UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended ~~September 30, 2018~~

March 31, 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~~CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its Charter)



Delaware Delaware		20-1764048 23-2872718
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA 17055

(Address of Principal Executive Offices and Zip code)

(717) 972-1100

(Registrants’ 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 (1) have 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 required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit such files). Yes ý 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 filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
		Emerging Growth Company o

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 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
		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 ý

As of ~~October 31, 2018,~~April 30, 2019, Select Medical Holdings Corporation had outstanding ~~135,331,864~~135,416,312 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 Parent”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings Parent and its subsidiaries.

TABLE OF CONTENTS



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	65

	Condensed consolidated statements of cash flows	7

	Notes to condensed consolidated financial statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3329

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5944

ITEM 4.	CONTROLS AND PROCEDURES	5944

PART II	OTHER INFORMATION	6045

ITEM 1.	LEGAL PROCEEDINGS	6045

ITEM 1A.	RISK FACTORS	6247

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6347

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6347

ITEM 4.	MINE SAFETY DISCLOSURES	6347

ITEM 5.	OTHER INFORMATION	6347

ITEM 6.	EXHIBITS	6448

SIGNATURES

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)


	Select Medical Holdings Corporation				Select Medical Corporation						Select Medical Holdings Corporation				Select Medical Corporation
	December 31, 2017		September 30, 2018		December 31, 2017			September 30, 2018			December 31, 2018		March 31, 2019		December 31, 2018				March 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	122,549	$	160,413	$	122,549		$	160,413		$	175,178	$	147,815	$	175,178			$	147,815
Accounts receivable	691,732		746,816		691,732			746,816			706,676		779,861		706,676				779,861
Prepaid income taxes	31,387		19,852		31,387			19,852			20,539		7,709		20,539				7,709
Other current assets	75,158		96,214		75,158			96,214			90,131		117,500		90,131				117,500
Total Current Assets	920,826		1,023,295		920,826			1,023,295			992,524		1,052,885		992,524				1,052,885
Operating lease right-of-use assets											—		982,616		—				982,616
Property and equipment, net	912,591		965,390		912,591			965,390			979,810		972,807		979,810				972,807
Goodwill	2,782,812		3,311,459		2,782,812			3,311,459			3,320,726		3,323,749		3,320,726				3,323,749
Identifiable intangible assets, net	326,519		444,847		326,519			444,847			437,693		426,428		437,693				426,428
Other assets	184,418		235,190		184,418			235,190			233,512		263,007		233,512				263,007
Total Assets	$	5,127,166	$	5,980,181	$	5,127,166		$	5,980,181		$	5,964,265	$	7,021,492	$	5,964,265			$	7,021,492
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	29,463	$	23,291	$	29,463		$	23,291		$	25,083	$	31,133	$	25,083			$	31,133
Current operating lease liabilities											—		205,145		—				205,145
Current portion of long-term debt and notes payable	22,187		24,175		22,187			24,175			43,865		12,329		43,865				12,329
Accounts payable	128,194		137,540		128,194			137,540			146,693		140,581		146,693				140,581
Accrued payroll	160,562		176,221		160,562			176,221			172,386		142,289		172,386				142,289
Accrued vacation	92,875		106,026		92,875			106,026			110,660		116,675		110,660				116,675
Accrued interest	19,885		23,648		19,885			23,648			12,137		22,593		12,137				22,593
Accrued other	143,166		188,079		143,166			188,079			190,691		205,535		190,691				205,535
Income taxes payable	9,071		6,129		9,071			6,129			3,671		8,657		3,671				8,657
Total Current Liabilities	605,403		685,109		605,403			685,109			705,186		884,937		705,186				884,937
Non-current operating lease liabilities											—		820,007		—				820,007
Long-term debt, net of current portion	2,677,715		3,305,533		2,677,715			3,305,533			3,249,516		3,299,103		3,249,516				3,299,103
Non-current deferred tax liability	124,917		148,227		124,917			148,227			153,895		153,863		153,895				153,863
Other non-current liabilities	145,709		174,170		145,709			174,170			158,940		105,791		158,940				105,791
Total Liabilities	3,553,744		4,313,039		3,553,744			4,313,039			4,267,537		5,263,701		4,267,537				5,263,701
Commitments and contingencies (Note 10)
Commitments and contingencies (Note 12)
Redeemable non-controlling interests	640,818		779,574		640,818			779,574			780,488		833,241		780,488				833,241
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 135,140,269 shares issued and outstanding at 2017 and 2018, respectively	134		135		—			—
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 135,262,866 shares issued and outstanding at 2018 and 2019, respectively											135		135		—			��	—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0			—		—		0				0
Capital in excess of par	463,499		477,822		947,370			964,683			482,556		488,303		970,156				975,903
Retained earnings (accumulated deficit)	359,735		296,635		(124,002		)	(190,091		)	320,351		313,593		(167,114		)		(173,872		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	823,368		774,592		823,368			774,592			803,042		802,031		803,042				802,031
Non-controlling interests	109,236		112,976		109,236			112,976			113,198		122,519		113,198				122,519
Total Equity	932,604		887,568		932,604			887,568			916,240		924,550		916,240				924,550
Total Liabilities and Equity	$	5,127,166	$	5,980,181	$	5,127,166		$	5,980,181		$	5,964,265	$	7,021,492	$	5,964,265			$	7,021,492

