, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with 2, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with 2, five year renewal options.

For the three and ~~Concentra reporting units, respectively.~~

4.~~Intangible Assets~~nine months ended September 30, 2019, the Company’s total lease cost was as follows (in thousands):

Three Months Ended September 30, 2019
Unrelated Parties Related Parties Total
Operating lease cost $ 68,046
$ 1,342
$ 69,388
Finance lease cost:
Amortization of right-of-use assets 73
—
73
Interest on lease liabilities 259
—
259
Short-term lease cost 592
—
592
Variable lease cost 11,789
156
11,945
Sublease income (2,458 ) —
(2,458 )
Total lease cost $ 78,301
$ 1,498
$ 79,799

Nine Months Ended September 30, 2019
Unrelated Parties Related Parties Total
Operating lease cost $ 202,600
$ 4,026
$ 206,626
Finance lease cost:
Amortization of right-of-use assets 199
—
199
Interest on lease liabilities 555
—
555
Short-term lease cost 1,776
—
1,776
Variable lease cost 32,380
397
32,777
Sublease income (7,388 ) —
(7,388 )
Total lease cost $ 230,122
$ 4,423
$ 234,545

For the nine months ended September 30, 2019, supplemental cash flow information related to leases was as follows (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 204,909
Operating cash flows for finance leases 526
Financing cash flows for finance leases 183
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾
$ 1,202,165
Finance leases 9,102

_______________________________________________________________________________


(1)	Includes the right-of-use assets obtained in exchange for lease liabilities of $1,057.0 million which were recognized upon adoption of ASC Topic 842 at January 1, 2019.

As of September 30, 2019, supplemental balance sheet information related to leases was as follows (in thousands):

Operating Leases
Unrelated Parties Related Parties Total
Operating lease right-of-use assets $ 968,181
$ 18,338
$ 986,519

Current operating lease liabilities $ 200,012
$ 4,924
$ 204,936
Non-current operating lease liabilities 819,808
16,397
836,205
Total operating lease liabilities $ 1,019,820
$ 21,321
$ 1,041,141

Finance Leases
Unrelated Parties Related Parties Total
Property and equipment, net $ 5,027
$ —
$ 5,027

Current portion of long-term debt and notes payable $ 210
$ —
$ 210
Long-term debt, net of current portion 13,137
—
13,137
Total finance lease liabilities $ 13,347
$ —
$ 13,347

As of September 30, 2019, the weighted average remaining lease terms and ~~Liabilities~~

discount rates were as follows:



Weighted average remaining lease term (in years):
Operating leases	8.1
Finance leases	34.9
Weighted average discount rate:
Operating leases	5.9	%
Finance leases	7.4	%

As of September 30, 2019, maturities of lease liabilities were approximately as follows (in thousands):
Operating Leases Finance Leases Total
2019 (remainder of year) $ 67,567
$ 294
$ 67,861
2020 250,778
1,182
251,960
2021 213,486
1,193
214,679
2022 173,399
1,203
174,602
2023 131,550
1,214
132,764
Thereafter 556,103
31,630
587,733
Total undiscounted cash flows 1,392,883
36,716
1,429,599
Less: Imputed interest 351,742
23,369
375,111
Total discounted lease liabilities $ 1,041,141
$ 13,347
$ 1,054,488

As disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s undiscounted future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties were approximately as follows as of December 31, 2018 (in thousands):

Total
2019 $ 267,846
2020 231,711
2021 193,155
2022 150,155
2023 107,759
Thereafter 484,038
$ 1,434,664


8.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, ~~2017:~~

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Total

(in thousands)

Balance as of December 31, 2016

$
1,447,406

$
643,557

$
660,037

$
2,751,000

Acquired

797

1,768

14,505

17,070

Measurement period adjustment

(342
)
168

—

(174
)
Balance as of September 30, 2017

$
1,447,861

$
645,493

$
674,542

$
2,767,896

~~See Note 3 for details of the goodwill acquired during the period.~~

2019:

Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Total
(in thousands)
Balance as of December 31, 2018 $ 1,045,220
$ 416,646
$ 642,422
$ 1,216,438
$ 3,320,726
Acquired 30,028
14,254
7,996
18,299
70,577
Sold —
—
(5,629 ) —
(5,629 )
Measurement period adjustment 421
—
—
(3,439 ) (3,018 )
Balance as of September 30, 2019 $ 1,075,669
$ 430,900
$ 644,789
$ 1,231,298
$ 3,382,656

Identifiable Intangible Assets ~~and Liabilities~~

The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible ~~assets and liabilities:~~

December 31, 2016

September 30, 2017

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

(in thousands)

Indefinite-lived assets:

Trademarks

$
166,698

$
—

$
166,698

$
166,698

$
—

$
166,698

Certificates of need

17,026

—

17,026

19,166

—

19,166

Accreditations

2,235

—

2,235

1,965

—

1,965

Finite-lived assets:

Customer relationships

142,198

(23,185
)
119,013

143,953

(34,482
)
109,471

Favorable leasehold interests

13,089

(2,317
)
10,772

13,295

(3,745
)
9,550

Non-compete agreements

26,655

(1,837
)
24,818

27,555

(3,369
)
24,186

Total identifiable intangible assets

$
367,901

$
(27,339
)
$
340,562

$
372,632

$
(41,596
)
$
331,036

Finite-lived liabilities:

Unfavorable leasehold interests

$
5,139

$
(1,410
)
$
3,729

$
5,343

$
(2,529
)
$
2,814

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $4.1 million and $4.4 million for the three months ended September 30, 2016 and 2017, respectively. Amortization expense was $12.2 million and $13.1 million for the nine months ended September 30, 2016 and 2017, respectively.

The Company’s favorable and unfavorable leasehold interests are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. The Company’s unfavorable leasehold interests are not separately presented on the condensed consolidated balance sheets but are included as a component of accrued other and other non-current liabilities.

assets:



	December 31, 2018							September 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,174		—			19,174		17,166		—			17,166
Accreditations	1,857		—			1,857		1,874		—			1,874
Finite-lived intangible assets:
Trademarks	5,000		(4,583		)	417		5,000		(5,000		)	—
Customer relationships	280,710		(61,900		)	218,810		287,880		(81,010		)	206,870
Favorable leasehold interests⁽¹⁾	13,553		(6,064		)	7,489		—		—			—
Non-compete agreements	29,400		(6,152		)	23,248		31,255		(8,100		)	23,155
Total identifiable intangible assets	$	516,392	$	(78,699	)	$	437,693	$	509,873	$	(94,110	)	$	415,763

_______________________________________________________________________________


(1)	Favorable leasehold interests are a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases.

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At September 30, ~~2017,~~2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~2.1~~7.4 years, respectively.

5.~~Long-Term Debt~~

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.9 million and ~~Notes Payable~~

$6.9 million for the three months ended September 30, 2018 and 2019, respectively. Amortization expense was $22.1 million and $22.9 million for the nine months ended September 30, 2018 and 2019, respectively.


9.	Long-Term Debt and Notes Payable

For purposes of this indebtedness footnote, references to Select exclude Concentra Inc. because the Concentra credit facilities are non-recourse to Holdings and Select.

~~The~~

As of September 30, 2019, the Company’s long-term debt and notes payable ~~as of September 30, 2017 are~~were as follows (in thousands):

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value

Select:

6.375% senior notes

$
710,000

$
835

$
(7,032
)
$
703,803

$
731,300

Credit facilities:

Revolving facility

320,000

—

—

320,000

294,400

Term loan

1,144,250

(12,962
)
(13,019
)
1,118,269

1,158,553

Other

35,184

—

—

35,184

35,184

Total Select debt

2,209,434

(12,127
)
(20,051
)
2,177,256

2,219,437

Concentra:

Credit facilities:

Term loan

619,175

(2,385
)
(11,268
)
605,522

620,917

Other

7,524

—

—

7,524

7,524

Total Concentra debt

626,699

(2,385
)
(11,268
)
613,046

628,441

Total debt

$
2,836,133

$
(14,512
)
$
(31,319
)
$
2,790,302

$
2,847,878



	Principal Outstanding		Unamortized Discount			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.250% senior notes	$	550,000	$	—		$	(10,582	)	$	539,418	$	576,125
Credit facilities:
Term loan	1,531,068		(10,915		)	(11,302		)	1,508,851		1,532,982
Other debt, including finance leases	70,816		—			(420		)	70,396		70,396
Total Select debt	2,151,884		(10,915		)	(22,304		)	2,118,665		2,179,503
Concentra Inc.:
Credit facilities:
Term loan	1,240,298		(2,643		)	(10,008		)	1,227,647		1,246,499
Other debt, including finance leases	5,850		—			—			5,850		5,850
Total Concentra Inc. debt	1,246,148		(2,643		)	(10,008		)	1,233,497		1,252,349
Total debt	$	3,398,032	$	(13,558	)	$	(32,312	)	$	3,352,162	$	3,431,852

Principal maturities of the Company’s long-term debt and notes payable ~~are~~were approximately as follows (in thousands):

2017

2018

2019

2020

2021

Thereafter

Total

Select:

6.375% senior notes

$
—

$
—

$
—

$
—

$
710,000

$
—

$
710,000

Credit facilities:

Revolving facility

—

—

—

—

—

320,000

320,000

Term loan

2,875

11,500

11,500

11,500

11,500

1,095,375

1,144,250

Other

17,828

5,437

11,827

68

14

10

35,184

Total Select debt

20,703

16,937

23,327

11,568

721,514

1,415,385

2,209,434

Concentra:

Credit facilities:

Term loan

—

—

—

3,016

6,520

609,639

619,175

Other

657

2,843

144

161

160

3,559

7,524

Total Concentra debt

657

2,843

144

3,177

6,680

613,198

626,699

Total debt

$
21,360

$
19,780

$
23,471

$
14,745

$
728,194

$
2,028,583

$
2,836,133

~~The~~



	2019		2020		2021		2022		2023		Thereafter		Total
Select:
6.250% senior notes	$	—	$	—	$	—	$	—	$	—	$	550,000	$	550,000
Credit facilities:
Term loan	1,250		5,000		5,000		5,000		5,000		1,509,818		1,531,068
Other debt, including finance leases	3,541		5,502		1,814		18,036		38		41,885		70,816
Total Select debt	4,791		10,502		6,814		23,036		5,038		2,101,703		2,151,884
Concentra Inc.:
Credit facilities:
Term loan	250		1,000		1,000		1,238,048		—		—		1,240,298
Other debt, including finance leases	136		1,194		330		358		363		3,469		5,850
Total Concentra Inc. debt	386		2,194		1,330		1,238,406		363		3,469		1,246,148
Total debt	$	5,177	$	12,696	$	8,144	$	1,261,442	$	5,401	$	2,105,172	$	3,398,032

As of December 31, 2018, the Company’s long-term debt and notes payable ~~as of December 31, 2016 are~~were as follows (in thousands):

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value

Select:

6.375% senior notes

$
710,000

$
1,006

$
(8,461
)
$
702,545

$
710,000

Credit facilities:

Revolving facility

220,000

—

—

220,000

204,600

Term loans

1,147,751

(11,967
)
(13,581
)
1,122,203

1,165,860

Other

22,688

—

—

22,688

22,688

Total Select debt

2,100,439

(10,961
)
(22,042
)
2,067,436

2,103,148

Concentra:

Credit facilities:

Term loan

642,239

(2,773
)
(13,091
)
626,375

644,648

Other

5,178

—

—

5,178

5,178

Total Concentra debt

647,417

(2,773
)
(13,091
)
631,553

649,826

Total debt

$
2,747,856

$
(13,734
)
$
(35,133
)
$
2,698,989

$
2,752,974

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

6.375% senior notes $ 710,000
$ 550
$ (4,642 ) $ 705,908
$ 706,450
Credit facilities:

Revolving facility 20,000
—
—
20,000
18,400
Term loan 1,129,875
(9,690 ) (9,321 ) 1,110,864
1,076,206
Other 56,415
—
(484 ) 55,931
55,931
Total Select debt 1,916,290
(9,140 ) (14,447 ) 1,892,703
1,856,987
Concentra Inc.:

Credit facilities:

Term loans 1,414,175
(2,765 ) (18,648 ) 1,392,762
1,357,802
Other debt, including finance leases 7,916
—
—
7,916
7,916
Total Concentra Inc. debt 1,422,091
(2,765 ) (18,648 ) 1,400,678
1,365,718
Total debt $ 3,338,381
$ (11,905 ) $ (33,095 ) $ 3,293,381
$ 3,222,705

Concentra Credit Facilities

On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5, among other things, (i) extended the maturity date of the Concentra revolving facility from June 1, 2020 to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra revolving facility from $75.0 million to $100.0 million.

On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million in term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.

Select Credit Facilities

On ~~March 6, 2017,~~August 1, 2019, Select entered into ~~a new senior secured~~Amendment No. 3 to the Select credit agreement ~~(the “Select~~dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit ~~agreement”) that provides for $1.6 billion in~~agreement.

Select 6.250% Senior Notes

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior ~~secured credit facilities comprising~~notes due August 15, 2026. Select used a ~~$1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and~~portion of the net proceeds of the 6.250% senior notes, together with a portion of the ~~Select~~proceeds from the incremental term loan ~~the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.~~

~~Select used~~ borrowings under the Select credit facilities ~~to:~~(as described above), in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the ~~series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the~~outstanding borrowings under Select’s revolving facility, ~~maturing March 1, 2018 under its then existing credit facilities;~~ and ~~(ii)~~(iii) pay related fees and expenses ~~in connection~~associated with the ~~refinancing, which resulted~~financing.

Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in ~~$6.5 million~~arrears on February 15 and August 15 of ~~debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.~~

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each ~~case based on Select’s leverage ratio.~~

~~The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan~~year, commencing on ~~June 30, 2017.~~February 15, 2020. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are ~~outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.~~

~~Select will be required~~Select’s senior unsecured obligations which are subordinated to prepay borrowings under the Select credit facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of September 30, 2017, Select’s leverage ratio was 5.82 to 1.00.

The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future ~~property and assets and by a pledge~~secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s ~~capital stock,~~other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.

Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of ~~Select’s domestic~~ subsidiaries, ~~and up to 65%~~(ix) use the proceeds from sales of ~~the~~assets, including capital stock of ~~Select’s foreign~~restricted subsidiaries, ~~held directly by Select or~~and (x) enter into transactions with affiliates. These covenants are subject to a ~~domestic subsidiary.~~

number of exceptions, limitations and qualifications.

Loss on Early Retirement of Debt

The Company incurred losses on early retirement of debt totaling $18.6 million for the nine months ended September 30, 2019.

Excess Cash Flow Payment

~~On March 1, 2017, Concentra~~

In February 2019, Select made a principal prepayment of ~~$23.1~~approximately $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.

In February 2019, Concentra ~~first lien~~Inc. made a principal prepayment of approximately $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s ~~6.375%~~6.250% senior notes and for ~~its~~the Select and Concentra credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s ~~6.375%~~6.250% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.

~~6. Segment Information~~


10.	Segment Information

The Company’s reportable segments ~~consist of: specialty hospitals,~~include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and ~~Concentra.~~Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and ~~certain other~~employee leasing services with non-consolidating ~~joint ventures~~subsidiaries. Prior to 2019, these employee leasing services were reflected in the financial results of the Company’s reportable segments. Net operating revenues have been conformed to the current presentation for the three and ~~minority investments in other healthcare related businesses.~~ nine months ended September 30, 2018.

The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Physiotherapy~~ acquisition costs ~~non-operating~~associated with U.S. HealthWorks, gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries.

The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

The following tables summarize selected financial data for the Company’s reportable segments. ~~The segment~~Prior year results ~~of Holdings are identical~~presented herein have been changed to ~~those of Select.~~

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

(in thousands)

Net operating revenues:

Specialty hospitals

$
544,491

$
585,288

$
1,729,261

$
1,785,035

Outpatient rehabilitation(1)

250,710

250,527

745,720

764,450

Concentra

258,507

261,295

764,252

779,030

Other

87

56

523

687

Total Company

$
1,053,795

$
1,097,166

$
3,239,756

$
3,329,202

Adjusted EBITDA:

Specialty hospitals

$
48,264

$
69,454

$
217,759

$
256,291

Outpatient rehabilitation(1)

31,995

29,298

99,006

102,575

Concentra

40,888

40,003

118,080

125,656

Other

(23,070
)
(22,928
)
(66,696
)
(71,125
)
Total Company

$
98,077

$
115,827

$
368,149

$
413,397

Total assets:(2)

Specialty hospitals

$
2,469,060

$
2,748,761

$
2,469,060

$
2,748,761

Outpatient rehabilitation

955,359

945,765

955,359

945,765

Concentra

1,318,866

1,332,012

1,318,866

1,332,012

Other

73,992

97,269

73,992

97,269

Total Company

$
4,817,277

$
5,123,807

$
4,817,277

$
5,123,807

Purchases of property and equipment, net:

Specialty hospitals

$
24,378

$
37,376

$
79,366

$
106,424

Outpatient rehabilitation(1)

6,234

6,496

15,032

19,370

Concentra

2,720

5,369

10,647

21,656

Other

4,670

19,257

13,215

26,350

Total Company

$
38,002

$
68,498

$
118,260

$
173,800

conform to the current presentation.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019
	(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	420,108		$	462,892		$	1,327,236		$	1,381,569
Rehabilitation hospital	144,588			173,369			432,675			488,301
Outpatient rehabilitation	245,234			265,330			743,379			774,126
Concentra	404,481			421,900			1,173,420			1,231,672
Other	52,990			69,852			139,865			203,670
Total Company	$	1,267,401		$	1,393,343		$	3,816,575		$	4,079,338
Adjusted EBITDA:
Critical illness recovery hospital	$	53,292		$	57,247		$	186,989		$	194,383
Rehabilitation hospital	25,343			36,780			80,314			92,545
Outpatient rehabilitation	34,531			40,040			107,003			111,615
Concentra	68,754			77,679			199,119			220,024
Other	(25,292		)	(29,081		)	(75,337		)	(79,552		)
Total Company	$	156,628		$	182,665		$	498,088		$	539,015
Total assets:
Critical illness recovery hospital	$	1,785,336		$	2,116,512		$	1,785,336		$	2,116,512
Rehabilitation hospital	888,342			1,121,260			888,342			1,121,260
Outpatient rehabilitation	991,105			1,280,712			991,105			1,280,712
Concentra	2,201,869			2,366,227			2,201,869			2,366,227
Other	113,529			270,045			113,529			270,045
Total Company	$	5,980,181		$	7,154,756		$	5,980,181		$	7,154,756
Purchases of property and equipment:
Critical illness recovery hospital	$	8,134		$	12,254		$	31,455		$	36,902
Rehabilitation hospital	8,769			5,293			29,766			23,832
Outpatient rehabilitation	7,209			7,476			22,565			23,221
Concentra	12,539			8,240			29,281			36,178
Other	2,740			1,408			7,972			3,823
Total Company	$	39,391		$	34,671		$	121,039		$	123,956

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

Three Months Ended September 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
48,264

$
31,995

$
40,888

$
(23,070
)

Depreciation and amortization

(14,317
)
(6,159
)
(15,278
)
(1,411
)

Stock compensation expense

—

—

(193
)
(4,557
)

Income (loss) from operations

$
33,947

$
25,836

$
25,417

$
(29,038
)
$
56,162

Loss on early retirement of debt

(10,853
)
Equity in earnings of unconsolidated subsidiaries

5,268

Non-operating loss

(1,028
)
Interest expense

(44,482
)
Income before income taxes

$
5,067

Three Months Ended September 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
69,454

$
29,298

$
40,003

$
(22,928
)

Depreciation and amortization

(15,437
)
(5,964
)
(15,014
)
(2,357
)

Stock compensation expense

—

—

(212
)
(4,745
)

Income (loss) from operations

$
54,017

$
23,334

$
24,777

$
(30,030
)
$
72,098

Equity in earnings of unconsolidated subsidiaries

4,431

Interest expense

(37,688
)
Income before income taxes

$
38,841

Nine Months Ended September 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
217,759

$
99,006

$
118,080

$
(66,696
)

Depreciation and amortization

(42,022
)
(16,397
)
(45,570
)
(3,898
)