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

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,
2017 2018 2017 2018
Net operating revenues $ 1,077,014
$ 1,267,401
$ 1,077,014
$ 1,267,401
Costs and expenses:

Cost of services 939,079
1,087,062
939,079
1,087,062
General and administrative 27,065
29,975
27,065
29,975
Depreciation and amortization 38,772
50,527
38,772
50,527
Total costs and expenses 1,004,916
1,167,564
1,004,916
1,167,564
Income from operations 72,098
99,837
72,098
99,837
Other income and expense:

Equity in earnings of unconsolidated subsidiaries 4,431
5,432
4,431
5,432
Non-operating gain —
2,139
—
2,139
Interest expense (37,688 ) (50,669 ) (37,688 ) (50,669 )
Income before income taxes 38,841
56,739
38,841
56,739
Income tax expense 14,017
14,060
14,017
14,060
Net income 24,824
42,679
24,824
42,679
Less: Net income attributable to non-controlling interests 6,362
9,762
6,362
9,762
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation $ 18,462
$ 32,917
$ 18,462
$ 32,917
Income per common share:

Basic $ 0.14
$ 0.24

Diluted $ 0.14
$ 0.24

Weighted average shares outstanding:

Basic 129,142
130,387

Diluted 129,322
130,447

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

~~Condensed Consolidated Statements of Operations~~

~~(unaudited)~~

~~(in thousands, except per share amounts)~~


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2018			2017			2018			2018			2019			2018			2019
Net operating revenues	$	3,270,996		$	3,816,575		$	3,270,996		$	3,816,575		$	1,252,964		$	1,324,631		$	1,252,964		$	1,324,631
Costs and expenses:
Cost of services	2,788,411			3,247,606			2,788,411			3,247,606
Cost of services, exclusive of depreciation and amortization													1,065,813			1,132,092			1,065,813			1,132,092
General and administrative	83,415			90,951			83,415			90,951			31,782			28,677			31,782			28,677
Depreciation and amortization	119,644			149,022			119,644			149,022			46,771			52,138			46,771			52,138
Total costs and expenses	2,991,470			3,487,579			2,991,470			3,487,579			1,144,366			1,212,907			1,144,366			1,212,907
Income from operations	279,526			328,996			279,526			328,996			108,598			111,724			108,598			111,724
Other income and expense:
Loss on early retirement of debt	(19,719		)	(10,255		)	(19,719		)	(10,255		)	(10,255		)	—			(10,255		)	—
Equity in earnings of unconsolidated subsidiaries	15,618			14,914			15,618			14,914			4,697			4,366			4,697			4,366
Non-operating gain (loss)	(49		)	9,016			(49		)	9,016
Non-operating gain													399			6,532			399			6,532
Interest expense	(116,196		)	(147,991		)	(116,196		)	(147,991		)	(47,163		)	(50,811		)	(47,163		)	(50,811		)
Income before income taxes	159,180			194,680			159,180			194,680			56,276			71,811			56,276			71,811
Income tax expense	59,593			47,460			59,593			47,460			12,294			18,467			12,294			18,467
Net income	99,587			147,220			99,587			147,220			43,982			53,344			43,982			53,344
Less: Net income attributable to non-controlling interests	23,200			34,053			23,200			34,053			10,243			12,510			10,243			12,510
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	76,387		$	113,167		$	76,387		$	113,167		$	33,739		$	40,834		$	33,739		$	40,834
Income per common share:
Earnings per common share (Note 11):
Basic	$	0.57		$	0.84								$	0.25		$	0.30
Diluted	$	0.57		$	0.84								$	0.25		$	0.30
Weighted average shares outstanding:
Basic	128,745			129,972
Diluted	128,916			130,066