Stock compensation expense

—

—

(577
)
(12,347
)

Physiotherapy acquisition costs

—

—

—

(3,236
)

Income (loss) from operations

$
175,737

$
82,609

$
71,933

$
(86,177
)
$
244,102

Loss on early retirement of debt

(11,626
)
Equity in earnings of unconsolidated subsidiaries

14,466

Non-operating gain

37,094

Interest expense

(127,662
)
Income before income taxes

$
156,374

Nine Months Ended September 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
256,291

$
102,575

$
125,656

$
(71,125
)

Depreciation and amortization

(49,391
)
(18,182
)
(46,566
)
(5,505
)

Stock compensation expense

—

—

(782
)
(13,445
)

Income (loss) from operations

$
206,900

$
84,393

$
78,308

$
(90,075
)
$
279,526

Loss on early retirement of debt

(19,719
)
Equity in earnings of unconsolidated subsidiaries

15,618

Non-operating loss

(49
)
Interest expense

(116,196
)
Income before income taxes

$
159,180

~~(1)~~



	Three Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	53,292		$	25,343		$	34,531		$	68,754		$	(25,292	)
Depreciation and amortization	(11,136		)	(6,079		)	(6,597		)	(24,488		)	(2,227		)
Stock compensation expense	—			—			—			(767		)	(5,497		)
Income (loss) from operations	$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837
Equity in earnings of unconsolidated subsidiaries																5,432
Gain on sale of businesses																2,139
Interest expense																(50,669		)
Income before income taxes																$	56,739



	Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	57,247		$	36,780		$	40,040		$	77,679		$	(29,081	)
Depreciation and amortization	(12,484		)	(7,234		)	(6,887		)	(23,989		)	(2,347		)
Stock compensation expense	—			—			—			(768		)	(6,050		)
Income (loss) from operations	$	44,763		$	29,546		$	33,153		$	52,922		$	(37,478	)	$	122,906
Loss on early retirement of debt																(18,643		)
Equity in earnings of unconsolidated subsidiaries																6,950
Interest expense																(54,336		)
Income before income taxes																$	56,877



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	186,989		$	80,314		$	107,003		$	199,119		$	(75,337	)
Depreciation and amortization	(34,146		)	(17,816		)	(19,938		)	(70,332		)	(6,790		)
Stock compensation expense	—			—			—			(2,116		)	(15,059		)
U.S. HealthWorks acquisition costs	—			—			—			(2,895		)	—
Income (loss) from operations	$	152,843		$	62,498		$	87,065		$	123,776		$	(97,186	)	$	328,996
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																14,914
Gain on sale of businesses																9,016
Interest expense																(147,991		)
Income before income taxes																$	194,680



	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552	)
Depreciation and amortization	(38,430		)	(20,332		)	(20,910		)	(73,372		)	(7,028		)
Stock compensation expense	—			—			—			(2,302		)	(17,129		)
Income (loss) from operations	$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709	)	$	359,512
Loss on early retirement of debt																(18,643		)
Equity in earnings of unconsolidated subsidiaries																18,710
Gain on sale of businesses																6,532
Interest expense																(156,611		)
Income before income taxes																$	209,500


11.	Revenue from Contracts with Customers

Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The ~~outpatient rehabilitation segment includes the operating results of~~following tables disaggregate the Company’s ~~contract therapy businesses through March 31, 2016~~net operating revenues for the three and ~~Physiotherapy beginning March 4, 2016.~~

~~(2)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of~~nine months ended September 30, ~~2016 were retrospectively conformed to reflect~~2018 and 2019:



	Three Months Ended September 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	210,101	$	71,564	$	40,563	$	455	$	—	$	322,683
Non-Medicare	206,629		64,322		185,787		401,537		—		858,275
Total patient services revenues	416,730		135,886		226,350		401,992		—		1,180,958
Other revenues⁽¹⁾	3,378		8,702		18,884		2,489		52,990		86,443
Total net operating revenues	$	420,108	$	144,588	$	245,234	$	404,481	$	52,990	$	1,267,401



	Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	218,096	$	86,495	$	44,230	$	451	$	—	$	349,272
Non-Medicare	240,603		76,957		200,093		418,380		—		936,033
Total patient services revenues	458,699		163,452		244,323		418,831		—		1,285,305
Other revenues	4,193		9,917		21,007		3,069		69,852		108,038
Total net operating revenues	$	462,892	$	173,369	$	265,330	$	421,900	$	69,852	$	1,393,343



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	676,950	$	217,459	$	120,228	$	1,600	$	—	$	1,016,237
Non-Medicare	639,718		188,611		569,298		1,164,711		—		2,562,338
Total patient services revenues	1,316,668		406,070		689,526		1,166,311		—		3,578,575
Other revenues⁽¹⁾	10,568		26,605		53,853		7,109		139,865		238,000
Total net operating revenues	$	1,327,236	$	432,675	$	743,379	$	1,173,420	$	139,865	$	3,816,575



	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	679,953	$	238,334	$	128,377	$	1,480	$	—	$	1,048,144
Non-Medicare	692,178		221,571		586,248		1,221,893		—		2,721,890
Total patient services revenues	1,372,131		459,905		714,625		1,223,373		—		3,770,034
Other revenues	9,438		28,396		59,501		8,299		203,670		309,304
Total net operating revenues	$	1,381,569	$	488,301	$	774,126	$	1,231,672	$	203,670	$	4,079,338


(1)	For the three and nine months ended September 30, 2018, the financial results of the Company’s reportable segments have been changed to remove the net operating revenues associated with employee leasing services provided to the Company’s non-consolidating subsidiaries. These results are now reported as part of the Company’s other activities.


12.	Earnings per Share

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the ~~adoption of the standard, resulting in a reduction to total assets of $28.1 million.~~

~~7. Income per Common Share~~

~~Holdings~~Company applies the two-class method ~~for calculating and presenting income per~~because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common ~~share. The~~stock in undistributed earnings. Application of the Company’s two-class method is ~~an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.~~

as follows:


(i)	Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were 0 dividends declared or contractual dividends paid for the three and nine months ended September 30, 2018 and 2019.


(ii)	The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.


(i)	The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.

The following table sets forth the ~~calculation of~~net income ~~per share in Holdings’ condensed consolidated statements of operations and~~attributable to the ~~differences between basic weighted average~~Company, its common shares outstanding, and ~~diluted~~its participating securities outstanding.



	Basic EPS				Diluted EPS
	Three Months Ended September 30,				Three Months Ended September 30,
	2018		2019		2018		2019
	(in thousands)
Net income	$	42,679	$	44,030	$	42,679	$	44,030
Less: net income attributable to non-controlling interests	9,762		13,298		9,762		13,298
Net income attributable to the Company	32,917		30,732		32,917		30,732
Less: net income attributable to participating securities	1,098		1,052		1,098		1,052
Net income attributable to common shares	$	31,819	$	29,680	$	31,819	$	29,680



	Basic EPS				Diluted EPS
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019
	(in thousands)
Net income	$	147,220	$	157,360	$	147,220	$	157,360
Less: net income attributable to non-controlling interests	34,053		40,978		34,053		40,978
Net income attributable to the Company	113,167		116,382		113,167		116,382
Less: net income attributable to participating securities	3,732		3,889		3,729		3,888
Net income attributable to common shares	$	109,435	$	112,493	$	109,438	$	112,494

The following tables set forth the computation of EPS under the two-class method:



	Three Months Ended September 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	31,819	130,387	$	0.24	$	31,819	130,447	$	0.24
Participating securities	1,098		4,501	$	0.24	1,098		4,501	$	0.24
Total Company	$	32,917				$	32,917



	Three Months Ended September 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	29,680	129,988	$	0.23	$	29,680	130,007	$	0.23
Participating securities	1,052		4,607	$	0.23	1,052		4,607	$	0.23
Total Company	$	30,732				$	30,732



	Nine Months Ended September 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	109,435	129,972	$	0.84	$	109,438	130,066	$	0.84
Participating securities	3,732		4,432	$	0.84	3,729		4,432	$	0.84
Total Company	$	113,167				$	113,167



	Nine Months Ended September 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	112,493	130,442	$	0.86	$	112,494	130,474	$	0.86
Participating securities	3,889		4,509	$	0.86	3,888		4,509	$	0.86
Total Company	$	116,382				$	116,382

(1) Represents the weighted average ~~shares~~share count outstanding ~~used to compute basic and diluted earnings per share, respectively.~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016

2017

2016

2017

(in thousands, except per share amounts)

Numerator:

Net income attributable to Select Medical Holdings Corporation

$
6,471

$
18,462

$
95,239

$
76,387

Less: Earnings allocated to unvested restricted stockholders

209

608

2,852

2,464

Net income available to common stockholders

$
6,262

$
17,854

$
92,387

$
73,923

Denominator:

Weighted average shares—basic

127,848

129,142

127,659

128,745

Effect of dilutive securities:

Stock options

141

180

145

171

Weighted average shares—diluted

127,989

129,322

127,804

128,916

Basic income per common share:

$
0.05

$
0.14

$
0.72

$
0.57

Diluted income per common share:

$
0.05

$
0.14

$
0.72

$
0.57

~~8. Commitments and Contingencies~~

during the period.


13.	Commitments and Contingencies

Litigation

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance ~~subject~~coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of ~~$2.0~~the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million ~~per medical incident for professional liability claims~~to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and ~~$2.0 million per occurrence for general liability claims.~~may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

Evansville ~~Litigation~~

Litigation.On October 19, 2015, the ~~plaintiff-relators~~plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty ~~Hospital—Evansville,~~Hospital-Evansville, LLC (“~~SSH-Evansville”~~SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private ~~plaintiff-relators~~plaintiff‑relators on behalf of the United States under the federal False Claims Act. The ~~plaintiff-relators~~plaintiff‑relators are the former CEO and ~~two~~2 former case managers at ~~SSH-Evansville,~~SSH‑Evansville, and the defendants currently include the Company, ~~SSH-Evansville,~~SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at ~~SSH-Evansville.~~SSH‑Evansville. The ~~plaintiff-relators~~plaintiff‑relators allege that ~~SSH-Evansville~~SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, ~~up-coded~~up‑coded diagnoses at admission, and admitted patients for whom ~~long-term~~long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the ~~plaintiff-relators~~plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the ~~plaintiff-relators~~plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the ~~plaintiff relators~~plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all ~~non-retaliation~~non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the ~~plaintiff-relators~~plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the ~~plaintiff relators’~~plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the ~~plaintiff relators’~~plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants ~~have~~ opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The ~~Company intends~~plaintiff-relators appealed this decision to ~~vigorously defend this action,~~the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ~~at this time~~ruled that the question of statistical sampling is not ripe for review.

In October 2019, the Company ~~is unable to predict the timing and outcome of this matter.~~

~~Knoxville Litigation~~

~~On July 13, 2015,~~entered into a settlement agreement with the United States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United Statesgovernment and the ~~State~~plaintiff-relators. Under the terms of ~~Tennessee notified~~ the ~~court on July 13, 2015 that each had decided not~~settlement, the Company agreed to ~~intervene~~make payments to the government, the plaintiff-relators and their counsel. Such payments, in the ~~case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of~~aggregate, are immaterial to the ~~federal False Claims Act~~Company’s financial statements. In the settlement agreement, the government and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of theplaintiff-relators released all defendants ~~during October 2015.~~

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were assertedfrom liability for all conduct alleged in the ~~Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar,~~complaint, and ~~because the plaintiff-relator did not plead his claims with sufficient particularity.~~

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The case has been fully briefed and argued in the Court of Appeals. The Company intends to vigorously defend this action, but at this time the Company ~~is unable to predict the timing and outcome of this matter.~~

admitted no liability or wrongdoing.

Wilmington ~~Litigation~~

Litigation.On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty ~~Hospital—Wilmington,~~Hospital-Wilmington, Inc. (“~~SSH-Wilmington”~~SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. ~~16-347-LPS.~~16‑347‑LPS. The Complaint was initially filed under seal onin May ~~12,~~ 2016 by a former chief nursing officer at ~~SSH-Wilmington~~SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention onin January ~~13,~~ 2017. The corporate defendants were served onin March 6, 2017. In the complaint, the ~~plaintiff-relator~~plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at ~~SSH-Wilmington,~~SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at ~~SSH-Wilmington.~~SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, onin May ~~17,~~ 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint ~~which is now pending,~~ based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim.

On In March ~~24,~~2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.

In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and ~~SSH-Wilmington,~~SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. ~~The motion is currently pending.~~

In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.

The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

Contract Therapy ~~Subpoena~~

Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~Northern District of Alabama Investigation~~

On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. The Company intends to cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~9. Subsequent Event~~

On October 23, 2017, Select announced that Concentra Group Holdings entered into an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) dated October 22, 2017 with Concentra, Concentra Group Holdings Parent, LLC (“Group Holdings Parent”), U.S. HealthWorks, Inc. (“U.S. HealthWorks”), and Dignity Health Holdings Company (“DHHC”). Pursuant to the terms of the Purchase Agreement, Concentra will acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.

In connection with the closing of the transaction, it is expected that Concentra Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Concentra Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests

14. Supplemental Financial Information of Concentra Group Holdings ~~outstanding after the redemption described above will be exchanged for membership interests in~~Parent

The following tables summarize selected financial information of Concentra Group Holdings Parent.

The transaction values U.S. HealthWorks at $753.0 million, subject to certain customary adjustments for working capital, cash, debt, transaction expenses and other items in accordance with the terms of the Purchase Agreement. DHHC, a subsidiary of Dignity Health, will be issued a 20% equity interest in Group Holdings Parent, which is valued at $238.0 million. The remainder of the purchase price will be paid in cash. Select will retain a majority voting interest in Group Holdings Parent following the closing of the transaction.

Concentra expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility, for which JP Morgan Chase, N.A. has provided Concentra with a debt commitment letter.

The transaction, which is expected to close in the first quarter of 2018, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

~~10. Condensed Consolidating Financial Information~~

Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are defined as subsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries” and Concentra Group Holdings and its subsidiaries, the “Non-Guarantor Concentra”).

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 2016 and September 30, 2017 and for the three and nine months ended September 30, 2016 and 2017.

The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

~~Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Assets

Current Assets:

Cash and cash equivalents

$
73

$
6,359

$
4,548

$
96,320

$
—

$
107,300

Accounts receivable, net

—

468,370

120,463

127,593

—

716,426

Intercompany receivables

—

1,488,527

36,784

—

(1,525,311
)(a)
—

Prepaid income taxes

2,882

—

—

—

(2,882
)(f)
—

Other current assets

10,937

30,142

16,814

22,431

—

80,324

Total Current Assets

13,892

1,993,398

178,609

246,344

(1,528,193
)
904,050

Property and equipment, net

50,736

646,672

75,315

173,340

—

946,063

Investment in affiliates

4,421,777

116,370

—

—

(4,538,147
)(b)(c)
—

Goodwill

—

2,093,354

—

674,542

—

2,767,896

Identifiable intangible assets, net

—

104,570

4,824

221,642

—

331,036

Other assets

42,852

101,285

36,285

16,144

(21,804
)(e)
174,762

Total Assets

$
4,529,257

$
5,055,649

$
295,033

$
1,332,012

$
(6,088,144
)
$
5,123,807

Liabilities and Equity

Current Liabilities:

Overdrafts

$
18,923

$
—

$
—

$
—

$
—

$
18,923

Current portion of long-term debt and notes payable

30,838

773

2,483

3,466

—

37,560

Accounts payable

13,066

82,662

24,196

13,397

—

133,321

Intercompany payables

1,488,527

36,784

—

—

(1,525,311
)(a)
—

Accrued payroll

11,186

86,257

3,931

38,028

—

139,402

Accrued vacation

3,848

55,949

12,040

17,334

—

89,171

Accrued interest

28,763

7

—

2,228

—

30,998

Accrued other

40,075

59,088

12,183

32,097

—

143,443

Income taxes payable

—

—

—

9,600

(2,882
)(f)
6,718

Total Current Liabilities

1,635,226

321,520

54,833

116,150

(1,528,193
)
599,536

Long-term debt, net of current portion

2,133,355

243

9,564

609,580

—

2,752,742

Non-current deferred tax liability

—

131,902

767

80,576

(21,804
)(e)
191,441

Other non-current liabilities

39,034

55,572

8,039

35,473

—

138,118

Total Liabilities

3,807,615

509,237

73,203

841,779

(1,549,997
)
3,681,837

Redeemable non-controlling interests

—

—

—

14,641

606,874
(d)
621,515

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

942,142

—

—

—

—

942,142

Retained earnings (accumulated deficit)

(220,500
)
1,328,453

(40,068
)
34,338

(1,322,723
)(c)(d)
(220,500
)
Subsidiary investment

—

3,217,959

261,898

437,568

(3,917,425
)(b)(d)
—

Total Select Medical Corporation Stockholder’s Equity

721,642

4,546,412

221,830

471,906

(5,240,148
)
721,642

Non-controlling interests

—

—

—

3,686

95,127
(d)
98,813

Total Equity

721,642

4,546,412

221,830

475,592

(5,145,021
)
820,455

Total Liabilities and Equity

$
4,529,257

$
5,055,649

$
295,033

$
1,332,012

$
(6,088,144
)
$
5,123,807



	December 31, 2018		September 30, 2019
	(in thousands)
Assets
Current assets	$	385,094	$	287,514
Non-current assets	1,793,774		2,078,713
Total Assets	$	2,178,868	$	2,366,227
Liabilities and Equity
Current liabilities	$	206,386	$	232,035
Non-current liabilities	1,478,084		1,587,721
Total Liabilities	1,684,470		1,819,756
Redeemable non-controlling interests	18,525		17,268
Members' Equity of Concentra Group Holdings Parent	470,329		523,814
Non-controlling interests	5,544		5,389
Total Equity	475,873		529,203
Total Liabilities and Equity	$	2,178,868	$	2,366,227

~~(a)~~ ~~Elimination of intercompany balances.~~

~~(b)~~ ~~Elimination of investments in consolidated subsidiaries.~~

~~(c)~~ ~~Elimination of investments in consolidated subsidiaries’ earnings.~~

~~(d)~~ ~~Reclassification of equity attributable to non-controlling interests.~~

~~(e)~~ ~~Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.~~

~~(f)~~ ~~Reclassification of prepaid income taxes to report net income taxes payable in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
56

$
661,676

$
174,139

$
261,295

$
—

$
1,097,166

Costs and expenses:

Cost of services

667

570,564

151,609

216,070

—

938,910

General and administrative

27,028

37

—

—

—

27,065

Bad debt expense

—

10,879

4,008

5,434

—

20,321

Depreciation and amortization

2,355

17,982

3,421

15,014

—

38,772

Total costs and expenses

30,050

599,462

159,038

236,518

—

1,025,068

Income (loss) from operations

(29,994
)
62,214

15,101

24,777

—

72,098

Other income and expense:

Intercompany interest and royalty fees

7,864

(4,194
)
(3,670
)
—

—

—

Intercompany management fees

51,241

(41,048
)
(10,193
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

4,416

15

—

—

4,431

Interest income (expense)

(30,239
)
270

(20
)
(7,699
)
—

(37,688
)

Income (loss) before income taxes

(1,128
)
21,658

1,233

17,078

—

38,841

Income tax expense (benefit)

(1,032
)
8,377

330

6,342

—

14,017

Equity in earnings of consolidated subsidiaries

18,558

399

—

—

(18,957
)(a)
—

Net income

18,462

13,680

903

10,736

(18,957
)
24,824

Less: Net income attributable to non-controlling interests

—

—

383

5,979

—

6,362

Net income attributable to Select Medical Corporation

$
18,462

$
13,680

$
520

$
4,757

$
(18,957
)
$
18,462



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019
	(in thousands)
Net operating revenues	$	404,481	$	421,900	$	1,173,420	$	1,231,672
Income from operations	43,499		52,922		123,776		144,350
Net income	16,084		17,788		45,576		53,521
Net income attributable to Select Medical Holdings Corporation	7,486		8,124		20,778		24,534

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Nine Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
687

$
2,038,955

$
510,530

$
779,030

$
—

$
3,329,202

Costs and expenses:

Cost of services

1,843

1,713,091

434,130

638,433

—

2,787,497

General and administrative

83,291

124

—

—

—

83,415

Bad debt expense

—

32,456

10,941

15,723

—

59,120

Depreciation and amortization

5,503

57,471

10,104

46,566

—

119,644

Total costs and expenses

90,637

1,803,142

455,175

700,722

—

3,049,676

Income (loss) from operations

(89,950
)
235,813

55,355

78,308

—

279,526

Other income and expense:

Intercompany interest and royalty fees

24,760

(13,586
)
(11,174
)
—

—

—

Intercompany management fees

176,443

(147,117
)
(29,326
)
—

—

—

Loss on early retirement of debt

(19,719
)
—

—

—

—

(19,719
)
Equity in earnings of unconsolidated subsidiaries

—

15,555

63

—

—

15,618

Non-operating loss

—

(49
)
—

—

—

(49
)
Interest income (expense)

(93,725
)
269

(104
)
(22,636
)
—

(116,196
)

Income (loss) before income taxes

(2,191
)
90,885

14,814

55,672

—

159,180

Income tax expense (benefit)

(3,230
)
41,620

943

20,260

—

59,593

Equity in earnings of consolidated subsidiaries

75,348

10,174

—

—

(85,522
)(a)
—

Net income

76,387

59,439

13,871

35,412

(85,522
)
99,587

Less: Net income attributable to non-controlling interests

—

—

3,627

19,573

—

23,200

Net income attributable to Select Medical Corporation

$
76,387

$
59,439

$
10,244

$
15,839

$
(85,522
)
$
76,387



	Nine Months Ended September 30,
	2018			2019
	(in thousands)
Net cash provided by operating activities	$	119,147		$	104,234
Net cash used in investing activities	(545,856		)	(56,400		)
Net cash provided by (used in) financing activities	465,314			(185,717		)
Net increase (decrease) in cash and cash equivalents	38,605			(137,883		)
Cash and cash equivalents at beginning of period	113,059			163,116
Cash and cash equivalents at end of period	$	151,664		$	25,233

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Nine Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
76,387

$
59,439

$
13,871

$
35,412

$
(85,522
)(a)
$
99,587

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries

—

14,493

49

—

—

14,542

Depreciation and amortization

5,503

57,471

10,104

46,566

—

119,644

Provision for bad debts

—

32,456

10,941

15,723

—

59,120

Equity in earnings of unconsolidated subsidiaries

—

(15,555
)
(63
)
—

—

(15,618
)
Equity in earnings of consolidated subsidiaries

(75,348
)
(10,174
)
—

—

85,522
(a)
—

Loss on extinguishment of debt

6,527

—

—

—

—

6,527

Loss (gain) on sale or disposal of assets and businesses

(8
)
(4,824
)
(4,687
)
20

—

(9,499
)
Stock compensation expense

13,445

—

—

782

—

14,227

Amortization of debt discount, premium and issuance costs

6,113

—

—

2,433

—

8,546

Deferred income taxes

5,014

—

—

(11,140
)
—

(6,126
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

—

(137,255
)
(33,634
)
(30,625
)
—

(201,514
)
Other current assets

1,016

3,816

(6,731
)
(778
)
—

(2,677
)
Other assets

1,633

(3,709
)
3,044

439

—

1,407

Accounts payable

2,375

(616
)
1,373

781

—

3,913

Accrued expenses

164

(2,075
)
11,181

9,482

—

18,752

Income taxes

3,776

—

—

15,365

—

19,141

Net cash provided by (used in) operating activities

46,597

(6,533
)
5,448

84,460

—

129,972

Investing activities

Business combinations, net of cash acquired

—

(3,356
)
(295
)
(15,720
)
—

(19,371
)
Purchases of property and equipment

(26,350
)
(102,150
)
(23,644
)
(21,656
)
—

(173,800
)
Investment in businesses

—

(11,374
)
—

—

—

(11,374
)
Proceeds from sale of assets and businesses

8

15,007

19,537

3

—

34,555

Net cash used in investing activities

(26,342
)
(101,873
)
(4,402
)
(37,373
)
—

(169,990
)

Financing activities

Borrowings on revolving facilities

805,000

—

—

—

—

805,000

Payments on revolving facilities

(705,000
)
—

—

—

—

(705,000
)
Proceeds from term loans

1,139,487

—

—

—

—

1,139,487

Payments on term loans

(1,153,502
)
—

—

(23,065
)
—

(1,176,567
)
Revolving facility debt issuance costs

(4,392
)
—

—

—

—

(4,392
)
Borrowings of other debt

21,572

—

3,232

2,767

—

27,571

Principal payments on other debt

(10,122
)
(306
)
(2,150
)
(2,534
)
—

(15,112
)
Dividends paid to Holdings

(3,603
)
—

—

—

—

(3,603
)
Equity investment by Holdings

1,634

—

—

—

—

1,634

Intercompany

(101,888
)
108,724

(6,836
)
—

—

—

Proceeds from issuance of non-controlling interests

—

—

8,986

—

—

8,986

Repayments of overdrafts

(20,439
)
—

—

—

—

(20,439
)
Purchase of non-controlling interests

—

(120
)
—

—

—

(120
)
Distributions to non-controlling interests

—

—

(4,786
)
(4,370
)
—

(9,156
)
Net cash provided by (used in) financing activities

(31,253
)
108,298

(1,554
)
(27,202
)
—

48,289

Net increase (decrease) in cash and cash equivalents

(10,998
)
(108
)
(508
)
19,885

—

8,271

Cash and cash equivalents at beginning of period

11,071

6,467

5,056

76,435

—

99,029

Cash and cash equivalents at end of period

$
73

$
6,359

$
4,548

$
96,320

$
—

$
107,300

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~December 31, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Assets

Current Assets:

Cash and cash equivalents

$
11,071

$
6,467

$
5,056

$
76,435

$
—

$
99,029

Accounts receivable, net

—

363,470

97,770

112,512

—

573,752

Intercompany receivables

—

1,573,960

25,578

—

(1,599,538
)(a)
—

Prepaid income taxes

6,658

—

—

5,765

—

12,423

Other current assets

11,953

33,958

10,269

21,519

—

77,699

Total Current Assets

29,682

1,977,855

138,673

216,231

(1,599,538
)
762,903

Property and equipment, net

48,697

603,408

50,869

189,243

—

892,217

Investment in affiliates

4,493,684

89,288

—

—

(4,582,972
)(b)(c)
—

Goodwill

—

2,090,963

—

660,037

—

2,751,000

Identifiable intangible assets, net

—

106,439

2,693

231,430

—

340,562

Other assets

45,636

84,803

53,954

16,235

(26,684
)(e)
173,944

Total Assets

$
4,617,699

$
4,952,756

$
246,189

$
1,313,176

$
(6,209,194
)
$
4,920,626

Liabilities and Equity

Current Liabilities:

Overdrafts

$
39,362

$
—

$
—

$
—

$
—

$
39,362

Current portion of long-term debt and notes payable

7,227

445

1,324

4,660

—

13,656

Accounts payable

10,775

78,608

22,397

14,778

—

126,558

Intercompany payables

1,573,960

25,578

—

—

(1,599,538
)(a)
—

Accrued payroll

16,963

92,216

4,246

32,972

—

146,397

Accrued vacation

3,440

55,486

10,668

13,667

—

83,261

Accrued interest

20,114

—

—

2,211

—

22,325

Accrued other

39,155

62,384

4,639

33,898

—

140,076

Total Current Liabilities

1,710,996

314,717

43,274

102,186

(1,599,538
)
571,635

Long-term debt, net of current portion

2,048,154

601

9,685

626,893

—

2,685,333

Non-current deferred tax liability

—

133,852

596

91,314

(26,684
)(e)
199,078

Other non-current liabilities

42,824

53,537

5,727

34,432

—

136,520

Total Liabilities

3,801,974

502,707

59,282

854,825

(1,626,222
)
3,592,566

Redeemable non-controlling interests

—

—

—

15,493

406,666
(d)
422,159

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

925,111

—

—

—

—

925,111

Retained earnings (accumulated deficit)

(109,386
)
1,269,009

(32,826
)
2,723

(1,238,906
)(c)(d)
(109,386
)
Subsidiary investment

—

3,181,040

219,733

436,786

(3,837,559
)(b)(d)
—

Total Select Medical Corporation Stockholder’s Equity

815,725

4,450,049

186,907

439,509

(5,076,465
)
815,725

Non-controlling interests

—

—

—

3,349

86,827
(d)
90,176

Total Equity

815,725

4,450,049

186,907

442,858

(4,989,638
)
905,901

Total Liabilities and Equity

$
4,617,699

$
4,952,756

$
246,189

$
1,313,176

$
(6,209,194
)
$
4,920,626

~~(a)~~ ~~Elimination of intercompany balances.~~

~~(b)~~ ~~Elimination of investments in consolidated subsidiaries.~~

~~(c)~~ ~~Elimination of investments in consolidated subsidiaries’ earnings.~~

~~(d)~~ ~~Reclassification of equity attributable to non-controlling interests.~~

~~(e)~~ ~~Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended September 30, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
85

$
655,663

$
139,540

$
258,507

$
—

$
1,053,795

Costs and expenses:

Cost of services

626

569,167

133,480

212,430

—

915,703

General and administrative

26,967

121

—

—

—

27,088

Bad debt expense

—

9,662

2,633

5,382

—

17,677

Depreciation and amortization

1,411

17,335

3,141

15,278

—

37,165

Total costs and expenses

29,004

596,285

139,254

233,090

—

997,633

Income (loss) from operations

(28,919
)
59,378

286

25,417

—

56,162

Other income and expense:

Intercompany interest and royalty fees

8,458

(4,884
)
(3,574
)
—

—

—

Intercompany management fees

33,693

(25,880
)
(7,813
)
—

—

—

Loss on early retirement of debt

—

—

—

(10,853
)
—

(10,853
)
Equity in earnings of unconsolidated subsidiaries

—

5,238

30

—

—

5,268

Non-operating gain (loss)

(6,963
)
5,935

—

—

—

(1,028
)
Interest income (expense)

(34,424
)
137

(31
)
(10,164
)
—

(44,482
)

Income (loss) before income taxes

(28,155
)
39,924

(11,102
)
4,400

—

5,067

Income tax expense (benefit)

5,701

(7,284
)
1,484

1,174

—

1,075

Equity in earnings (losses) of consolidated subsidiaries

40,327

(7,877
)
—

—

(32,450
)(a)
—

Net income (loss)

6,471

39,331

(12,586
)
3,226

(32,450
)
3,992

Less: Net income (loss) attributable to non-controlling interests

—

(6
)
(4,804
)
2,331

—

(2,479
)

Net income (loss) attributable to Select Medical Corporation

$
6,471

$
39,337

$
(7,782
)
$
895

$
(32,450
)
$
6,471

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Nine Months Ended September 30, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
522

$
2,095,102

$
379,880

$
764,252

$
—

$
3,239,756

Costs and expenses:

Cost of services

1,576

1,780,606

340,254

632,514

—

2,754,950

General and administrative

81,198

28

—

—

—

81,226

Bad debt expense

—

30,665

6,691

14,235

—

51,591

Depreciation and amortization

3,898

49,983

8,436

45,570

—

107,887

Total costs and expenses

86,672

1,861,282

355,381

692,319

—

2,995,654

Income (loss) from operations

(86,150
)
233,820

24,499

71,933

—

244,102

Other income and expense:

Intercompany interest and royalty fees

22,793

(12,314
)
(10,479
)
—

—

—

Intercompany management fees

127,832

(108,007
)
(19,825
)
—

—

—

Loss on early retirement of debt

(773
)
—

—

(10,853
)
—

(11,626
)
Equity in earnings of unconsolidated subsidiaries

—

14,384

82

—

—

14,466

Non-operating gain

33,932

3,162

—

—

—

37,094

Interest income (expense)

(97,239
)
293

(71
)
(30,645
)
—

(127,662
)

Income (loss) before income taxes

395

131,338

(5,794
)
30,435

—

156,374

Income tax expense

13,840

24,701

2,091

10,953

—

51,585

Equity in earnings (losses) of consolidated subsidiaries

108,684

(6,004
)
—

—

(102,680
)(a)
—

Net income (loss)

95,239

100,633

(7,885
)
19,482

(102,680
)
104,789

Less: Net income (loss) attributable to non-controlling interests

—

27

(2,109
)
11,632

—

9,550

Net income (loss) attributable to Select Medical Corporation

$
95,239

$
100,606

$
(5,776
)
$
7,850

$
(102,680
)
$
95,239

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Nine Months Ended September 30, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
95,239

$
100,633

$
(7,885
)
$
19,482

$
(102,680
)(a)
$
104,789

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries

—

16,075

70

—

—

16,145

Depreciation and amortization

3,898

49,983

8,436

45,570

—

107,887

Provision for bad debts

—

30,665

6,691

14,235

—

51,591

Equity in earnings of unconsolidated subsidiaries

—

(14,384
)
(82
)
—

—

(14,466
)
Equity in earnings of consolidated subsidiaries

(108,684
)
6,004

—

—

102,680
(a)
—

Loss on extinguishment of debt

773

—

—

10,853

—

11,626

Loss (gain) on sale or disposal of assets and businesses

(33,707
)
(8,367
)
185

(21
)
—

(41,910
)
Gain on sale of equity investment

—

(241
)
—

—

—

(241
)
Impairment of equity investment

—

5,339

—

—

—

5,339

Stock compensation expense

12,347

—

—

577

—

12,924

Amortization of debt discount, premium and issuance costs

9,289

—

—

2,556

—

11,845

Deferred income taxes

(902
)
—

—

(12,186
)
—

(13,088
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

—

6,288

(27,966
)
(19,098
)
—

(40,776
)
Other current assets

(1,153
)
9,745

(6,113
)
9,615

—

12,094

Other assets

(3,881
)
53,100

(53,961
)
9,888

—

5,146

Accounts payable

(239
)
(22,529
)
487

4,529

—

(17,752
)
Accrued expenses

19,692

36,051

(214
)
(2,533
)
—

52,996

Due to third party payors

—

15,019

(3,954
)
—

—

11,065

Income taxes

3,230

—

—

2,317

—

5,547

Net cash provided by (used in) operating activities

(4,098
)
283,381

(84,306
)
85,784

—

280,761

Investing activities

Business combinations, net of cash acquired

(406,305
)
(3,523
)
—

(4,403
)
—

(414,231
)
Purchases of property and equipment

(13,315
)
(68,609
)
(25,689
)
(10,647
)
—

(118,260
)
Investment in businesses

—

(3,140
)
—

—

—

(3,140
)
Proceeds from sale of assets, businesses, and equity investment

63,418

9,205

6

—

—

72,629

Net cash used in investing activities

(356,202
)
(66,067
)
(25,683
)
(15,050
)
—

(463,002
)

Financing activities

Borrowings on revolving facilities

420,000

—

—

—

—

420,000

Payments on revolving facilities

(540,000
)
—

—

(5,000
)
—

(545,000
)
Proceeds from term loans

600,127

—

—

195,217

—

795,344

Payments on term loans

(228,962
)
—

—

(205,880
)
—

(434,842
)
Borrowings of other debt

8,748

—

12,237

2,816

—

23,801

Principal payments on other debt

(10,971
)
(528
)
(1,813
)
(2,165
)
—

(15,477
)
Dividends paid to Holdings

(1,939
)
—

—

—

—

(1,939
)
Equity investment by Holdings

1,488

—

—

—

—

1,488

Intercompany

116,274

(214,053
)
97,779

—

—

—

Proceeds from issuance of non-controlling interests

—

—

11,846

—

—

11,846

Repayments of overdrafts

(8,464
)
—

—

—

—

(8,464
)
Purchase of non-controlling interests

—

(1,530
)
—

—

—

(1,530
)
Distributions to non-controlling interests

—

(217
)
(6,545
)
(2,436
)
—

(9,198
)
Net cash provided by (used in) financing activities

356,301

(216,328
)
113,504

(17,448
)
—

236,029

Net increase (decrease) in cash and cash equivalents

(3,999
)
986

3,515

53,286

—

53,788

Cash and cash equivalents at beginning of period

4,070

3,706

625

6,034

—

14,435

Cash and cash equivalents at end of period

$
71

$
4,692

$
4,140

$
59,320

$
—

$
68,223

~~(a)~~ ~~Elimination of equity in earnings of consolidated subsidiaries.~~

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.

Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

changes in government reimbursement for our services ~~due to the implementation of healthcare reform legislation, deficit reduction measures,~~ and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a long term acute care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

· the impact of the Bipartisan Budget Act of 2013 (the “BBA of 2013”), which established payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and profitability of our long term acute care hospitals (“LTCHs”);

the failure of our ~~specialty~~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 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;~~


•	the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilitiesoperated 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 ~~pending~~ 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 SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, as such risk factors may be updated from time to time in our periodic filings with the SEC.

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.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of ~~specialty~~critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational ~~medicine~~health centers in the United States. As of September 30, ~~2017,~~2019, we had operations in 4647 states and the District of Columbia. ~~As of September 30, 2017, we~~We operated ~~123 specialty~~100 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and ~~1,604~~1,707 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, ~~which is operated through~~ a joint venture subsidiary, operated ~~312 medical~~523 occupational health centers in 3841 states as of September 30, ~~2017.~~2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics ~~or “CBOCs.”~~

~~We manage our Company through three business segments: specialty hospitals,~~(“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and ~~Concentra.~~the Concentra segment. We had net operating revenues of ~~$3,329.2~~$4,079.3 million for the nine months ended September 30, ~~2017.~~2019. Of this total, we earned approximately ~~54%~~34% of our net operating revenues from our ~~specialty hospitals~~critical illness recovery hospital segment, approximately ~~23%~~12% from our rehabilitation hospital segment, approximately 19% from our outpatient rehabilitation segment, and approximately ~~23%~~30% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our ~~specialty~~critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. ~~These patients have specialized needs, with serious and often complex medical conditions.~~ Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of ~~medical~~occupational health centers that provide workers’ compensation injury care, physical therapy, and ~~contract~~consumer health services ~~provided~~as well as onsite clinics located at employer worksites ~~and~~that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs ~~CBOCs that deliver occupational medicine, physical therapy, veteran’s healthcare,~~CBOCs. During 2019, we began reporting the net operating revenues and ~~consumer health services.~~

expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, 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 by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“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 ~~calculations,~~definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Physiotherapy~~ acquisition costs ~~non-operating~~associated with U.S. HealthWorks, gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted ~~EBITDA.~~

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

(in thousands)

Net income

$
3,992

$
24,824

$
104,789

$
99,587

Income tax expense

1,075

14,017

51,585

59,593

Interest expense

44,482

37,688

127,662

116,196

Non-operating loss (gain)

1,028

—

(37,094
)
49

Equity in earnings of unconsolidated subsidiaries

(5,268
)
(4,431
)
(14,466
)
(15,618
)
Loss on early retirement of debt

10,853

—

11,626

19,719

Income from operations

56,162

72,098

244,102

279,526

Stock compensation expense:

Included in general and administrative

3,932

4,079

10,771

11,603

Included in cost of services

818

878

2,153

2,624

Depreciation and amortization

37,165

38,772

107,887

119,644

Physiotherapy acquisition costs

—

—

3,236

—

Adjusted EBITDA

$
98,077

$
115,827

$
368,149

$
413,397

EBITDA:

Three Months Ended September 30, Nine Months Ended September 30,
2018 2019 2018 2019
(in thousands)
Net income $ 42,679
$ 44,030
$ 147,220
$ 157,360
Income tax expense 14,060
12,847
47,460
52,140
Interest expense 50,669
54,336
147,991
156,611
Gain on sale of businesses (2,139 ) —
(9,016 ) (6,532 )
Equity in earnings of unconsolidated subsidiaries (5,432 ) (6,950 ) (14,914 ) (18,710 )
Loss on early retirement of debt —
18,643
10,255
18,643
Income from operations 99,837
122,906
328,996
359,512
Stock compensation expense:

Included in general and administrative 4,683
5,305
12,720
14,849
Included in cost of services 1,581
1,513
4,455
4,582
Depreciation and amortization 50,527
52,941
149,022
160,072
U.S. HealthWorks acquisition costs —
—
2,895
—
Adjusted EBITDA $ 156,628
$ 182,665
$ 498,088
$ 539,015

Summary Financial Results

Three Months Ended September 30, ~~2017~~

2019

For the three months ended September 30, ~~2017,~~2019, our net operating revenues increased ~~4.1%~~9.9% to ~~$1,097.2~~$1,393.3 million, compared to ~~$1,053.8~~$1,267.4 million for the three months ended September 30, ~~2016.~~2018. Income from operations increased ~~28.4%~~23.1% to ~~$72.1~~$122.9 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$56.2~~$99.8 million for the three months ended September 30, ~~2016.~~ 2018.