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

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


				Select Medical Holdings Corporation Stockholders																			For the Three Months Ended March 31, 2019
	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, 2017	$	640,818		134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
																							Select Medical Holdings Corporation Stockholders
																							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											113,167			113,167						113,167									40,834			40,834						40,834
Net income attributable to non-controlling interests	25,896													—			8,157			8,157												—			4,810			4,810
Issuance of restricted stock				1,222		1		(1		)				—						—			21		0		0					—						—
Forfeitures of unvested restricted stock				(88	)	0		0						—						—			(24	)	0		0					—						—
Vesting of restricted stock								15,059						15,059						15,059							5,488					5,488						5,488
Repurchase of common shares				(285	)	0		(2,989		)	(2,651		)	(5,640		)				(5,640		)
Exercise of stock options				176		0		1,633						1,633						1,633
Issuance and exchange of non-controlling interests	163,659							1,553			74,341			75,894			1,921			77,815
Issuance of non-controlling interests																																—			6,837			6,837
Distributions to and purchases of non-controlling interests	(215,847		)					(932		)	(83,617		)	(84,549		)	(7,471		)	(92,020		)					259					259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests	164,065										(164,065		)	(164,065		)				(164,065		)							(47,470		)	(47,470		)				(47,470		)
Other	983										(275		)	(275		)	1,133			858									(122		)	(122		)	413			291
Balance at September 30, 2018	$	779,574		135,140		$	135	$	477,822		$	296,635		$	774,592		$	112,976		$	887,568
Balance at March 31, 2019																							135,263		$	135	$	488,303	$	313,593		$	802,031		$	122,519		$	924,550

Select Medical Corporation Stockholders

Redeemable
Non-controlling
Interests

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par
Accumulated Deficit
Total
Stockholders’
Equity

Non-controlling
Interests

Total
Equity
Balance at December 31, 2017 $ 640,818
0
$ 0
$ 947,370
$ (124,002 ) $ 823,368
$ 109,236
$ 932,604
Net income attributable to Select Medical Corporation

113,167
113,167

113,167
Net income attributable to non-controlling interests 25,896

—
8,157
8,157
Additional investment by Holdings

1,633

1,633

1,633
Dividends declared and paid to Holdings

(5,640 ) (5,640 )
(5,640 )
Contribution related to restricted stock award issuances by Holdings

15,059

15,059

15,059
Issuance and exchange of non-controlling interests 163,659
1,553
74,341
75,894
1,921
77,815
Distributions to and purchases of non-controlling interests (215,847 )

(932 ) (83,617 ) (84,549 ) (7,471 ) (92,020 )
Redemption adjustment on non-controlling interests 164,065

(164,065 ) (164,065 )
(164,065 )
Other 983

(275 ) (275 ) 1,133
858
Balance at September 30, 2018 $ 779,574
0
$ 0
$ 964,683
$ (190,091 ) $ 774,592
$ 112,976
$ 887,568



	For the Three Months Ended March 31, 2018

	Select Medical Holdings Corporation Stockholders
	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 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

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

Condensed Consolidated Statements of Changes in Equity and Income (Continued)

(unaudited)

(in thousands)