Net income increased 3.2% to ~~$24.8~~$44.0 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$4.0~~$42.7 million for the three months ended September 30, ~~2016.~~2018. Net income ~~for the three months ended September 30, 2016~~ included a pre-tax ~~loss~~losses on early retirement of debt of ~~$10.9 million and a pre-tax non-operating loss of $1.0 million. Our Adjusted EBITDA increased 18.1% to $115.8~~$18.6 million for the three months ended September 30, ~~2017, compared to $98.1~~2019. Net income included a pre-tax gain on sale of businesses of $2.1 million for the three months ended September 30, ~~2016. Our~~ 2018.

Adjusted EBITDA ~~margin was 10.6%~~increased 16.6% to $182.7 million for the three months ended September 30, ~~2017,~~2019, compared to ~~9.3%~~$156.6 million for the three months ended September 30, ~~2016.~~

2018. Our Adjusted EBITDA margin was 13.1% for the three months ended September 30, 2019, compared to 12.4% for the three months ended September 30, 2018.

The following tables reconcile our segment performance measures to our consolidated operating results:

Three Months Ended September 30, 2019
Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Net operating revenues $ 462,892
$ 173,369
$ 265,330
$ 421,900
$ 69,852
$ 1,393,343
Operating expenses 405,645
136,589
225,290
344,989
104,983
1,217,496
Depreciation and amortization 12,484
7,234
6,887
23,989
2,347
52,941
Income (loss) from operations $ 44,763
$ 29,546
$ 33,153
$ 52,922
$ (37,478 ) $ 122,906
Depreciation and amortization 12,484
7,234
6,887
23,989
2,347
52,941
Stock compensation expense —
—
—
768
6,050
6,818
Adjusted EBITDA $ 57,247
$ 36,780
$ 40,040
$ 77,679
$ (29,081 ) $ 182,665
Adjusted EBITDA margin 12.4 % 21.2 % 15.1 % 18.4 % N/M
13.1 %

Three Months Ended September 30, 2018
Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Net operating revenues⁽¹⁾
$ 420,108
$ 144,588
$ 245,234
$ 404,481
$ 52,990
$ 1,267,401
Operating expenses⁽¹⁾
366,816
119,245
210,703
336,494
83,779
1,117,037
Depreciation and amortization 11,136
6,079
6,597
24,488
2,227
50,527
Income (loss) from operations $ 42,156
$ 19,264
$ 27,934
$ 43,499
$ (33,016 ) $ 99,837
Depreciation and amortization 11,136
6,079
6,597
24,488
2,227
50,527
Stock compensation expense —
—
—
767
5,497
6,264
Adjusted EBITDA $ 53,292
$ 25,343
$ 34,531
$ 68,754
$ (25,292 ) $ 156,628
Adjusted EBITDA margin 12.7 % 17.5 % 14.1 % 17.0 % N/M
12.4 %

The following table summarizes changes in segment performance measures for the three months ended September 30, 2019, compared to the three months ended September 30, 2018:

Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
Change in net operating revenues 10.2 % 19.9 % 8.2 % 4.3 % 31.8 % 9.9 %
Change in income from operations 6.2 % 53.4 % 18.7 % 21.7 % (13.5 )% 23.1 %
Change in Adjusted EBITDA 7.4 % 45.1 % 16.0 % 13.0 % (15.0 )% 16.6 %

_______________________________________________________________________________

N/M — Not meaningful.


(1)	For the three months ended September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Nine Months Ended September 30, ~~2017~~

2019

For the nine months ended September 30, ~~2017,~~2019, our net operating revenues increased ~~2.8%~~6.9% to ~~$3,329.2~~$4,079.3 million, compared to $~~3,239.8~~$3,816.6 million for the nine months ended September 30, ~~2016.~~2018. Income from operations increased ~~14.5%~~9.3% to ~~$279.5~~$359.5 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$244.1~~$329.0 million for the nine months ended September 30, ~~2016.~~ 2018.

Net income ~~was $99.6~~increased 6.9% to $157.4 million for the nine months ended September 30, ~~2017, which includes~~2019, compared to $147.2 million for the nine months ended September 30, 2018. Net income included pre-tax losses on early retirement of debt of ~~$19.7 million. Net income was $104.8~~$18.6 million and a pre-tax gain on sale of businesses of $6.5 million for the nine months ended September 30, ~~2016, which~~2019. Net income included ~~pre-tax non-operating gains of $37.1 million and~~ pre-tax losses on early retirement of debt of ~~$11.6 million. Our Adjusted EBITDA increased 12.3% to $413.4~~$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 for the nine months ended September 30, ~~2017, compared~~2018.

Adjusted EBITDA increased 8.2% to ~~$368.1~~$539.0 million for the nine months ended September 30, ~~2016. Our Adjusted EBITDA margin was 12.4%~~2019, compared to $498.1 million for the nine months ended September 30, ~~2017, compared to 11.4%~~2018. Our Adjusted EBITDA margin was 13.2% for the nine months ended September 30, ~~2016.~~

~~Implementation of Patient Criteria~~

~~As discussed below under “~~~~Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria~~,”2019, compared to 13.1% for the nine months ended September 30, 2018.

The following tables reconcile our ~~LTCHs transitioned~~segment performance measures to ~~new Medicare regulations, which established payment limits~~our consolidated operating results:



	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	1,381,569		$	488,301		$	774,126		$	1,231,672		$	203,670		$	4,079,338
Operating expenses	1,187,186			395,756			662,511			1,013,950			300,351			3,559,754
Depreciation and amortization	38,430			20,332			20,910			73,372			7,028			160,072
Income (loss) from operations	$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709	)	$	359,512
Depreciation and amortization	38,430			20,332			20,910			73,372			7,028			160,072
Stock compensation expense	—			—			—			2,302			17,129			19,431
Adjusted EBITDA	$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552	)	$	539,015
Adjusted EBITDA margin	14.1		%	19.0		%	14.4		%	17.9		%	N/M			13.2		%



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues⁽¹⁾	$	1,327,236		$	432,675		$	743,379		$	1,173,420		$	139,865		$	3,816,575
Operating expenses⁽¹⁾	1,140,247			352,361			636,376			979,312			230,261			3,338,557
Depreciation and amortization	34,146			17,816			19,938			70,332			6,790			149,022
Income (loss) from operations	$	152,843		$	62,498		$	87,065		$	123,776		$	(97,186	)	$	328,996
Depreciation and amortization	34,146			17,816			19,938			70,332			6,790			149,022
Stock compensation expense	—			—			—			2,116			15,059			17,175
U.S. HealthWorks acquisition costs	—			—			—			2,895			—			2,895
Adjusted EBITDA	$	186,989		$	80,314		$	107,003		$	199,119		$	(75,337	)	$	498,088
Adjusted EBITDA margin	14.1		%	18.6		%	14.4		%	17.0		%	N/M			13.1		%

The following table summarizes changes in segment performance measures for ~~Medicare patients discharged from an LTCH who do not meet specified patient criteria, beginning October 1, 2015. Since completing our transition~~the nine months ended September 30, 2019, compared to the ~~new LTCH Medicare patient criteria regulations during the third quarter~~nine months ended September 30, 2018:



	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	4.1	%	12.9	%	4.1	%	5.0	%	45.6	%	6.9	%
Change in income from operations	2.0	%	15.5	%	4.2	%	16.6	%	(6.7	)%	9.3	%
Change in Adjusted EBITDA	4.0	%	15.2	%	4.3	%	10.5	%	(5.6	)%	8.2	%

_______________________________________________________________________________

N/M — Not meaningful.


(1)	For the nine months ended September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Significant Events

Select 6.250% Senior Notes

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of ~~2016, we have experienced an increase in admissions of patients eligible for the full LTCH-PPS standard reimbursement rate.~~

~~The table below illustrates the trends of our case mix index and occupancy percentages during the periods in which our LTCHs became subject to the new patient criteria requirements.~~

2015

2016

2017

Occupancy
Percentage

Case Mix
Index(1)

Occupancy
Percentage

Case Mix
Index(1)

Occupancy
Percentage

Case Mix
Index(1)

Three months ended:

March 31

71
%
1.22

71
%
1.24

68
%
1.28

June 30

70
%
1.21

67
%
1.27

66
%
1.28

September 30

70
%
1.18

61
%
1.26

65
%
1.27

December 31

70
%
1.21

63
%
1.26

~~(1)~~ ~~Case mix index, which is calculated as the sum of all diagnostic-related group weights for the period divided by the sum of discharges for the same period, is reflective~~6.250% senior notes due August 15, 2026. Select used a portion of the ~~level of patient-acuity in our LTCHs.~~

~~From 2015 to 2017, our case mix index has increased, which is reflective~~net proceeds of the higher-acuity patients we are now admitting under patient criteria. This has resulted in increases in our net revenue per patient day due to higher reimbursement rates for these cases. Our LTCH occupancy percentage reached its lowest level during6.250% senior notes, together with a portion of the ~~third quarter of 2016, which is~~proceeds from the ~~first quarter in which all of our LTCHs operated~~incremental term loan borrowings under the ~~new Medicare payment rules.~~

~~Significant Events~~

~~Refinancing~~

Select credit facilities (as described below) in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.

Select Credit Facilities

On ~~March 6, 2017,~~August 1, 2019, Select entered into ~~a new senior secured~~Amendment No. 3 to the Select credit agreement dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, ~~provides~~along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.

Concentra Credit Facilities

On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for ~~$1.6 billion~~an additional $100.0 million in ~~senior secured credit facilities comprising~~term loans that, along with the existing Concentra first lien term loans, have a ~~$1.15 billion, seven-year term loan~~maturity date of June 1, 2022 and ~~a $450.0 million, five-year~~(ii) extended the maturity date of the revolving ~~credit~~ facility ~~including a $75.0 million sublimit for~~from June 1, 2021 to March 1, 2022. Concentra Inc. used the ~~issuance of standby letters of credit. Select used~~incremental borrowings under the ~~new Select~~Concentra first lien credit ~~facilities to: (i) repay the series E tranche B~~agreement to prepay in full all of its term loans ~~due June 1, 2018,~~outstanding under the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and (ii) pay fees and expenses in connection with the refinancing.

~~Pending Acquisition of U.S. HealthWorks~~

~~On October 23, 2017, Select announced that~~ Concentra Group Holdings entered into a Purchase Agreement dated October 22, 2017 with Concentra, Group Holdings Parent, U.S. HealthWorks, and DHHC. Pursuant to the terms of the Purchase Agreement, Concentra will acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.

Concentra expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien ~~term facility, for which JP Morgan Chase, N.A. has provided Concentra with a debt commitment letter.~~

credit agreement on September 20, 2019.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, filed with the SEC on February ~~23, 2017,~~21, 2019, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately ~~30%~~26% of our net operating revenues for ~~both~~ the nine months ended September 30, ~~2017~~2019, and 27% of our net operating revenues for the year ended December 31, ~~2016.~~

2018.

Medicare Reimbursement of LTCH Services

~~There have been~~

The following is a summary of significant regulatory changes affecting ~~LTCHs~~our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”), as well as the policies and payment rates that ~~have affected~~may affect our ~~net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures~~future results of ~~CMS. All~~operations. Medicare payments to our ~~LTCHs~~critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). ~~Proposed rules specifically related to LTCHs are generally published in April or May, finalized in August, and effective on October 1st of each year.~~

The following is a summary of significant changes to ~~the Medicare prospective payment system for LTCHs~~LTCH-PPS which have affected our ~~financial performance in~~results of operations, as well as the ~~periods covered by this report or may affect our financial performance and financial condition in the future.~~

~~Fiscal Year 2016. On August 17, 2015, CMS published the final rule updating~~ policies and payment rates for the LTCH-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an increase from the standard federal rate applicable during fiscal year 2015that may affect our future results of $41,044. The update to the standard federal rate for fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the Affordable Care Act (“ACA”). The fixed loss amount for high cost outlier cases paid under LTCH-PPS was set at $16,423, an increase from the fixed loss amount in the 2015 fiscal year of $14,972. The fixed loss amount for high cost outlier cases paid under the site neutral payment rate described below was set at $22,538.

~~Fiscal Year 2017~~. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the 2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.

operations.

Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ~~ACA. As noted below, the~~Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 iswas further impacted ~~further~~ by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

~~Patient Criteria~~

~~The BBA of 2013, enacted December 26, 2013, establishes a dual-rate~~

Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for ~~Medicare patients discharged from an LTCH. Specifically, for Medicare patients discharged in~~fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2015, LTCHs will be reimbursed at~~2018 through September 30, 2019). Certain errors in the ~~LTCH-PPS~~final rule were corrected in a final rule published October 3, 2018. The standard federal ~~payment~~ rate ~~only if, immediately preceding~~was set at $41,559, an increase from the ~~patient’s LTCH admission,~~standard federal rate applicable during fiscal year 2018 of $41,415. The update to the ~~patient was discharged from~~standard federal rate for fiscal year 2019 included a ~~“subsection (d) hospital” (generally,~~market basket increase of 2.9%, less a ~~short-term acute care hospital~~productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from the inpatient prospective payment system, or “IPPS”) and either the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d) hospital, or the patient was assigned to Medicare severity diagnosis-related group (“MS-LTC-DRG”) for LTCHs for cases receiving at least 96 hours of ventilator servicesfixed-loss amount in the ~~LTCH. In addition, to be~~2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH will be paid a lower “site neutral” payment rate, which will be the lower of: (i) IPPS comparable per diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) payment rate plus any outlier payments; or (ii) 100 percent of the estimated costs for services.

~~The BBA of 2013 provides for a transition to~~under the site-neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.

Fiscal Year 2020. On August 16, 2019, CMS published the final rule updating policies and payment rates for ~~those patients not paid at~~ the LTCH-PPS ~~standard federal payment rate. During the transition period (applicable to hospital cost reporting periods beginning on or after October 1, 2015~~for fiscal year 2020 (affecting discharges and on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral payment rate amount and 50% of the standard federal payment rate amount. For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral payment rate will apply for Medicare patients not meeting the new criteria.

~~In addition, for~~ cost reporting periods beginning on or after October 1, 2019 ~~qualifying discharges from an LTCH will continue to be paid at~~through September 30, 2020). Certain errors in the ~~LTCH-PPS~~final rule were corrected in a final rule published October 8, 2019. The standard federal ~~payment~~ rate ~~unless~~was set at $42,678, an increase from the ~~number~~standard federal rate applicable during fiscal year 2019 of ~~discharges~~$41,559. The update to the standard federal rate for ~~which payment is made~~fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. The standard federal rate also included an area wage budget neutrality factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of 0.999858 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $26,778, a decrease from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate ~~is greater than 50% of the total number of discharges~~was set at $26,552, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH ~~for that period. If the number of~~ discharges ~~for which payment is made under the site-neutral~~occurring in cost reporting periods beginning in FY 2020, site neutral payment rate ~~is greater than 50%, then beginning in the next cost reporting period all discharges from the LTCH~~cases will ~~be reimbursed at the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment rate~~begin to be ~~reinstated for~~paid fully on the site neutral payment ~~under the dual-rate LTCH-PPS.~~

~~Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below), apply to LTCH discharges regardless of whether the case is paid at the standard federal payment~~ rate, or the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid at the site-neutral payment rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from the site-neutral payment rate. In addition, CMS applies the IPPS fixed-loss amount for high cost outliers to site-neutral cases, rather than the ~~LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the site-neutral~~transitional blended rate.

~~Medicare Market Basket Adjustments~~

The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.

25 Percent Rule

The “25 Percent Rule” iswas a downward payment adjustment that ~~applies~~applied if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) ~~exceeds~~exceeded the applicable percentage admissions threshold during a particular cost reporting period. For Medicare patients above the applicable percentage admissions threshold, the LTCH is reimbursed at a rate equivalent to that under general acute care hospital IPPS, which is generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the admissions threshold and are paid under LTCH-PPS.

Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges occurring on or after October 1, 2016 and before October 1, 2017. In addition, current law applies higher percentage admissions thresholds under the 25 Percent Rule for most hospitals within hospitals (“HIHs”) for cost reporting years beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs are exempt from the 25 Percent Rule regulations.

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.

For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule ~~applies~~includes a temporary, one-time adjustment to ~~discharges occurring on or after October 1, 2018. After~~ the expiration of the regulatory moratorium, our LTCHs (whether freestanding, HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes will have an adverse financial impact on the net operating revenues and profitability of many of these hospitals for discharges on or after October 1, 2018.

~~Short Stay Outlier Policy~~

CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” SSO cases are paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.

~~For~~ fiscal year 2018, CMS adopted changes to the SSO policy such that all SSO cases discharged on or after October 1, 2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS. Under this policy, as the length of stay of a SSO case increases, the percentage of the per diem payment amounts based on the full MS-LTCH-DRG2019 LTCH-PPS standard federal payment rate, ~~increases and the percentage of the payment based on the IPPS comparable amount decreases.~~

~~Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH beds~~

~~Current law imposes~~ a moratorium on the establishment and classification of new LTCHs or LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities through September 30, 2017. There are three exceptionstemporary, one-time adjustment to the ~~moratorium for projects that were under development when~~fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment to the ~~moratorium began on April 1, 2014. Only one exception needs to exist for the moratorium not to apply.~~

LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.

Medicare Reimbursement of ~~Inpatient Rehabilitation Facility~~IRF Services

The following is a summary of significant regulatory changes ~~to the~~affecting our rehabilitation hospitals, which are certified by Medicare ~~prospective payment system for~~as inpatient rehabilitation facilities (“IRFs”) ~~which have affected our financial performance in~~, as well as the ~~periods covered by this report or~~policies and payment rates that may affect our ~~financial performance and financial condition in the future.~~future results of operations. Medicare payments to our ~~IRFs~~rehabilitation hospitals are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).

~~Fiscal Year 2016. On August 6, 2015, CMS published~~

The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the ~~final rule updating~~ policies and payment rates for the IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard payment conversion factor for discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor applicable during fiscal year 2015that may affect our future results of $15,198. The update to the standard payment conversion factor for fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.

~~Fiscal Year 2017~~. On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.

operations.

Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. ~~As noted below, the~~The standard payment conversion factor for fiscal year 2018 iswas further impacted ~~further~~ by the Medicare Access and CHIP Reauthorization Act of 2015, which ~~limits~~limited the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.

~~Medicare Market Basket Adjustments~~

Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The ~~ACA instituted~~standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 included a market basket ~~payment~~increase of 2.9%, less a productivity adjustment ~~for IRFs. In fiscal years 2018~~of 0.8%, and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket paymentless a reduction of 0.75% mandated by the ACA. ~~The ACA specifically allows these market basket reductions~~CMS increased the outlier threshold amount for fiscal year 2019 to ~~result~~$9,402 from $8,679 established in ~~less than a 0% payment update~~the final rule for fiscal year 2018.

Fiscal Year 2020. On August 8, 2019, CMS published the final rule updating policies and payment rates ~~that are less than~~for the ~~prior year.~~

~~Patient Classification Criteria~~

~~In order to qualify as an IRF a hospital must demonstrate that during its most recent twelve month~~IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting ~~period it served an inpatient population of whom at least 60% required intensive rehabilitation services~~periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for one or more of 13 conditions specified by regulation. Compliance with the 60% rule is demonstrated through either medical review or the “presumptive” method, in which a patient’s diagnosis codes are compared to a “presumptive compliance” list. Fordischarges for fiscal year ~~2018,~~2020 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS ~~revised~~decreased the ~~60% rule’s presumptive methodology by (i) including certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes~~outlier threshold amount for patients with traumatic brain injury and hip fracture conditions; and (ii) revising the presumptive methodology list for major multiple trauma by counting IRF cases that contain two or more of the ICD-10-CM codesfiscal year 2020 to $9,300 from ~~three major multiple trauma lists~~$9,402 established in the ~~specified combinations.~~

final rule for fiscal year 2019.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update ~~will be~~was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the ~~Merit-Based~~Merit‑Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years, eligible professionals participating in APMs ~~that~~who meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.

Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements ~~a provider’s~~an eligible clinician’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the ~~professional’s~~clinician’s payment for a year. Each year from 2019 through 2024 ~~professionals~~eligible clinicians who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. ~~The specifics~~

Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants

In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the ~~MIPS and APM adjustments~~fee schedule rate beginning ~~in 2019 and 2020, respectively, will be subject to future notice and comment rule-making.~~

on January 1, 2022.

Operating Statistics

The following table sets forth operating statistics for each of our ~~operating~~ segments for ~~each of~~ the periods presented. The operating statistics reflect data for the period of time we managed these ~~operations:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

Specialty hospitals data:(1)

Number of hospitals owned—start of period

116

114

118

115

Number of hospitals acquired

1

—

4

1

Number of hospital start-ups

1

2

2

2

Number of hospitals closed/sold

(3
)
(2
)
(9
)
(4
)
Number of hospitals owned—end of period

115

114

115

114

Number of hospitals managed—end of period

8

9

8

9

Total number of hospitals (all)—end of period

123

123

123

123

Long term acute care hospitals

104

101

104

101

Rehabilitation hospitals

19

22

19

22

Available licensed beds(2)

5,208

5,189

5,208

5,189

Admissions(2)

12,586

13,728

39,541

41,314

Patient days(2)

296,202

316,170

951,292

950,419

Average length of stay (days)(2)

24

23

24

23

Net revenue per patient day(2)(3)

$
1,642

$
1,676

$
1,651

$
1,707

Occupancy rate(2)

62
%
66
%
67
%
67
%
Percent patient days—Medicare(2)

53
%
53
%
55
%
54
%

Outpatient rehabilitation data:

Number of clinics owned—start of period

1,435

1,441

896

1,445

Number of clinics acquired

3

4

546

5

Number of clinic start-ups

7

3

20

17

Number of clinics closed/sold

(8
)
(13
)
(25
)
(32
)
Number of clinics owned—end of period

1,437

1,435

1,437

1,435

Number of clinics managed—end of period

166

169

166

169

Total number of clinics (all)—end of period

1,603

1,604

1,603

1,604

Number of visits(2)

2,052,678

1,986,213

5,751,562

6,168,763

Net revenue per visit(2)(4)

$
102

$
104

$
102

$
103

Concentra data:

Number of centers owned—start of period

301

315

300

300

Number of centers acquired

1

—

3

11

Number of center start-ups

—

—

—

4

Number of centers closed/sold

(1
)
(3
)
(2
)
(3
)
Number of centers owned—end of period

301

312

301

312

Number of visits(5)

1,906,242

1,979,481

5,642,305

5,848,551

Net revenue per visit(5)(6)

$
119

$
116

$
118

$
117

operations.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019
Critical illness recovery hospital data:
Number of hospitals owned—start of period	98			99			99			96
Number of hospitals acquired	—			—			—			3
Number of hospital start-ups	—			—			1			—
Number of hospitals closed/sold	(1		)	—			(3		)	—
Number of hospitals owned—end of period	97			99			97			99
Number of hospitals managed—end of period	—			1			—			1
Total number of hospitals (all)—end of period	97			100			97			100
Available licensed beds⁽¹⁾	4,095			4,230			4,095			4,230
Admissions⁽¹⁾	8,651			9,051			27,605			27,679
Patient days⁽¹⁾	243,891			258,089			765,863			779,078
Average length of stay (days)⁽¹⁾	28			28			28			28
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,705		$	1,773		$	1,716		$	1,757
Occupancy rate⁽¹⁾	65		%	67		%	68		%	69		%
Percent patient days—Medicare⁽¹⁾	53		%	49		%	53		%	51		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	17			19			16			17
Number of hospitals start-ups	—			—			1			2
Number of hospitals owned—end of period	17			19			17			19
Number of hospitals managed—end of period	9			10			9			10
Total number of hospitals (all)—end of period	26			29			26			29
Available licensed beds⁽¹⁾	1,189			1,309			1,189			1,309
Admissions⁽¹⁾	5,370			6,400			16,219			18,253
Patient days⁽¹⁾	79,232			89,454			233,537			258,795
Average length of stay (days)⁽¹⁾	15			14			15			14
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,582		$	1,724		$	1,604		$	1,665
Occupancy rate⁽¹⁾	72		%	75		%	73		%	75		%
Percent patient days—Medicare⁽¹⁾	53		%	53		%	54		%	51		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,435			1,419			1,447			1,423
Number of clinics acquired	—			3			14			17
Number of clinic start-ups	8			14			26			36
Number of clinics closed/sold	(23		)	(7		)	(67		)	(47		)
Number of clinics owned—end of period	1,420			1,429			1,420			1,429
Number of clinics managed—end of period	229			278			229			278
Total number of clinics (all)—end of period	1,649			1,707			1,649			1,707
Number of visits⁽¹⁾	2,039,462			2,204,328			6,251,582			6,462,316
Net revenue per visit⁽¹⁾⁽³⁾	$	103		$	103		$	103		$	103
Concentra data:
Number of centers owned—start of period	527			526			312			524
Number of centers acquired	1			1			220			6
Number of centers closed/sold	(3		)	(4		)	(7		)	(7		)
Number of centers owned—end of period	525			523			525			523
Number of onsite clinics operated—end of period	123			131			123			131
Number of CBOCs owned—end of period	30			32			30			32
Number of visits⁽¹⁾	2,984,832			3,150,903			8,605,012			9,165,599
Net revenue per visit⁽¹⁾⁽³⁾	$	124		$	120		$	124		$	122

~~(1)~~ ~~Specialty hospitals consist of LTCHs and IRFs.~~

~~(2)~~ ~~Data excludes specialty hospitals and outpatient clinics managed by the Company.~~

~~(3)~~ ~~Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenues by the total number of patient days.~~

~~(4)~~ Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy revenue.

~~(5)~~ ~~Data excludes onsite clinics and CBOCs.~~

~~(6)~~ ~~Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits.~~


(1)	Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded.


(2)	Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days.


(3)	Net revenue per visit is calculated by dividing direct patient service revenue by the total number of visits. For purposes of this computation for our Concentra segment, direct patient service revenue does not include onsite clinics and community-based outpatient clinics.

Results of Operations

The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

100.0
%
100.0
%
100.0
%
100.0
%
Cost of services(1)

86.9

85.6

85.0

83.7

General and administrative

2.6

2.5

2.5

2.5

Bad debt expense

1.7

1.9

1.6

1.8

Depreciation and amortization

3.5

3.4

3.4

3.6

Income from operations

5.3

6.6

7.5

8.4

Loss on early retirement of debt

(1.0
)
—

(0.4
)
(0.6
)
Equity in earnings of unconsolidated subsidiaries

0.5

0.3

0.5

0.5

Non-operating gain (loss)

(0.1
)
—

1.1

(0.0
)
Interest expense

(4.2
)
(3.4
)
(3.9
)
(3.5
)
Income before income taxes

0.5

3.5

4.8

4.8

Income tax expense

0.1

1.2

1.6

1.8

Net income

0.4

2.3

3.2

3.0

Net income (loss) attributable to non-controlling interests

(0.2
)
0.6

0.3

0.7

Net income attributable to Holdings and Select

0.6
%
1.7
%
2.9
%
2.3
%



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services, exclusive of depreciation and amortization⁽¹⁾	85.8		84.9		85.1		84.9
General and administrative	2.4		2.5		2.4		2.3
Depreciation and amortization	3.9		3.8		3.9		4.0
Income from operations	7.9		8.8		8.6		8.8
Loss on early retirement of debt	—		(1.3	)	(0.3	)	(0.5	)
Equity in earnings of unconsolidated subsidiaries	0.4		0.5		0.4		0.5
Gain on sale of businesses	0.2		—		0.2		0.2
Interest expense	(4.0	)	(3.9	)	(3.8	)	(3.9	)
Income before income taxes	4.5		4.1		5.1		5.1
Income tax expense	1.1		0.9		1.2		1.2
Net income	3.4		3.2		3.9		3.9
Net income attributable to non-controlling interests	0.8		1.0		0.9		1.0
Net income attributable to Select Medical Holdings Corporation	2.6	%	2.2	%	3.0	%	2.9	%

~~(1)~~ ~~Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.~~

_______________________________________________________________________________


(1)	Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs.

The following table summarizes selected financial data by ~~business~~ segment for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

% Change

2016

2017

% Change

(in thousands)

Net operating revenues:

Specialty hospitals

$
544,491

$
585,288

7.5
%
$
1,729,261

$
1,785,035

3.2
%
Outpatient rehabilitation(1)

250,710

250,527

(0.1
)
745,720

764,450

2.5

Concentra

258,507

261,295

1.1

764,252

779,030

1.9

Other(2)

87

56

N/M

523

687

N/M

Total Company

$
1,053,795

$
1,097,166

4.1
%
$
3,239,756

$
3,329,202

2.8
%
Income (loss) from operations:

Specialty hospitals

$
33,947

$
54,017

59.1
%
$
175,737

$
206,900

17.7
%
Outpatient rehabilitation(1)

25,836

23,334

(9.7
)
82,609

84,393

2.2

Concentra

25,417

24,777

(2.5
)
71,933

78,308

8.9

Other(2)

(29,038
)
(30,030
)
(3.4
)
(86,177
)
(90,075
)
(4.5
)
Total Company

$
56,162

$
72,098

28.4
%
$
244,102

$
279,526

14.5
%
Adjusted EBITDA:

Specialty hospitals

$
48,264

$
69,454

43.9
%
$
217,759

$
256,291

17.7
%
Outpatient rehabilitation(1)

31,995

29,298

(8.4
)
99,006

102,575

3.6

Concentra

40,888

40,003

(2.2
)
118,080

125,656

6.4

Other(2)

(23,070
)
(22,928
)
0.6

(66,696
)
(71,125
)
(6.6
)
Total Company

$
98,077

$
115,827

18.1
%
$
368,149

$
413,397

12.3
%
Adjusted EBITDA margins:

Specialty hospitals

8.9
%
11.9
%

12.6
%
14.4
%

Outpatient rehabilitation(1)

12.8

11.7

13.3

13.4

Concentra

15.8

15.3

15.5

16.1

Other(2)

N/M

N/M

N/M

N/M

Total Company

9.3
%
10.6
%

11.4
%
12.4
%

Total assets:(3)

Specialty hospitals

$
2,469,060

$
2,748,761

$
2,469,060

$
2,748,761

Outpatient rehabilitation

955,359

945,765

955,359

945,765

Concentra

1,318,866

1,332,012

1,318,866

1,332,012

Other(2)

73,992

97,269

73,992

97,269

Total Company

$
4,817,277

$
5,123,807

$
4,817,277

$
5,123,807

Purchases of property and equipment, net:

Specialty hospitals

$
24,378

$
37,376

$
79,366

$
106,424

Outpatient rehabilitation(1)

6,234

6,496

15,032

19,370

Concentra

2,720

5,369

10,647

21,656

Other(2)

4,670

19,257

13,215

26,350

Total Company

$
38,002

$
68,498

$
118,260

$
173,800



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change
	(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	420,108		$	462,892		10.2	%	$	1,327,236		$	1,381,569		4.1	%
Rehabilitation hospital	144,588			173,369			19.9		432,675			488,301			12.9
Outpatient rehabilitation	245,234			265,330			8.2		743,379			774,126			4.1
Concentra	404,481			421,900			4.3		1,173,420			1,231,672			5.0
Other⁽¹⁾	52,990			69,852			31.8		139,865			203,670			45.6
Total Company	$	1,267,401		$	1,393,343		9.9	%	$	3,816,575		$	4,079,338		6.9	%
Income (loss) from operations:
Critical illness recovery hospital	$	42,156		$	44,763		6.2	%	$	152,843		$	155,953		2.0	%
Rehabilitation hospital	19,264			29,546			53.4		62,498			72,213			15.5
Outpatient rehabilitation	27,934			33,153			18.7		87,065			90,705			4.2
Concentra	43,499			52,922			21.7		123,776			144,350			16.6
Other⁽¹⁾	(33,016		)	(37,478		)	(13.5	)	(97,186		)	(103,709		)	(6.7	)
Total Company	$	99,837		$	122,906		23.1	%	$	328,996		$	359,512		9.3	%
Adjusted EBITDA:
Critical illness recovery hospital	$	53,292		$	57,247		7.4	%	$	186,989		$	194,383		4.0	%
Rehabilitation hospital	25,343			36,780			45.1		80,314			92,545			15.2
Outpatient rehabilitation	34,531			40,040			16.0		107,003			111,615			4.3
Concentra	68,754			77,679			13.0		199,119			220,024			10.5
Other⁽¹⁾	(25,292		)	(29,081		)	(15.0	)	(75,337		)	(79,552		)	(5.6	)
Total Company	$	156,628		$	182,665		16.6	%	$	498,088		$	539,015		8.2	%
Adjusted EBITDA margins:
Critical illness recovery hospital	12.7		%	12.4		%			14.1		%	14.1		%
Rehabilitation hospital	17.5			21.2					18.6			19.0
Outpatient rehabilitation	14.1			15.1					14.4			14.4
Concentra	17.0			18.4					17.0			17.9
Other⁽¹⁾	N/M			N/M					N/M			N/M
Total Company	12.4		%	13.1		%			13.1		%	13.2		%
Total assets:
Critical illness recovery hospital	$	1,785,336		$	2,116,512				$	1,785,336		$	2,116,512
Rehabilitation hospital	888,342			1,121,260					888,342			1,121,260
Outpatient rehabilitation	991,105			1,280,712					991,105			1,280,712
Concentra	2,201,869			2,366,227					2,201,869			2,366,227
Other⁽¹⁾	113,529			270,045					113,529			270,045
Total Company	$	5,980,181		$	7,154,756				$	5,980,181		$	7,154,756
Purchases of property and equipment:
Critical illness recovery hospital	$	8,134		$	12,254				$	31,455		$	36,902
Rehabilitation hospital	8,769			5,293					29,766			23,832
Outpatient rehabilitation	7,209			7,476					22,565			23,221
Concentra	12,539			8,240					29,281			36,178
Other⁽¹⁾	2,740			1,408					7,972			3,823
Total Company	$	39,391		$	34,671				$	121,039		$	123,956


(1)	Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.


(2)	For the three and nine months ended September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

N/M—M — Not ~~Meaningful.~~

~~(1)~~ ~~The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.~~

~~(2)~~ ~~Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.~~

~~(3)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of September 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $28.1 million.~~

meaningful.

Three Months Ended September 30, ~~2017~~2019, Compared to Three Months Ended September 30, ~~2016~~

2018

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income ~~(loss)~~ attributable to non-controlling ~~interests, which, in each case, are the same for Holdings and Select.~~

interests.

Net Operating Revenues

Our net operating revenues increased ~~4.1%~~9.9% to ~~$1,097.2~~$1,393.3 million for the three months ended September 30, ~~2017,~~2019, compared to $~~1,053.8~~$1,267.4 million for the three months ended September 30, ~~2016.~~

~~Specialty Hospitals~~2018.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~7.5%~~10.2% to ~~$585.3~~$462.9 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$544.5~~$420.1 million for the three months ended September 30, ~~2016 for our specialty hospitals segment.~~2018. The increase in net operating revenues ~~is principally~~was due to ~~several new inpatient rehabilitation facilities which commenced operations during 2016~~increases in both patient volume and ~~2017 and an increase in~~net revenue per patient ~~volumes at our LTCHs.~~day. Our patient days increased ~~6.7%~~5.8% to ~~316,170~~258,089 days for the three months ended September 30, ~~2017,~~2019, compared to ~~296,202~~243,891 days for the three months ended September 30, ~~2016.~~2018. The ~~average~~acquisition of three hospitals during 2019 contributed to the increase in patient days. We also experienced a 2.9% increase in patient days in our existing hospitals, which was offset in part by a decrease in patient days from the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. For the three months ended September 30, 2019, our net revenue per patient day ~~for our specialty hospitals~~ increased ~~2.1%~~4.0% to ~~$1,676~~$1,773, as compared to $1,705 for the three months ended September 30, ~~2017, compared to $1,642 for the three months ended September 30, 2016.~~

~~Outpatient~~ 2018. The increase is primarily driven by an increase in our Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues ~~were $250.5~~increased 19.9% to $173.4 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$250.7~~$144.6 million for the three months ended September 30, ~~2016 for our outpatient rehabilitation segment. The decrease in net operating revenues was principally due~~2018. Our patient days increased 12.9% to a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues. Additionally, we experienced a decline in visits at Physiotherapy clinics within some of our markets. We had 1,986,213 visits in our clinics89,454 days for the three months ended September 30, ~~2017,~~2019, compared to ~~2,052,678~~79,232 days for the three months ended September 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced a 4.0% increase in patient days within our existing hospitals. Our net revenue per patient day increased 9.0% to $1,724 for the three months ended September 30, 2019, compared to $1,582 for the three months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 8.2% to $265.3 million for the three months ended September 30, 2019, compared to $245.2 million for the three months ended September 30, 2018. The increase in net operating revenues was attributable to an increase in visits, which increased 8.1% to 2,204,328 for the three months ended September 30, 2019, compared to 2,039,462 visits for the three months ended September 30, ~~2016.~~2018. The ~~decline~~increase in ~~net operating revenues attributable~~visits was due to ~~lower patient volumes~~new outpatient rehabilitation clinics and a 7.2% increase in visits within our existing clinics. This growth was offset in part by ~~an increase in net revenue per visit. Net revenue per visit increased 2.0%~~the sale of outpatient rehabilitation clinics to ~~$104 for~~non-consolidating subsidiaries since September 30, 2018, which contributed 24,146 visits during the three months ended September 30, ~~2017, compared to $102 for~~2018. During the three months ended September 30, ~~2016.~~

2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. Our net revenue per visit was $103 for both the three months ended September 30, 2019 and 2018.

Concentra Segment. Net operating revenues increased ~~1.1%~~4.3% to ~~$261.3~~$421.9 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$258.5~~$404.5 million for the three months ended September 30, ~~2016 for our Concentra segment.~~2018. The increase in net operating revenues was ~~principally due~~attributable to an increase in visits, ~~from newly acquired and developed medical centers,~~ offset in part by a ~~decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $1.2 million~~ decrease in net ~~operating revenues.~~revenue per visit. Visits ~~in our centers~~ increased ~~3.8%~~5.6% to ~~1,979,481~~3,150,903 visits for the three months ended September 30, ~~2017,~~2019, compared to ~~1,906,242~~2,984,832 visits for the three months ended September 30, ~~2016. The growth in visits primarily related to an increase in employer services visits.~~2018. Net revenue per visit was ~~$116~~$120 for the three months ended September 30, ~~2017,~~2019, compared to ~~$119~~$124 for the three months ended September 30, ~~2016.~~2018. The decrease in net revenue per visit iswas principally due to an ~~increased proportion of~~increase in employer ~~service~~services visits, which yield lower per ~~visit~~visits rates.

Operating Expenses

Our operating expenses ~~include our~~consist principally of cost of services and general and administrative ~~expense, and bad debt expense.~~expenses. Our operating expenses were ~~$986.3~~$1,217.5 million, or ~~90.0%~~87.4% of net operating revenues, for the three months ended September 30, ~~2017,~~2019, compared to ~~$960.5~~$1,117.0 million, or ~~91.1%~~88.2% of net operating revenues, for the three months ended September 30, ~~2016.~~2018. Our cost of services, a major component of which is labor expense, was ~~$938.9~~$1,183.1 million, or ~~85.6%~~84.9% of net operating revenues, for the three months ended September 30, ~~2017,~~2019, compared to ~~$915.7~~$1,087.1 million, or ~~86.9%~~85.8% of net operating revenues, for the three months ended September 30, ~~2016.~~2018. The decrease in our operating expenses relative to our net operating revenues iswas principally due to the improved operating performance of our ~~acquired~~rehabilitation hospital and ~~start-up specialty hospitals. Facility rent expense, a component of cost of services, was $57.9 million for~~Concentra segments during the three months ended September 30, ~~2017, compared to $58.5 million for the three months ended September 30, 2016.~~2019. General and administrative expenses were $27.1 million for both the three months ended September 30, 2017 and 2016. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended September 30, 2017, compared to 2.6% for the three months ended September 30, 2016. Our bad debt expense was $20.3$34.4 million, or ~~1.9%~~2.5% of net operating revenues, for the three months ended September 30, ~~2017,~~2019, compared to $~~17.7~~$30.0 million, or ~~1.7%~~2.4% of net operating revenues, for the three months ended September 30, ~~2016. The increase in bad debt expense occurred principally in our specialty hospitals segment.~~

2018.