	For the Three Months Ended March 31, 2019

	Select Medical Corporation Stockholders
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	0	$	0	$	970,156	$	(167,114	)	$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Corporation						40,834			40,834						40,834
Net income attributable to non-controlling interests									—			4,810			4,810
Contribution related to restricted stock award issuances by Holdings				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	0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550



	For the Three Months Ended March 31, 2018

	Select Medical Corporation Stockholders
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	0	$	0	$	947,370	$	(124,002	)	$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Corporation						33,739			33,739						33,739
Net income attributable to non-controlling interests									—			4,500			4,500
Additional investment by Holdings				738					738						738
Dividends declared and paid to Holdings						(122		)	(122		)				(122		)
Contribution related to restricted stock award issuances by Holdings				4,717					4,717						4,717
Issuance and exchange of non-controlling interests						74,341			74,341						74,341
Distributions to 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	0	$	0	$	952,825	$	(100,225	)	$	852,600		$	112,677		$	965,277

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

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2018			2017			2018			2018			2019			2018			2019
Operating activities
Net income	$	99,587		$	147,220		$	99,587		$	147,220		$	43,982		$	53,344		$	43,982		$	53,344
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	14,542			10,734			14,542			10,734			1,364			7,872			1,364			7,872
Depreciation and amortization	119,644			149,022			119,644			149,022			46,771			52,138			46,771			52,138
Provision for bad debts	914			(373		)	914			(373		)	85			1,567			85			1,567
Equity in earnings of unconsolidated subsidiaries	(15,618		)	(14,914		)	(15,618		)	(14,914		)	(4,697		)	(4,366		)	(4,697		)	(4,366		)
Loss on extinguishment of debt	6,527			484			6,527			484			412			—			412			—
Gain on sale of assets and businesses	(9,499		)	(9,129		)	(9,499		)	(9,129		)	(513		)	(6,233		)	(513		)	(6,233		)
Stock compensation expense	14,227			17,175			14,227			17,175			4,927			6,255			4,927			6,255
Amortization of debt discount, premium and issuance costs	8,546			9,845			8,546			9,845			3,136			3,231			3,136			3,231
Deferred income taxes	(6,126		)	(2,092		)	(6,126		)	(2,092		)	78			(81		)	78			(81		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(143,308		)	23,495			(143,308		)	23,495			(45,811		)	(74,752		)	(45,811		)	(74,752		)
Other current assets	(2,677		)	(10,274		)	(2,677		)	(10,274		)	(8,945		)	(7,523		)	(8,945		)	(7,523		)
Other assets	1,407			4,828			1,407			4,828			16,633			57,319			16,633			57,319
Accounts payable	3,913			(3,507		)	3,913			(3,507		)	(6,552		)	4,324			(6,552		)	4,324
Accrued expenses	18,752			49,391			18,752			49,391			(11,981		)	(69,163		)	(11,981		)	(69,163		)
Income taxes	19,141			9,072			19,141			9,072			11,838			17,830			11,838			17,830
Net cash provided by operating activities	129,972			380,977			129,972			380,977			50,727			41,762			50,727			41,762
Investing activities
Business combinations, net of cash acquired	(19,371		)	(519,258		)	(19,371		)	(519,258		)	(515,359		)	(6,120		)	(515,359		)	(6,120		)
Purchases of property and equipment	(173,800		)	(121,039		)	(173,800		)	(121,039		)	(39,617		)	(49,073		)	(39,617		)	(49,073		)
Investment in businesses	(11,374		)	(12,936		)	(11,374		)	(12,936		)	(1,754		)	(27,608		)	(1,754		)	(27,608		)
Proceeds from sale of assets and businesses	34,555			6,691			34,555			6,691			691			2			691			2
Net cash used in investing activities	(169,990		)	(646,542		)	(169,990		)	(646,542		)	(556,039		)	(82,799		)	(556,039		)	(82,799		)
Financing activities
Borrowings on revolving facilities	805,000			420,000			805,000			420,000			165,000			360,000			165,000			360,000
Payments on revolving facilities	(705,000		)	(585,000		)	(705,000		)	(585,000		)	(150,000		)	(220,000		)	(150,000		)	(220,000		)
Proceeds from term loans	1,139,487			779,904			1,139,487			779,904			779,904			—			779,904			—
Payments on term loans	(1,176,567		)	(8,625		)	(1,176,567		)	(8,625		)	(2,875		)	(132,685		)	(2,875		)	(132,685		)
Revolving facility debt issuance costs	(4,392		)	(1,333		)	(4,392		)	(1,333		)	(1,333		)	—			(1,333		)	—
Borrowings of other debt	27,571			30,134			27,571			30,134			11,600			8,290			11,600			8,290
Principal payments on other debt	(15,112		)	(17,971		)	(15,112		)	(17,971		)	(5,909		)	(6,155		)	(5,909		)	(6,155		)
Repurchase of common stock	(3,603		)	(5,640		)	—			—			(122		)	—			—			—
Dividends paid to Holdings	—			—			(3,603		)	(5,640		)	—			—			(122		)	—
Proceeds from exercise of stock options	1,634			1,633			—			—			738			—			—			—
Equity investment by Holdings	—			—			1,634			1,633			—			—			738			—
Decrease in overdrafts	(20,439		)	(6,172		)	(20,439		)	(6,172		)
Increase (decrease) in overdrafts													(7,916		)	6,050			(7,916		)	6,050
Proceeds from issuance of non-controlling interests	8,986			2,926			8,986			2,926			—			3,425			—			3,425
Distributions to non-controlling interests	(9,276		)	(306,427		)	(9,276		)	(306,427		)
Distributions to and purchases of non-controlling interests													(286,641		)	(5,251		)	(286,641		)	(5,251		)
Net cash provided by financing activities	48,289			303,429			48,289			303,429			502,446			13,674			502,446			13,674
Net increase in cash and cash equivalents	8,271			37,864			8,271			37,864
Net decrease in cash and cash equivalents													(2,866		)	(27,363		)	(2,866		)	(27,363		)
Cash and cash equivalents at beginning of period	99,029			122,549			99,029			122,549			122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	107,300		$	160,413		$	107,300		$	160,413		$	119,683		$	147,815		$	119,683		$	147,815
Supplemental Information
Cash paid for interest	$	101,341		$	134,378		$	101,341		$	134,378		$	35,233		$	37,199		$	35,233		$	37,199
Cash paid for taxes	46,553			40,460			46,553			40,460			376			718			376			718
Non-cash equity exchange for acquisition of U.S. HealthWorks	—			238,000			—			238,000			238,000			—			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~~	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, 2018,~~March 31, 2019, and for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2018 and ~~2018,~~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, 2018,~~March 31, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2018.~~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, ~~2017,~~2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~22, 2018.~~21, 2019.