Adjusted EBITDA

~~Specialty Hospitals~~

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~43.9%~~7.4% to ~~$69.5~~$57.2 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$48.3~~$53.3 million for the three months ended September 30, ~~2016 for our specialty hospitals segment.~~2018. Our Adjusted EBITDA margin for the ~~specialty hospitals~~critical illness recovery hospital segment was ~~11.9%~~12.4% for the three months ended September 30, ~~2017,~~2019, compared to ~~8.9%~~12.7% for the three months ended September 30, ~~2016.~~2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.” The decrease in our Adjusted EBITDA margin resulted from our newly acquired hospitals operating at lower margins than our other critical illness recovery hospitals.

Rehabilitation Hospital Segment. Adjusted EBITDA increased 45.1% to $36.8 million for the three months ended September 30, 2019, compared to $25.3 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months ended September 30, 2019, compared to 17.5% for the three months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin ~~for our specialty hospitals segment~~ were primarily ~~driven by the~~attributable to improved ~~operating performance~~patient volume and net revenue per patient day within several of our ~~LTCHs and reductions in~~existing hospitals, as discussed above under “Net Operating Revenues.”

Outpatient Rehabilitation Segment. Adjusted EBITDA ~~losses in our start-up specialty hospitals. Adjusted EBITDA losses in our start-up specialty hospitals were $1.5~~increased 16.0% to $40.0 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$9.0~~$34.5 million for the three months ended September 30, ~~2016.~~

~~Outpatient Rehabilitation Segment.~~ ~~Adjusted EBITDA was $29.3 million for the three months ended September 30, 2017, compared to $32.0 million for the three months ended September 30, 2016 for our outpatient rehabilitation segment.~~2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~11.7%~~15.1% for the three months ended September 30, ~~2017,~~2019, compared to ~~12.8%~~14.1% for the three months ended September 30, ~~2016. The decrease in~~2018. Our Adjusted EBITDA ~~was principally due to a decline in visits within areas affected by Hurricanes Harvey~~ and ~~Irma, as discussed above under “~~~~Net Operating Revenues~~~~.” Additionally, we experienced a decline in visits at Physiotherapy clinics within some of our markets. The decline in our~~ Adjusted EBITDA margin ~~for~~increased principally from increased patient volumes in our existing outpatient rehabilitation ~~segment was the result of higher labor expenses~~clinics, allowing these clinics to operate at lower relative ~~to our net operating revenues within markets which~~costs, as well as other cost reductions we have ~~experienced a decline in patient volumes.~~

achieved.

Concentra Segment. Adjusted EBITDA ~~was $40.0~~increased 13.0% to $77.7 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$40.9~~$68.8 million for the three months ended September 30, ~~2016 for our Concentra segment.~~2018. Our Adjusted EBITDA margin for the Concentra segment was ~~15.3%~~18.4% for the three months ended September 30, ~~2017,~~2019, compared to ~~15.8%~~17.0% for the three months ended September 30, ~~2016.~~2018. The ~~decrease~~increase in Adjusted EBITDA margin resulted principally from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

Depreciation and Amortization

Depreciation and amortization expense was ~~principally due to a decline in visits within areas affected by Hurricanes Harvey and Irma, as discussed above under “~~~~Net Operating Revenues~~.”

~~Other.~~ ~~The Adjusted EBITDA loss was $22.9~~$52.9 million for the three months ended September 30, ~~2017,~~2019, compared to ~~an Adjusted EBITDA loss of $23.1~~$50.5 million for the three months ended September 30, ~~2016.~~

~~Depreciation~~2018. The increase principally occurred within our critical illness recovery hospital and ~~Amortization~~

~~Depreciation and amortization expense was $38.8~~rehabilitation hospital segments.

Income from Operations

For the three months ended September 30, 2019, we had income from operations of $122.9 million, compared to $99.8 million for the three months ended September 30, ~~2017, compared to~~ ~~$37.2 million for the three months ended September 30, 2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment.~~

~~Income from Operations~~

~~For the three months ended September 30, 2017, we had income from operations of $72.1 million, compared to $56.2 million for the three months ended September 30, 2016.~~2018. The increase in income from operations resulted principally from ~~the improved operating performance of~~ our ~~specialty hospitals segment.~~

rehabilitation hospital and Concentra segments.

Loss on Early Retirement of Debt

~~On September 26, 2016,~~

The amendment to the Select credit agreement, the amendment to the Concentra ~~prepaid~~first lien credit agreement, the ~~second lien~~repayment of term ~~loan~~loans outstanding under the Concentra second lien credit ~~facilities, resulting~~agreement, and the redemption of the 6.375% senior notes resulted in ~~a loss~~losses on early retirement of debt ~~of approximately $10.9 million. The loss on early retirement of debt consisted of a prepayment premium, unamortized debt issuance costs, and unamortized original issue discounts.~~

totaling $18.6 million for the three months ended September 30, 2019.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended September 30, ~~2017,~~2019, we had equity in earnings of unconsolidated subsidiaries of ~~$4.4~~$7.0 million, compared to ~~$5.3~~$5.4 million for the three months ended September 30, ~~2016.~~2018. The ~~decrease~~increase in ~~our~~ equity in earnings was principally attributable to the growth of ~~unconsolidated~~certain of our non-consolidating subsidiaries, which resulted from our sales of outpatient rehabilitation clinics to these subsidiaries.

Gain on Sale of Businesses

We recognized a gain of $2.1 million during the three months ended September 30, 2018. The gain was principally ~~from losses incurred by start-up companies in which we own~~attributable to the sale of outpatient rehabilitation clinics to a ~~minority interest.~~

non-consolidating subsidiary.

Interest Expense

Interest expense was ~~$37.7~~$54.3 million for the three months ended September 30, ~~2017,~~2019, compared to ~~$44.5~~$50.7 million for the three months ended September 30, ~~2016.~~2018. The ~~decrease~~increase in interest expense was principally due to the ~~result~~recognition of ~~decreases in our~~ interest

~~rates associated with~~ expense on both the ~~refinancing~~6.250% senior notes and the 6.375% senior notes during August 2019, as the redemption of the ~~Select credit facilities during~~6.375% senior notes occurred on August 30, 2019, while the ~~quarter ended March 31, 2017 and~~issuance of the ~~Concentra credit facilities during the quarter ended September 30, 2016.~~

$550.0 million 6.250% senior notes occurred on August 1, 2019.

Income Taxes

We recorded income tax expense of ~~$14.0~~$12.8 million for the three months ended September 30, ~~2017,~~2019, which represented an effective tax rate of ~~36.1%~~22.6%. We recorded income tax expense of ~~$1.1~~$14.1 million for the three months ended September 30, ~~2016,~~2018, which represented an effective tax rate of ~~21.2%~~24.8%. ~~Our quarterly~~The decrease in the effective ~~income~~ tax rate ~~is derived~~resulted from ~~our full year estimated effective~~a lower estimate of state and local income ~~tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate.~~

taxes.

Net Income ~~(Loss)~~ Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$6.4~~$13.3 million for the three months ended September 30, ~~2017,~~2019, compared to ~~net losses attributable to non-controlling interests of $2.5~~$9.8 million for the three months ended September 30, ~~2016.~~2018. The increase iswas principally due to ~~increases in net income of our joint venture subsidiary, Concentra, and~~ the improved operating performance of ~~joint venture inpatient rehabilitation facilities operating within~~ our ~~specialty hospitals~~Concentra segment.

Nine Months Ended September 30, ~~2017~~2019, Compared to Nine Months Ended September 30, ~~2016~~

2018

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, ~~non-operating~~ gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling ~~interests, which, in each case, are the same for Holdings and Select.~~

interests.

Net Operating Revenues

Our net operating revenues increased ~~2.8%~~6.9% to ~~$3,329.2~~$4,079.3 million for the nine months ended September 30, ~~2017,~~2019, compared to $~~3,239.8~~$3,816.6 million for the nine months ended September 30, ~~2016.~~

~~Specialty Hospitals~~2018.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~3.2%~~4.1% to ~~$1,785.0~~$1,381.6 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$1,729.3~~$1,327.2 million for the nine months ended September 30, ~~2016 for our specialty hospitals segment.~~2018. The increase in net operating revenues ~~is principally~~was due to ~~several new inpatient rehabilitation facilities which commenced operations during 2016~~increases in both patient volume and ~~2017. The average~~ net revenue per patient day for our specialty hospitals increased 3.4% to $1,707 for the nine months ended September 30, 2017, compared to $1,651 for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, we had 950,419day. Our patient days ~~compared~~increased 1.7% to ~~951,292~~779,078 days for the nine months ended September 30, ~~2016.~~2019, compared to 765,863 days for the nine months ended September 30, 2018. The acquisition of three hospitals during 2019 contributed to the increase in patient days. We also experienced an increase in patient days in our existing hospitals, which was offset by a decrease in patient days ~~is principally due~~from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. Net revenue per patient day increased 2.4% to ~~closed specialty hospitals.~~

~~Outpatient~~ $1,757 for the nine months ended September 30, 2019, compared to $1,716 for the nine months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased ~~2.5%~~12.9% to ~~$764.5~~$488.3 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$745.7~~$432.7 million for the nine months ended September 30, ~~2016~~2018. The increase in net operating revenues resulted from both an increase in patient volumes and net revenue per patient day during the nine months ended September 30, 2019. Our patient days increased 10.8% to 258,795 days for the nine months ended September 30, 2019, compared to 233,537 days for the nine months ended September 30, 2018. The increase in patient days was principally driven by our ~~outpatient~~ rehabilitation ~~segment.~~hospitals which recently commenced operations. We also experienced a 3.0% increase in patient days in our existing hospitals. Our net revenue per patient day increased 3.8% to $1,665 for the nine months ended September 30, 2019, compared to $1,604 for the nine months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 4.1% to $774.1 million for the nine months ended September 30, 2019, compared to $743.4 million for the nine months ended September 30, 2018. The increase in net operating revenues was ~~principally due~~attributable to ~~the acquisition of Physiotherapy on March 4, 2016, which contributed to the overall growth in our visits. Additionally, we experienced~~ an increase in ~~our net revenue per visit. Visits~~visits, which increased ~~7.3%~~3.4% to ~~6,168,763~~6,462,316 for the nine months ended September 30, ~~2017,~~2019, compared to ~~5,751,562~~6,251,582 visits for the nine months ended September 30, ~~2016. Net revenue per visit increased 1.0% to $103 for the nine months ended September 30, 2017, compared to $102 for the nine months ended September 30, 2016.~~2018. The increase in ~~net operating revenues~~visits was due to new outpatient rehabilitation clinics and a 5.0% increase in visits within our existing clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since September 30, 2018, which contributed 192,149 visits during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we also experienced an increase in management fee revenues related to services provided to our ~~contract therapy businesses on March 31, 2016.~~

non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the nine months ended September 30, 2019 and 2018.

Concentra Segment. Net operating revenues increased ~~1.9%~~5.0% to ~~$779.0~~$1,231.7 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$764.3~~$1,173.4 million for the nine months ended September 30, ~~2016 for our Concentra segment. The increase in net operating revenues was principally due to an increase in visits from newly acquired and developed medical centers.~~2018. Visits in our centers increased ~~3.7%~~6.5% to ~~5,848,551~~9,165,599 for the nine months ended September 30, ~~2017,~~2019, compared to ~~5,642,305~~8,605,012 visits for the nine months ended September 30, ~~2016.~~2018. The ~~growth~~increases in net operating revenues and visits were principally ~~related~~due to ~~an increase in employer services visits.~~U.S. HealthWorks, which we acquired on February 1, 2018, and other newly acquired centers. Net revenue per visit was ~~$117~~$122 for the nine months ended September 30, ~~2017,~~2019, compared to ~~$118~~$124 for the nine months ended September 30, ~~2016.~~2018. The decrease in net revenue per visit iswas principally due to an ~~increased proportion of~~increase in employer ~~service~~services visits, which yield lower per ~~visit~~visits rates.

Operating Expenses

Our operating expenses ~~include our~~consist principally of cost of services and general and administrative ~~expense, and bad debt expense.~~expenses. Our operating expenses were ~~$2,930.0~~$3,559.8 million, or ~~88.0%~~87.2% of net operating revenues, for the nine months ended September 30, ~~2017,~~2019, compared to ~~$2,887.8~~$3,338.6 million, or ~~89.1%~~87.5% of net operating revenues, for the nine months ended September 30, ~~2016.~~2018. Our cost of services, a major component of which is labor expense, was ~~$2,787.5~~$3,465.4 million, or ~~83.7%~~84.9% of net operating revenues, for the nine months ended September 30, ~~2017,~~2019, compared to ~~$2,755.0~~$3,247.6 million, or ~~85.0%~~85.1% of net operating revenues, for the nine months ended September 30, ~~2016.~~2018. The decrease in our operating expenses relative to our net operating revenues iswas principally due to the ~~improved~~ operating performance of our ~~acquired~~Concentra and start-up specialty hospitals, specialty hospitals closures, and cost reductions achieved by Concentra. Facility rent expense, a component of cost of services, was $171.7 million for the nine months ended September 30, 2017, compared to $167.5 million for the nine months ended September 30, 2016.rehabilitation hospital segments. General and administrative expenses were $83.4 million for the nine months ended September 30, 2017, compared to $81.2 million for the nine months ended September 30, 2016, which included $3.2 million of Physiotherapy acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both the nine months ended September 30, 2017 and 2016. Our bad debt expense was $59.1$94.4 million, or ~~1.8%~~2.3% of net operating revenues, for the nine months ended September 30, ~~2017, compared to $51.6~~2019. General and administrative expenses were $91.0 million, or ~~1.6%~~2.4% of net operating revenues, for the nine months ended September 30, ~~2016. The increase was principally~~2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the ~~result of increases in bad debt expense in our specialty hospitals and Concentra segments.~~

nine months ended September 30, 2018.

Adjusted EBITDA

~~Specialty Hospitals~~

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~17.7%~~4.0% to ~~$256.3~~$194.4 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$217.8~~$187.0 million for the nine months ended September 30, ~~2016 for our specialty hospitals segment.~~2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~14.4%~~14.1% for both the nine months ended September 30, 2019 and 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.”

Rehabilitation Hospital Segment. Adjusted EBITDA increased 15.2% to $92.5 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~12.6%~~$80.3 million for the nine months ended September 30, ~~2016.~~2018. Our 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 nine months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin ~~for our specialty hospitals segment were~~are primarily ~~driven by the improved operating performance~~attributable to increases in patient volume and net revenue per visit at several of our ~~LTCHs, reductions in~~existing hospitals. Adjusted EBITDA start-up losses in our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses during the nine months ended September 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were ~~$4.7~~$8.8 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$19.4~~$3.8 million for the nine months ended September 30, ~~2016.~~

2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA increased ~~3.6%~~4.3% to ~~$102.6~~$111.6 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$99.0~~$107.0 million for the nine months ended September 30, ~~2016 for our outpatient rehabilitation segment. The increase in Adjusted EBITDA was principally due to growth in visits and an increase in net revenue per visit, as discussed above under “~~~~Net Operating Revenues~~.”2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~13.4%~~14.4% for both the nine months ended September 30, ~~2017, compared to 13.3% for~~2019 and 2018. For the nine months ended September 30, ~~2016. The~~2019, the increase in Adjusted EBITDA ~~margin was~~resulted principally ~~due to the sale of~~from our ~~contract therapy businesses on March 31, 2016, which operated at lower Adjusted EBITDA margins than our~~start-up and newly developed outpatient rehabilitation clinics.

Concentra Segment. Adjusted EBITDA increased ~~6.4%~~10.5% to ~~$125.7~~$220.0 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$118.1~~$199.1 million for the nine months ended September 30, ~~2016 for our Concentra segment.~~2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was ~~16.1%~~17.9% for the nine months ended September 30, ~~2017,~~2019, compared to ~~15.5%~~17.0% for the nine months ended September 30, ~~2016.~~2018. The increases in Adjusted EBITDA and Adjusted EBITDA ~~margins for~~margin resulted from achieving lower relative operating costs across our combined Concentra ~~segment were principally the result of cost reductions we have achieved.~~

~~Other.~~ ~~The Adjusted EBITDA loss~~and U.S. HealthWorks businesses.

Depreciation and Amortization

Depreciation and amortization expense was ~~$71.1~~$160.1 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~an Adjusted EBITDA loss of $66.7~~$149.0 million for the nine months ended September 30, ~~2016.~~2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in our ~~Adjusted EBITDA loss~~Concentra segment was principally due to anthe acquisition of U.S. HealthWorks, which we acquired on February 1, 2018. The increase in ~~general and administrative costs, which encompass~~ our ~~corporate shared service activities.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense~~critical illness recovery hospital segment was ~~$119.6~~principally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the nine months ended September 30, 2019.

Income from Operations

For the nine months ended September 30, 2019, we had income from operations of $359.5 million, compared to $329.0 million for the nine months ended September 30, ~~2017, compared to~~ ~~$107.9 million for the nine months ended September 30, 2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment.~~

~~Income from Operations~~

~~For the nine months ended September 30, 2017, we had income from operations of $279.5 million, compared to $244.1 million for the nine months ended September 30, 2016.~~2018. The increase in income from operations resulted principally from ~~the improved operating performance of~~ our ~~specialty hospitals~~Concentra and ~~Concentra~~rehabilitation hospital segments.

Loss on Early Retirement of Debt

~~On March 6, 2017,~~

During the nine months ended September 30, 2019, the amendment to the Select credit agreement, the amendment to the Concentra first lien credit agreement, the repayment of term loans outstanding under the Concentra second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million.

During the nine months ended September 30, 2018, we ~~refinanced Select’s senior secured~~amended both the Select credit ~~facilities~~agreement and the Concentra first lien credit agreement which resulted in losses on early retirement of debt of ~~$19.7 million during the nine months ended September 30, 2017.~~

~~On March 4, 2016, we refinanced a portion of our term loans under Select’s 2011 senior secured credit facility which resulted in a loss on early retirement of debt of $0.8~~$10.3 million. ~~On September 26, 2016, Concentra prepaid the second lien term loan under the Concentra credit facilities, resulting in a loss on early retirement of debt of approximately $10.9 million.~~

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the nine months ended September 30, ~~2017,~~2019, we had equity in earnings of unconsolidated subsidiaries of ~~$15.6~~$18.7 million, compared to ~~$14.5~~$14.9 million for the nine months ended September 30, ~~2016.~~2018. The increase in ~~our~~ equity in earnings was principally attributable to the growth of ~~unconsolidated~~certain non-consolidating subsidiaries ~~resulted principally from improved performance~~as a result of ~~the inpatient~~our sales of outpatient rehabilitation ~~businesses in which we have a minority interest.~~

~~Non-Operating~~ clinics to these subsidiaries.

Gain

on Sale of Businesses

We recognized ~~a non-operating gain~~gains of ~~$37.1~~$6.5 million and $9.0 million during the nine months ended September 30, ~~2016.~~2019 and 2018, respectively. The ~~non-operating gain was~~gains were principally ~~due~~attributable to ~~the sale~~sales of ~~our contract therapy businesses on March 31, 2016, as well as the sale of nine~~ outpatient rehabilitation clinics to a non-consolidating ~~subsidiary and the sale of five specialty hospitals in an exchange transaction during the quarter ended June 30, 2016.~~

subsidiaries.