2.~~Accounting Policies~~


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.

~~Recent Accounting Pronouncements~~Credit Risk Concentrations

~~Lease Accounting~~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.

~~Beginning in February 2016,~~Because of the ~~Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”)~~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 18% of the Company’s accounts receivable are from Medicare at December 31, 2018, and March 31, 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 ~~established Topic 842,~~ ~~Leases~~ ~~(the “standard”). This standard includes~~ a ~~lessee accounting model that~~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 two types of leases: finance and operating. This standard 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,~~liability at lease commencement. A right-of-use asset represents the ~~FASB retained~~Company’s right to use an underlying asset for the ~~dual model, requiring leases~~lease term while the lease liability represents an obligation to ~~be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows~~make lease payments arising from a lease bywhich are measured on a ~~lessee will depend on~~discounted basis. The Company elected the short-term lease exemption for its ~~classification as finance or operating lease. For short-term~~equipment leases; accordingly, equipment leases with an initial term of ~~twelve~~12 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~~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 ~~respective~~ 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.

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 ~~amendments~~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.

Redeemable Non-Controlling Interests

The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values after the attribution of net income or loss.

The changes in redeemable non-controlling interests, which are the same for Holdings and Select, are as follows (in thousands):



Balance as of December 31, 2017	$	640,818
Net income attributable to redeemable non-controlling interests	5,743
Issuance and exchange of redeemable non-controlling interests	163,659
Distributions to redeemable non-controlling interests	(203,972		)
Redemption adjustment on redeemable non-controlling interests	1,051
Other	175
Balance as of March 31, 2018	$	607,474



Balance as of December 31, 2018	$	780,488
Net income attributable to redeemable non-controlling interests	7,700
Distributions to and purchases of redeemable non-controlling interests	(2,771		)
Redemption adjustment on redeemable non-controlling interests	47,470
Other	354
Balance as of March 31, 2019	$	833,241

Recent Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The Company’s accounts receivable derived from contracts with customers will be subject to ASU 2016-13.

The standard will ~~take effect for public companies~~be effective 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. There are two transition approaches available under the standard:~~The guidance must be applied using a modified retrospective approach ~~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 or a cumulative-effect approach~~statements. Given the very high rate of collectability of the Company’s accounts receivable derived from contracts with ~~an adjustment to the opening balance of retained earnings in the period of adoption.~~

~~Upon adoption,~~customers, the Company ~~will recognize significant assets and liabilities on~~believes that the ~~consolidated balance sheets as a result~~impact of ~~the operating lease obligations of the Company. Operating lease expense will still~~ASU 2016-13 is unlikely to 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, using the cumulative-effect approach, without adjusting the comparative periods. The Company has completed its inventory of leases and has begun to implement a new technology platform to account for leases under the new standard. The Company has substantially completed validating its lease data to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

~~Cloud Computing Arrangements~~

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Intangibles - Goodwill and Other-Internal-Use Software~~ which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impacts that adoption of this ASU will have on its consolidated financial statements.material.

Recently Adopted Accounting Pronouncements

~~Revenue from Contracts with Customers~~Leases

~~Beginning in May 2014, the FASB issued several ASUs~~The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which ~~established Topic 606,~~ ~~Revenue from Contracts with Customers~~ ~~(the “revenue recognition standard”). This revenue recognition standard supersedes existing revenue recognition requirements~~existed on that date. Prior comparative periods were not adjusted and seeks to eliminate most industry-specific guidance under current GAAP. 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.~~accordance with ASC Topic 840, Leases.

The Company ~~adopted~~elected the ~~new revenue~~package of practical expedients, which permitted the Company not to reassess under ASC Topic 842 the 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 Company.

The adoption of the standard resulted in the recognition ~~standard on~~of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, ~~2018, using~~2019. The difference between the ~~full retrospective transition method. Adoption~~operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of ~~the revenue recognition standard impacted the Company’s reported results as follows:~~

Three Months Ended September 30, 2017
As Reported
As Adjusted⁽¹⁾
Adoption Impact
(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues $ 1,097,166
$ 1,077,014
$ (20,152 )
Bad debt expense 20,321
169
(20,152 )

Nine Months Ended September 30, 2017
As Reported
As Adjusted⁽¹⁾
Adoption Impact
(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues $ 3,329,202
$ 3,270,996
$ (58,206 )
Bad debt expense 59,120
914
(58,206 )

Condensed Consolidated Statements of Cash Flows
Provision for bad debts $ 59,120
$ 914
$ (58,206 )
Changes in accounts receivable (201,514 ) (143,308 ) 58,206

~~_____________________________________________________________~~

~~(1) Bad debt expense is now included in cost of services on the condensed consolidated statements of operations.~~

December 31, 2017
As Reported As Adjusted Adoption Impact
(in thousands)
Condensed Consolidated Balance Sheets
Accounts receivable $ 767,276
$ 691,732
$ (75,544 )
Allowance for doubtful accounts 75,544
—
(75,544 )
Accounts receivable $ 691,732
$ 691,732
$ —

prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company ~~has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7.~~did not recognize a cumulative-effect adjustment to retained earnings upon adoption.

~~Income Taxes~~

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~IncomeTaxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory.~~ Previous GAAP prohibited 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 Company adopted the guidance effective January 1, 2018. Adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

~~3. Acquisitions~~


3.	Acquisitions

U.S. HealthWorks Acquisition

On February 1, 2018, Concentra Inc. (“Concentra”) acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, ~~pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”~~from Dignity Health Holding Corporation (“DHHC”) ~~dated as of October 22, 2017, by and among~~ .