Interest Expense

Interest expense was ~~$116.2~~$156.6 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$127.7~~$148.0 million for the nine months ended September 30, ~~2016.~~2018. The ~~decrease~~increase in interest expense was principally ~~the result of decreases~~due an increase in ~~our~~variable interest rates associated with the ~~refinancing of the Select credit facilities during the quarter ended March 31, 2017 and the~~ Concentra credit facilities and an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks on February 1, 2018. We also recognized interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the ~~quarter ended September~~redemption of the 6.375% senior notes occurred on August 30, ~~2016.~~

2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.

Income Taxes

We recorded income tax expense of ~~$59.6~~$52.1 million for the nine months ended September 30, ~~2017,~~2019, which represented an effective tax rate of ~~37.4%~~24.9%. We recorded income tax expense of ~~$51.6~~$47.5 million for the nine months ended September 30, ~~2016,~~2018, which represented an effective tax rate of ~~33.0%~~24.4%.

Our effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate. On March 31, 2016, we sold our contract therapy businesses. Our tax basis in our contract therapy businesses exceeded our selling price; as a result, we had no tax expense from the sale. During the quarter ended June 30, 2016, we exchanged five specialty hospitals. Our tax basis in the five specialty hospitals was less than our book basis, resulting in a tax gain exceeding our book gain. The lower effective tax rate for For the nine months ended September 30, ~~2016~~2018, the lower effective tax rate resulted principally from the ~~net effects of the two~~ discrete tax ~~events discussed above.~~

benefits realized from certain equity interests redeemed at our Concentra subsidiary.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$23.2~~$41.0 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$9.6~~$34.1 million for the nine months ended September 30, ~~2016.~~2018. The increase iswas principally due to ~~increases in net income of our joint venture subsidiary, Concentra, and~~ the improved operating performance of our Concentra segment and several of our joint venture ~~inpatient~~ rehabilitation ~~facilities operating within our specialty hospitals segment.~~

hospitals.

Liquidity and Capital Resources

Cash Flows for the Nine Months Ended September 30, ~~2017~~2019 and Nine Months Ended September 30, ~~2016~~

2018

In the following, we discuss cash flows from operating activities, investing activities, and financing ~~activities, which, in each case, are the same for Holdings and Select.~~

Nine Months Ended September 30,

2016

2017

(in thousands)

Cash flows provided by operating activities

$
280,761

$
129,972

Cash flows used in investing activities

(463,002
)
(169,990
)
Cash flows provided by financing activities

236,029

48,289

Net increase in cash and cash equivalents

53,788

8,271

Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$
68,223

$
107,300

activities.



	Nine Months Ended September 30,
	2018			2019
	(in thousands)
Cash flows provided by operating activities	$	380,977		$	266,640
Cash flows used in investing activities	(646,542		)	(270,710		)
Cash flows provided by (used in) financing activities	303,429			(35,145		)
Net increase (decrease) in cash and cash equivalents	37,864			(39,215		)
Cash and cash equivalents at beginning of period	122,549			175,178
Cash and cash equivalents at end of period	$	160,413		$	135,963

Operating activities provided ~~$130.0~~$266.6 million of cash flows for the nine months ended September 30, ~~2017.~~2019, compared to $381.0 million of cash flows for the nine months ended September 30, 2018. The ~~decrease in~~lower operating cash flows for the nine months ended September 30, ~~2017~~2019, compared to the nine months ended September 30, ~~2016 is~~2018, was principally ~~due to increases~~driven by the change in our accounts receivable. ~~Our~~We experienced an increase in days sales outstanding ~~was 60~~to 53 days at September 30, ~~2017,~~2019, compared to 51 days at December 31, ~~2016 and 52~~2018. We experienced a decline in days sales outstanding to 54 days at September 30, ~~2016.~~2018, compared to 58 days at December 31, 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. ~~The increase in our~~Our days sales outstanding fell within our expected range at September 30, 2019 and related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

December 31, 2018.

Investing activities used $170.0 million for the nine months ended September 30, 2017. The principal use of cash was $173.8 million for purchases of property and equipment and $19.4 million for the acquisition of businesses, offset in part by $34.6 million of proceeds received from the sale of assets. Investing activities used $463.0$270.7 million of cash flows for the nine months ended September 30, ~~2016, principally due to the acquisition~~2019. The principal uses of ~~Physiotherapy. Investing activities for the nine months ended September 30, 2016 also included $118.3~~cash were $124.0 million for purchases of property and equipment ~~offset~~and $146.9 million for investments in ~~part by proceeds received from the sales~~and acquisitions of ~~businesses and an equity investment of $72.6 million.~~

~~Financing~~businesses. Investing activities ~~provided $48.3~~used $646.5 million of cash flows for the nine months ended September 30, ~~2017.~~2018. The principal ~~source~~uses of cash ~~was $100.0~~were $515.0 million of net borrowings under the Select revolving facility, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $5.8 million of cash used for term loan payments associated with the Select credit facilities, and cash used for the payment of financing costs related to the ~~refinancing~~acquisition of ~~the Select credit facilities.~~

U.S. HealthWorks and $121.0 million for purchases of property and equipment.

Financing activities ~~provided $236.0~~used $35.1 million of cash flows for the nine months ended September 30, ~~2016.~~2019. The principal sources of cash were from the issuance of $550.0 million 6.250% senior notes, $500.0 million of incremental term loan borrowings under the Select credit facilities, and $100.0 million of incremental term loan borrowings under the Concentra first lien credit agreement. These borrowings resulted in net proceeds of $1,132.9 million. A portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities, were used to redeem in full Select’s $710.0 million 6.375% senior notes at a redemption price of 100.000% of the principal amount. The proceeds from the incremental term loans under the Concentra first lien credit agreement were used, in part, to repay the $240.0 million of term loans outstanding under the Concentra second lien credit agreement. We also used $98.8 million and $33.9 million of cash for mandatory prepayments of term loans under the Select credit facilities and Concentra credit facilities, respectively. During the nine months ended September 30, 2019, we had net repayments of $20.0 million under the Select revolving facility.

Financing activities provided $303.4 million of cash flows for the nine months ended September 30, 2018. The principal source of cash was from the issuance of ~~$625.0 million of series F tranche B~~ term loans ~~resulting~~under the Concentra credit facilities which resulted in net proceeds of ~~$600.1 million,~~$779.9 million. This was offset in part by ~~$215.7~~$306.4 million of ~~cash used~~distributions to ~~repay~~non-controlling interests, of which $294.9 million related to the ~~series D tranche B term loans~~redemption and ~~$125.0~~reorganization transactions executed in connection with the acquisition of U.S. HealthWorks, and $165.0 million of net repayments under the Select ~~and Concentra~~ revolving ~~facilities.~~

facility.

Capital Resources

Working capital. We had net working capital of ~~$304.5~~$180.5 million at September 30, ~~2017,~~2019, compared to ~~$191.3~~$287.3 million at December 31, ~~2016.~~2018. The ~~increase~~decrease in net working capital ~~is primarily~~was principally due to the recognition of current operating lease liabilities upon the adoption of ASC Topic 842, Leases, on January 1, 2019, offset in part by an increase in our accounts receivable.

Select credit facilities. ~~On March 6, 2017,~~

In February 2019, Select ~~entered into~~made a ~~new senior secured credit agreement that provides for $1.6 billion~~principal prepayment of $98.8 million associated with its term loans in ~~senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for~~accordance with the ~~issuance of standby letters of credit. Select used borrowings under~~provision in the Select credit facilities ~~to: (i) repay the series E tranche B~~that requires mandatory prepayments of term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

~~Borrowings under the Select credit facilities bear interest at~~as a ~~rate equal to: (i) in the case~~result of ~~the Select term loan, Adjusted LIBO (as~~annual excess cash flow, as defined in the Select credit ~~agreement) plus 3.50% (subject~~facilities.

On August 1, 2019, Select entered into Amendment No. 3 to ~~an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in~~ the Select credit ~~agreement) plus 2.50% (subject to~~agreement dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an ~~Alternate Base Rate floor~~additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of ~~2.00%); and~~March 6, 2025, (ii) inextended the ~~case~~maturity date of the Select revolving facility ~~Adjusted LIBO plus a percentage ranging~~ from ~~3.00%~~March 6, 2022 to ~~3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s~~March 6, 2024, and (iii) increased the total net leverage ~~ratio.~~

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

~~Select will be required to prepay borrowings~~ratio permitted under the Select credit facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

agreement.

At September 30, ~~2017,~~2019, Select had outstanding borrowings under the Select credit facilities consisting of ~~a $1,144.3~~$1,531.1 million in Select term ~~loan~~loans (excluding unamortized discounts and debt issuance costs of ~~$26.0~~$22.2 million) ~~and~~. Select did not have any borrowings ~~of $320.0 million (excluding letters of credit)~~ under the Select revolving facility. At September 30, ~~2017,~~2019, Select had ~~$91.4~~$411.7 million of availability under the Select revolving facility after giving effect to ~~$38.6~~$38.3 million of outstanding letters of credit.

Select 6.250% senior notes.

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above) in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.

Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.

The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.

Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select and Holdings, it is included in ~~Select’s~~our consolidated financial statements.

~~On March 1, 2017,~~

In February 2019, Concentra Inc. made a principal prepayment of ~~$23.1~~$33.9 million associated with its ~~first lien~~ term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

On September ~~30, 2017,~~20, 2019, Concentra ~~had $619.2~~Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million ofin term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.

At September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$13.7~~$12.7 million) ~~under the~~. Concentra ~~credit facilities. Concentra~~Inc. did not have any borrowings ~~excluding letters of credit, outstanding~~ under the Concentra revolving facility. At September 30, ~~2017,~~2019, Concentra Inc. had ~~$43.4~~$87.3 million of availability under its revolving facility after giving effect to ~~$6.6~~$12.7 million of outstanding letters of credit.

Stock Repurchase Program. Holdings’ board of directors 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, ~~2018,~~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 Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. ~~Holdings did not repurchase shares during~~During the ~~three~~nine months ended September 30, ~~2017.~~2019, Holdings 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, ~~2017,~~2019, Holdings has repurchased ~~35,924,128~~38,089,349 shares at a cost of approximately ~~$314.7~~$347.9 million, or ~~$8.76~~$9.13 per share, which includes transaction costs.

Liquidity. We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare ~~providers, and from time to time we may also develop new inpatient rehabilitation hospitals and occupational medicine centers.~~providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic ~~acquisitions such as the pending acquisition of U.S. HealthWorks.~~

acquisitions.

Recent Accounting Pronouncements

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805),~~ ~~Clarifying the Definition of a Business~~~~, which clarifies the definition of a business with the objective of adding guidance~~

Refer to ~~assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all~~Note 2 – Accounting Policies of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activitiesnotes to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 will be applied prospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~Income~~ ~~Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~ Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company plans to adopt the guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the standard to determine the impact it will have on itsour condensed consolidated financial ~~statements.~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~~~. This ASU includes a lessee~~statements included herein for information regarding recent accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.

Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of operations.

The Company will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

~~In May 2014, March 2016, April 2016, and December 2016, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~~~, ASU 2016-08,~~ ~~Revenue from Contracts with Customers, Principal versus Agent Considerations~~~~, ASU 2016-10,~~ ~~Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing~~~~, ASU 2016-12,~~ ~~Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients~~~~, and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer~~ (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The standards require the selection of a retrospective or cumulative effect transition method.

The Company will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income is not expected to materially change upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.

~~The Company’s remaining implementation efforts are focused principally on refining the accounting processes, disclosure processes, and internal controls.~~

~~Recently Adopted Accounting Pronouncements~~

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes~~, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.

~~As of~~

At September 30, ~~2017,~~2019, Select had ~~a $1,144.3~~outstanding borrowings under the Select credit facilities consisting of $1,531.1 million in Select term ~~loan outstanding~~loans (excluding unamortized discounts and debt issuance costs of ~~$26.0~~$22.2 million) ~~and $320.0 million in revolving borrowings outstanding under the Select credit facilities,~~, which bear interest at variable rates.

~~As of~~ Select did not have any borrowings under the Select revolving facility.

At September 30, ~~2017,~~2019, Concentra Inc. had ~~$619.2~~outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of ~~first lien~~Concentra term loans ~~outstanding~~ (excluding unamortized discounts and debt issuance costs of ~~$13.7~~$12.7 million) ~~under the Concentra credit facilities,~~, which bear interest at variable rates. Concentra Inc. did not have any ~~outstanding~~borrowings under the Concentra revolving ~~borrowings at~~facility.

As of September 30, ~~2017.~~

~~At September 30, 2017, the 3-month LIBOR rate was 1.33%. Consequently,~~2019, each 0.25% increase in market interest rates will impact the interest expense on Select’s and ~~Concentra’s~~Concentra Inc.’s variable rate debt by ~~$5.2~~$6.9 million per annum.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of September 30, 2019, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective ~~as of September 30, 2017~~ to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the third quarter ended September 30, ~~2017~~2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

PART IIII: OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, ~~CMS,~~Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

Evansville ~~Litigation~~

Litigation.On October 19, 2015, the ~~plaintiff-relators~~plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty ~~Hospital—Evansville,~~Hospital-Evansville, LLC (“~~SSH-Evansville”~~SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private ~~plaintiff-relators~~plaintiff‑relators on behalf of the United States under the federal False Claims Act. The ~~plaintiff-relators~~plaintiff‑relators are the former CEO and two former case managers at ~~SSH-Evansville,~~SSH‑Evansville, and the defendants currently include the Company, ~~SSH-Evansville,~~SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at ~~SSH-Evansville.~~SSH‑Evansville. The ~~plaintiff-relators~~plaintiff‑relators allege that ~~SSH-Evansville~~SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, ~~up-coded~~up‑coded diagnoses at admission, and admitted patients for whom ~~long-term~~long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.

the District Court ruled that the ~~plaintiff-relators~~plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the ~~plaintiff relators’~~plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the ~~plaintiff relators’~~plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants ~~have~~ opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The ~~Company intends~~plaintiff-relators appealed this decision to ~~vigorously defend this action,~~the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ~~at this time~~ruled that the question of statistical sampling is not ripe for review.

In October 2019, the Company ~~is unable to predict the timing and outcome of this matter.~~

~~Knoxville Litigation~~

admitted no liability or wrongdoing.

Wilmington ~~Litigation~~

In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.

The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

Contract Therapy ~~Subpoena~~

Subpoena.On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~Northern District of Alabama Investigation~~

ITEM 1A.RISK FACTORS

~~The information set forth in this report should be read in conjunction with the~~

There have been no material changes from our risk factors ~~set forth below and the risk factors discussed~~as previously reported in ~~Item 1A of~~ our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

The closing of the acquisition of U.S. HealthWorks by Concentra is subject to the satisfaction of certain conditions, and we cannot predict whether the necessary conditions will be satisfied or waived.

~~The closing of the acquisition of U.S. HealthWorks by Concentra is subject to regulatory approvals and customary conditions, including, without limitation:~~

· ~~the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;~~

· ~~the accuracy of the representations and warranties in the Purchase Agreement and compliance with the respective covenants of the parties, subject to certain qualifiers;~~

· ~~the absence of any law or injunction that prohibits the consummation of the acquisition;~~

· ~~the absence of certain governmental actions; and~~

· ~~the absence of a material adverse effect on U.S. HealthWorks or Concentra.~~

The acquisition of U.S. HealthWorks may not close in the anticipated time frame, if at all. The Company has no control over certain conditions in the Purchase Agreement, and cannot predict whether such conditions will be satisfied or waived.

2018.

~~The acquisition of U.S. HealthWorks by Concentra and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.~~

As part of our growth strategy, we may pursue acquisitions of specialty hospitals, outpatient rehabilitation clinics and other related healthcare facilities and services. These acquisitions, including the acquisition of U.S. HealthWorks by Concentra, may involve significant cash expenditures, debt incurrence, additional operating losses and expenses and compliance risks that could have a material adverse effect on our financial condition and results of operations.

We may not be able to successfully integrate U.S. HealthWorks or other acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate U.S. HealthWorks or other acquisitions, our financial condition and results of operations may be materially adversely affected. The acquisition of U.S. HealthWorks by Concentra and other acquisitions could result in difficulties integrating acquired operations, technologies and personnel into our business. Such difficulties may divert significant financial, operational and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic objectives. We may fail to retain employees or patients acquired through the acquisition of U.S. HealthWorks by Concentra or other acquisitions, which may negatively impact the integration efforts. The acquisition of U.S. HealthWorks by Concentra or other acquisitions could also have a negative impact on our results of operations if it is subsequently determined that goodwill or other acquired intangible assets are impaired, thus resulting in an impairment charge in a future period.

In addition, the acquisition of U.S. HealthWorks by Concentra and other acquisitions involve risks that the acquired businesses will not perform in accordance with expectations; that we may become liable for unforeseen financial or business liabilities of the acquired businesses, including liabilities for failure to comply with healthcare regulations; that the expected synergies associated with acquisitions will not be achieved; and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect, which could have an material adverse effect on our financial condition and results of operations.

~~Our substantial indebtedness may limit the amount of cash flow available to invest in the ongoing needs of our business.~~

We have a substantial amount of indebtedness. As of September 30, 2017, Select had approximately $2,177.3 million of total indebtedness, and Concentra had approximately $613.0 million of total indebtedness, which is nonrecourse to Select. As of September 30, 2017, our total indebtedness was $2,790.3 million. In connection with the closing of the acquisition of U.S. HealthWorks, Concentra’s indebtedness is expected to substantially increase with the addition of a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility. Our indebtedness could have important consequences to you. For example, it:

· requires us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, acquisitions, and other general corporate purposes;

· ~~increases our vulnerability to adverse general economic or industry conditions;~~

· ~~limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;~~

· ~~makes us more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at variable rates;~~

· ~~limits our ability to obtain additional financing in the future for working capital or other purposes; and~~

· ~~places us at a competitive disadvantage compared to our competitors that have less indebtedness.~~

Any of these consequences could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our indebtedness. In addition, there would be a material adverse effect on our business, financial condition, results of operations and cash flows if we were unable to service our indebtedness or obtain additional financing, as needed.

~~See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”~~

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, ~~2018 and~~2020, 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 Holdings deems appropriate. ~~Holdings did not repurchase shares during the three months ended September 30, 2017 under the authorized common stock repurchase program.~~

The following table provides information regarding repurchases of our common stock during the three months ended September 30, 2017. The shares repurchased during the three months ended September 30, 2017 relate entirely to shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.2019.



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
July 1 - July 31, 2019	—	$	—	—	$	172,124,038
August 1 - August 31, 2019	1,473,676	15.85		1,242,256	152,417,000
September 1 - September 30, 2019	20,652	16.01		20,652	152,086,459
Total	1,494,328	$	15.85	1,262,908	$	152,086,459

Total Number of
Shares Purchased

Average Price
Paid Per Share

Total Number
of Shares
Purchased as
Part of Publically
Announced
Plans or Programs

Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under Plans or
Programs

July 1 - July 31, 2017

—

$
—

—

$
185,249,408

August 1 - August 31, 2017

175,113

17.15

—

185,249,408

September 1 - September 30, 2017

—

—

—

185,249,408

Total

175,113

$
17.15

—

$
185,249,408

(1) Includes share repurchases under our common stock repurchase program and common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

~~Not applicable~~

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

~~Number~~		~~Description~~

~~31.1~~ Number	Description
4.1	Indenture, dated as of August 1, 2019, by and among Select Medical Corporation, the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on August 1, 2019).
4.2	Forms of 6.250% Senior Notes due 2026 (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed on August 1, 2019).
10.1	Amendment No. 3, dated August 1, 2019, to the Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated as of March 22, 2018, and Amendment No. 2, dated as of October 26, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on August 1, 2019).
10.2	Amendment No. 6, dated September 20, 2019, to the First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, Amendment No. 4, dated as of October 26, 2018, and Amendment No. 5, dated as of April 8, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on September 24, 2019).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
~~31.2~~	Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
~~32.1~~	Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
~~101~~ 101.SCH	~~The following financial information from~~XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File - the ~~Registrant’s Quarterly Report on Form 10-Q for~~cover page interactive data file does not appear in the ~~quarter ended September 30, 2017 formatted in~~Interactive Data File because its XBRL ~~(eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for~~tags are embedded within the three and nine months ended September 30, 2016 and 2017, (ii) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 and 2017, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the nine months ended September 30, 2017 and (v) Notes to Condensed Consolidated Financial Statements. Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~Registrants have~~Registrant has duly caused this Report to be signed on ~~their~~its behalf by the undersigned, thereunto duly authorized.



	SELECT MEDICAL HOLDINGS CORPORATION


	By:	/s/ Martin F. Jackson
		Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)

	By:	/s/ Scott A. Romberger
		Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)

Dated: ~~November 2, 2017~~

	~~SELECT MEDICAL HOLDINGS CORPORATION~~


	~~By:~~	~~/s/ Martin F. Jackson~~
		~~Martin F. Jackson~~
		~~Executive Vice President and Chief Financial Officer~~
		~~(Duly Authorized Officer)~~

	~~By:~~	~~/s/ Scott A. Romberger~~
		~~Scott A. Romberger~~
		~~Senior Vice President, Chief Accounting Officer and Controller~~
		~~(Principal Accounting Officer)~~

~~Dated: November 2, 2017~~

October 31, 2019

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		September 30,		December 31,			September 30,
	2016		2017		2016			2017

ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	107,300	$	99,029		$	107,300
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively	573,752		716,426		573,752			716,426
Prepaid income taxes	12,423		—		12,423			—
Other current assets	77,699		80,324		77,699			80,324
Total Current Assets	762,903		904,050		762,903			904,050

Property and equipment, net	892,217		946,063		892,217			946,063
Goodwill	2,751,000		2,767,896		2,751,000			2,767,896
Identifiable intangible assets, net	340,562		331,036		340,562			331,036
Other assets	173,944		174,762		173,944			174,762

Total Assets	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807

LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	39,362	$	18,923	$	39,362		$	18,923
Current portion of long-term debt and notes payable	13,656		37,560		13,656			37,560
Accounts payable	126,558		133,321		126,558			133,321
Accrued payroll	146,397		139,402		146,397			139,402
Accrued vacation	83,261		89,171		83,261			89,171
Accrued interest	22,325		30,998		22,325			30,998
Accrued other	140,076		143,443		140,076			143,443
Income taxes payable	—		6,718		—			6,718
Total Current Liabilities	571,635		599,536		571,635			599,536

Long-term debt, net of current portion	2,685,333		2,752,742		2,685,333			2,752,742
Non-current deferred tax liability	199,078		191,441		199,078			191,441
Other non-current liabilities	136,520		138,118		136,520			138,118

Total Liabilities	3,592,566		3,681,837		3,592,566			3,681,837

Commitments and contingencies (Note 8)

Redeemable non-controlling interests	422,159		621,515		422,159			621,515

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 shares issued and outstanding at 2016 and 2017, respectively	132		133		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	443,908		459,004		925,111			942,142
Retained earnings (accumulated deficit)	371,685		262,505		(109,386		)	(220,500		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		721,642		815,725			721,642
Non-controlling interests	90,176		98,813		90,176			98,813
Total Equity	905,901		820,455		905,901			820,455

Total Liabilities and Equity	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended September 30,						For the Three Months Ended September 30,
	2016			2017			2016			2017

Net operating revenues	$	1,053,795		$	1,097,166		$	1,053,795		$	1,097,166

Costs and expenses:
Cost of services	915,703			938,910			915,703			938,910
General and administrative	27,088			27,065			27,088			27,065
Bad debt expense	17,677			20,321			17,677			20,321
Depreciation and amortization	37,165			38,772			37,165			38,772
Total costs and expenses	997,633			1,025,068			997,633			1,025,068

Income from operations	56,162			72,098			56,162			72,098

Other income and expense:
Loss on early retirement of debt	(10,853		)	—			(10,853		)	—
Equity in earnings of unconsolidated subsidiaries	5,268			4,431			5,268			4,431
Non-operating loss	(1,028		)	—			(1,028		)	—
Interest expense	(44,482		)	(37,688		)	(44,482		)	(37,688		)

Income before income taxes	5,067			38,841			5,067			38,841

Income tax expense	1,075			14,017			1,075			14,017
Net income	3,992			24,824			3,992			24,824

Less: Net income (loss) attributable to non-controlling interests	(2,479		)	6,362			(2,479		)	6,362

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	6,471		$	18,462		$	6,471		$	18,462

Income per common share:
Basic	$	0.05		$	0.14
Diluted	$	0.05		$	0.14

Weighted average shares outstanding:
Basic	127,848			129,142
Diluted	127,989			129,322



	For the Nine Months Ended September 30,
	2018			2019
Net operating revenues	$	3,816,575		$	4,079,338
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	3,247,606			3,465,353
General and administrative	90,951			94,401
Depreciation and amortization	149,022			160,072
Total costs and expenses	3,487,579			3,719,826
Income from operations	328,996			359,512
Other income and expense:
Loss on early retirement of debt	(10,255		)	(18,643		)
Equity in earnings of unconsolidated subsidiaries	14,914			18,710
Gain on sale of businesses (Note 5)	9,016			6,532
Interest expense	(147,991		)	(156,611		)
Income before income taxes	194,680			209,500
Income tax expense	47,460			52,140
Net income	147,220			157,360
Less: Net income attributable to non-controlling interests	34,053			40,978
Net income attributable to Select Medical Holdings Corporation	$	113,167		$	116,382
Earnings per common share (Note 12):
Basic	$	0.84		$	0.86
Diluted	$	0.84		$	0.86

				Select Medical Holdings Corporation Stockholders
	Redeemable Non-controlling interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2016	$	422,159		132,597		$	132	$	443,908		$	371,685		$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Holdings Corporation											76,387			76,387						76,387
Net income attributable to non-controlling interests	18,519													—			4,681			4,681
Issuance and vesting of restricted stock				1,323		1		13,445						13,446						13,446
Repurchase of common shares				(220	)	0		(1,934		)	(1,669		)	(3,603		)				(3,603		)
Exercise of stock options				185		0		1,634						1,634						1,634
Issuance of non-controlling interests								1,951						1,951			8,944			10,895
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(4,003		)											—			(5,153		)	(5,153		)
Redemption adjustment on non-controlling interests	184,294										(184,294		)	(184,294		)				(184,294		)
Other	673										389			389			165			554
Balance at September 30, 2017	$	621,515		133,885		$	133	$	459,004		$	262,505		$	721,642		$	98,813		$	820,455



	For the Nine Months Ended September 30, 2019

			Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value			Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	135,266		$	135		$	482,556		$	320,351		$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Holdings Corporation									40,834			40,834						40,834
Net income attributable to non-controlling interests												—			4,810			4,810
Issuance of restricted stock	21		0			0						—						—
Forfeitures of unvested restricted stock	(24	)	0			0						—						—
Vesting of restricted stock						5,488						5,488						5,488
Issuance of non-controlling interests												—			6,837			6,837
Distributions to and purchases of non-controlling interests						259						259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests									(47,470		)	(47,470		)				(47,470		)
Other									(122		)	(122		)	413			291
Balance at March 31, 2019	135,263		$	135		$	488,303		$	313,593		$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Holdings Corporation									44,816			44,816						44,816
Net income attributable to non-controlling interests												—			3,663			3,663
Issuance of restricted stock	187		0			0						—						—
Vesting of restricted stock						5,591						5,591						5,591
Repurchase of common shares	(936	)	0			(8,164		)	(5,456		)	(13,620		)				(13,620		)
Exercise of stock options	50		0			459						459						459
Issuance of non-controlling interests						6,366						6,366			24,761			31,127
Distributions to and purchases of non-controlling interests						14						14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests									270			270						270
Other									82			82			428			510
Balance at June 30, 2019	134,564		$	135		$	492,569		$	353,305		$	846,009		$	149,941		$	995,950
Net income attributable to Select Medical Holdings Corporation									30,732			30,732						30,732
Net income attributable to non-controlling interests												—			7,202			7,202
Issuance of restricted stock	1,069		1			(1		)				—						—
Forfeitures of unvested restricted stock	(12	)	0			0						—						—
Vesting of restricted stock						6,050						6,050						6,050
Repurchase of common shares	(1,494	)	(2		)	(13,616		)	(10,071		)	(23,689		)				(23,689		)
Exercise of stock options	45		0			413						413						413
Distributions to and purchases of non-controlling interests												—			(6,538		)	(6,538		)
Redemption adjustment on non-controlling interests									(104,553		)	(104,553		)				(104,553		)
Other									(244		)	(244		)	420			176
Balance at September 30, 2019	134,172		$	134		$	485,415		$	269,169		$	754,718		$	151,025		$	905,743

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626

Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

Cash and cash equivalents	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	87,832
Identifiable intangible assets	32,484
Goodwill	343,187
Total assets	475,843
Total liabilities	54,685
Acquired non-controlling interests	2,514
Net assets acquired	418,644
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	406,304

	Nine Months Ended September 30, 2016
	(in thousands, except per share amounts)
Net revenue	$	3,293,286
Net income attributable to Holdings	93,418
Income per common share:
Basic	$	0.71
Diluted	$	0.71



	Three Months Ended September 30, 2019
	Unrelated Parties			Related Parties		Total
Operating lease cost	$	68,046		$	1,342	$	69,388
Finance lease cost:
Amortization of right-of-use assets	73			—		73
Interest on lease liabilities	259			—		259
Short-term lease cost	592			—		592
Variable lease cost	11,789			156		11,945
Sublease income	(2,458		)	—		(2,458		)
Total lease cost	$	78,301		$	1,498	$	79,799



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	204,909
Operating cash flows for finance leases	526
Financing cash flows for finance leases	183
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	1,202,165
Finance leases	9,102



	Total
2019	$	267,846
2020	231,711
2021	193,155
2022	150,155
2023	107,759
Thereafter	484,038
	$	1,434,664

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	797			1,768		14,505		17,070
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of September 30, 2017	$	1,447,861		$	645,493	$	674,542	$	2,767,896

	December 31, 2016							September 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	17,026		—			17,026		19,166		—			19,166
Accreditations	2,235		—			2,235		1,965		—			1,965
Finite-lived assets:
Customer relationships	142,198		(23,185		)	119,013		143,953		(34,482		)	109,471
Favorable leasehold interests	13,089		(2,317		)	10,772		13,295		(3,745		)	9,550
Non-compete agreements	26,655		(1,837		)	24,818		27,555		(3,369		)	24,186
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	372,632	$	(41,596	)	$	331,036

Finite-lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(2,529	)	$	2,814

	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	835		$	(7,032	)	$	703,803	$	731,300
Credit facilities:
Revolving facility	320,000		—			—			320,000		294,400
Term loan	1,144,250		(12,962		)	(13,019		)	1,118,269		1,158,553
Other	35,184		—			—			35,184		35,184
Total Select debt	2,209,434		(12,127		)	(20,051		)	2,177,256		2,219,437

Concentra:
Credit facilities:
Term loan	619,175		(2,385		)	(11,268		)	605,522		620,917
Other	7,524		—			—			7,524		7,524
Total Concentra debt	626,699		(2,385		)	(11,268		)	613,046		628,441

Total debt	$	2,836,133	$	(14,512	)	$	(31,319	)	$	2,790,302	$	2,847,878

	2017		2018		2019		2020		2021		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	—	$	710,000	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		—		320,000		320,000
Term loan	2,875		11,500		11,500		11,500		11,500		1,095,375		1,144,250
Other	17,828		5,437		11,827		68		14		10		35,184
Total Select debt	20,703		16,937		23,327		11,568		721,514		1,415,385		2,209,434

Concentra:
Credit facilities:
Term loan	—		—		—		3,016		6,520		609,639		619,175
Other	657		2,843		144		161		160		3,559			7,524
Total Concentra debt	657		2,843		144		3,177		6,680		613,198		626,699

Total debt	$	21,360	$	19,780	$	23,471	$	14,745	$	728,194	$	2,028,583	$	2,836,133

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2017			2016			2017
	(in thousands)
Net operating revenues:
Specialty hospitals	$	544,491		$	585,288		$	1,729,261		$	1,785,035
Outpatient rehabilitation(1)	250,710			250,527			745,720			764,450
Concentra	258,507			261,295			764,252			779,030
Other	87			56			523			687
Total Company	$	1,053,795		$	1,097,166		$	3,239,756		$	3,329,202

Adjusted EBITDA:
Specialty hospitals	$	48,264		$	69,454		$	217,759		$	256,291
Outpatient rehabilitation(1)	31,995			29,298			99,006			102,575
Concentra	40,888			40,003			118,080			125,656
Other	(23,070		)	(22,928		)	(66,696		)	(71,125		)
Total Company	$	98,077		$	115,827		$	368,149		$	413,397

Total assets:(2)
Specialty hospitals	$	2,469,060		$	2,748,761		$	2,469,060		$	2,748,761
Outpatient rehabilitation	955,359			945,765			955,359			945,765
Concentra	1,318,866			1,332,012			1,318,866			1,332,012
Other	73,992			97,269			73,992			97,269
Total Company	$	4,817,277		$	5,123,807		$	4,817,277		$	5,123,807

Purchases of property and equipment, net:
Specialty hospitals	$	24,378		$	37,376		$	79,366		$	106,424
Outpatient rehabilitation(1)	6,234			6,496			15,032			19,370
Concentra	2,720			5,369			10,647			21,656
Other	4,670			19,257			13,215			26,350
Total Company	$	38,002		$	68,498		$	118,260		$	173,800

	Three Months Ended September 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	48,264		$	31,995		$	40,888		$	(23,070	)
Depreciation and amortization	(14,317		)	(6,159		)	(15,278		)	(1,411		)
Stock compensation expense	—			—			(193		)	(4,557		)
Income (loss) from operations	$	33,947		$	25,836		$	25,417		$	(29,038	)	$	56,162
Loss on early retirement of debt													(10,853		)
Equity in earnings of unconsolidated subsidiaries													5,268
Non-operating loss													(1,028		)
Interest expense													(44,482		)
Income before income taxes													$	5,067

	Three Months Ended September 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	69,454		$	29,298		$	40,003		$	(22,928	)
Depreciation and amortization	(15,437		)	(5,964		)	(15,014		)	(2,357		)
Stock compensation expense	—			—			(212		)	(4,745		)
Income (loss) from operations	$	54,017		$	23,334		$	24,777		$	(30,030	)	$	72,098
Equity in earnings of unconsolidated subsidiaries													4,431
Interest expense													(37,688		)
Income before income taxes													$	38,841

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2017		2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	6,471	$	18,462	$	95,239	$	76,387
Less: Earnings allocated to unvested restricted stockholders	209		608		2,852		2,464
Net income available to common stockholders	$	6,262	$	17,854	$	92,387	$	73,923

Denominator:
Weighted average shares—basic	127,848		129,142		127,659		128,745
Effect of dilutive securities:
Stock options	141		180		145		171
Weighted average shares—diluted	127,989		129,322		127,804		128,916

Basic income per common share:	$	0.05	$	0.14	$	0.72	$	0.57
Diluted income per common share:	$	0.05	$	0.14	$	0.72	$	0.57

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	73		$	6,359	$	4,548		$	96,320	$	—		$	107,300
Accounts receivable, net	—			468,370		120,463			127,593		—			716,426
Intercompany receivables	—			1,488,527		36,784			—		(1,525,311		)(a)	—
Prepaid income taxes	2,882			—		—			—		(2,882		)(f)	—
Other current assets	10,937			30,142		16,814			22,431		—			80,324
Total Current Assets	13,892			1,993,398		178,609			246,344		(1,528,193		)	904,050

Property and equipment, net	50,736			646,672		75,315			173,340		—			946,063
Investment in affiliates	4,421,777			116,370		—			—		(4,538,147		)(b)(c)	—
Goodwill	—			2,093,354		—			674,542		—			2,767,896
Identifiable intangible assets, net	—			104,570		4,824			221,642		—			331,036
Other assets	42,852			101,285		36,285			16,144		(21,804		)(e)	174,762

Total Assets	$	4,529,257		$	5,055,649	$	295,033		$	1,332,012	$	(6,088,144	)	$	5,123,807

Liabilities and Equity
Current Liabilities:
Overdrafts	$	18,923		$	—	$	—		$	—	$	—		$	18,923
Current portion of long-term debt and notes payable	30,838			773		2,483			3,466		—			37,560
Accounts payable	13,066			82,662		24,196			13,397		—			133,321
Intercompany payables	1,488,527			36,784		—			—		(1,525,311		)(a)	—
Accrued payroll	11,186			86,257		3,931			38,028		—			139,402
Accrued vacation	3,848			55,949		12,040			17,334		—			89,171
Accrued interest	28,763			7		—			2,228		—			30,998
Accrued other	40,075			59,088		12,183			32,097		—			143,443
Income taxes payable	—			—		—			9,600		(2,882		)(f)	6,718
Total Current Liabilities	1,635,226			321,520		54,833			116,150		(1,528,193		)	599,536

Long-term debt, net of current portion	2,133,355			243		9,564			609,580		—			2,752,742
Non-current deferred tax liability	—			131,902		767			80,576		(21,804		)(e)	191,441
Other non-current liabilities	39,034			55,572		8,039			35,473		—			138,118

Total Liabilities	3,807,615			509,237		73,203			841,779		(1,549,997		)	3,681,837

Redeemable non-controlling interests	—			—		—			14,641		606,874		(d)	621,515

Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	942,142			—		—			—		—			942,142
Retained earnings (accumulated deficit)	(220,500		)	1,328,453		(40,068		)	34,338		(1,322,723		)(c)(d)	(220,500		)
Subsidiary investment	—			3,217,959		261,898			437,568		(3,917,425		)(b)(d)	—
Total Select Medical Corporation Stockholder’s Equity	721,642			4,546,412		221,830			471,906		(5,240,148		)	721,642

Non-controlling interests	—			—		—			3,686		95,127		(d)	98,813
Total Equity	721,642			4,546,412		221,830			475,592		(5,145,021		)	820,455

Total Liabilities and Equity	$	4,529,257		$	5,055,649	$	295,033		$	1,332,012	$	(6,088,144	)	$	5,123,807

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments			Consolidated Select Medical Corporation
	(in thousands)

Net operating revenues	$	687		$	2,038,955		$	510,530		$	779,030		$	—		$	3,329,202

Costs and expenses:
Cost of services	1,843			1,713,091			434,130			638,433			—			2,787,497
General and administrative	83,291			124			—			—			—			83,415
Bad debt expense	—			32,456			10,941			15,723			—			59,120
Depreciation and amortization	5,503			57,471			10,104			46,566			—			119,644
Total costs and expenses	90,637			1,803,142			455,175			700,722			—			3,049,676

Income (loss) from operations	(89,950		)	235,813			55,355			78,308			—			279,526

Other income and expense:
Intercompany interest and royalty fees	24,760			(13,586		)	(11,174		)	—			—			—
Intercompany management fees	176,443			(147,117		)	(29,326		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			15,555			63			—			—			15,618
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest income (expense)	(93,725		)	269			(104		)	(22,636		)	—			(116,196		)

Income (loss) before income taxes	(2,191		)	90,885			14,814			55,672			—			159,180

Income tax expense (benefit)	(3,230		)	41,620			943			20,260			—			59,593
Equity in earnings of consolidated subsidiaries	75,348			10,174			—			—			(85,522		)(a)	—

Net income	76,387			59,439			13,871			35,412			(85,522		)	99,587

Less: Net income attributable to non-controlling interests	—			—			3,627			19,573			—			23,200

Net income attributable to Select Medical Corporation	$	76,387		$	59,439		$	10,244		$	15,839		$	(85,522	)	$	76,387

	2015			2016			2017
	Occupancy Percentage		Case Mix Index(1)	Occupancy Percentage		Case Mix Index(1)	Occupancy Percentage		Case Mix Index(1)
Three months ended:
March 31	71	%	1.22	71	%	1.24	68	%	1.28
June 30	70	%	1.21	67	%	1.27	66	%	1.28
September 30	70	%	1.18	61	%	1.26	65	%	1.27
December 31	70	%	1.21	63	%	1.26

	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
July 1 - July 31, 2017	—	$	—	—	$	185,249,408
August 1 - August 31, 2017	175,113	17.15		—	185,249,408
September 1 - September 30, 2017	—	—		—	185,249,408
Total	175,113	$	17.15	—	$	185,249,408


(1)	Includes share repurchases under our common stock repurchase program and common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.