Concentra acquired U.S. HealthWorks ~~Concentra Group Holdings, LLC (“Concentra Group Holdings”),~~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”) and Dignity Health Holding Corporation (“DHHC”). For the nine months ended September 30, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.

In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.

Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.

For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their ~~preliminary~~ estimated fair values in accordance with the provisions of ~~Accounting Standards Codification~~ASC Topic 805, Business Combinations. ~~The Company is in~~During the process of completing its assessment of the acquisition-date fair values of the assets acquired and the liabilities assumed and determining the estimated useful lives of long-lived assets and finite-lived intangible assets; therefore, the values set forth below are subject to adjustment during the measurement period. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities byyear ended December 31, ~~2018.~~2018, the Company finalized the purchase accounting related to this acquisition.

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


Identifiable tangible assets	$	184,163
Accounts receivable			$	68,934
Other current assets			10,810
Property and equipment			69,712
Identifiable intangible assets	140,406		140,406
Other assets			25,435
Goodwill	533,124		540,067
Total assets	857,693		855,364
Accounts payable and other current liabilities			49,925
Deferred income taxes and other long-term liabilities			51,851
Total liabilities	104,693		101,776
Consideration given	$	753,000	$	753,588

The preliminary fair value assigned to identifiable intangible assets was determined through the use of the income and cost approaches. Both valuation methods rely on management judgment including expected future cash flows, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates, and other factors. Useful lives for identifiable intangible assets were determined based upon the remaining useful economic lives of the identifiable intangible assets that are expected to contribute directly or indirectly to future cash flows. The valuations of tangible assets were derived using a combination of the market and cost approaches. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, useful lives of assets, and estimated selling prices.

Fair Value
Weighted Average
Amortization Period
(in thousands) (in years)
Customer relationships $ 135,000
15.0 years
Trademarks 5,000
1.0 year
Favorable leasehold interests 406
2.9 years
Identifiable intangible assets $ 140,406

The customer relationships and trademarks are being amortized on a straight-line basis over their expected useful lives. Favorable leasehold interests are being amortized over their remaining lease terms at the time of acquisition.

A preliminary estimate for goodwill of $533.1 million has been recognized for the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.

For the ~~three months ended September 30,~~period February 1, 2018 through March 31, 2018, U.S. HealthWorks ~~had~~contributed net operating revenues of ~~$133.3~~$89.9 million which is reflected in the Company’s consolidated statements of operations. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks had net operating revenues of $362.7 million which is reflected in the Company’s consolidated statementsstatement of operations for the ~~nine~~three months ended ~~September 30,~~March 31, 2018. Due to the integrated nature of ~~our~~the Company’s operations, the Company believes that it is not practicable to separately identify earnings of 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 U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date. For the three months ended March 31, 2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2018 2017 2018
(in thousands, except per share amounts)
Net revenue $ 1,215,869
$ 1,267,401
$ 3,687,574
$ 3,864,155
Net income 21,929
45,721
85,317
153,144
Net income attributable to the Company 17,011
34,441
69,237
116,135
Income per common share:

Basic $ 0.13
$ 0.26
$ 0.52
$ 0.86
Diluted $ 0.13
$ 0.26
$ 0.52
$ 0.86



	Three Months Ended March 31, 2018
	(in thousands)
Net operating revenues	$	1,300,544
Net income attributable to the Company	34,538

The pro forma financial information is based on the preliminary allocation of the purchase price of the U.S. HealthWorks acquisition and is therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period. The net income tax impact was calculated at a statutory rate, as if U.S. HealthWorks had been a subsidiary of the Company as of January 1, 2017.

~~For the nine months ended September 30, 2017,~~Company’s pro forma results were adjusted to ~~include the~~recognize U.S. HealthWorks acquisition costs ~~recognized by~~as of January 1, 2017. Accordingly, for the ~~Company during 2017 and 2018, which were approximately $5.7 million. For the nine~~three months ended ~~September 30,~~March 31, 2018, pro forma results were adjusted to exclude ~~approximately~~ $2.9 million of U.S. HealthWorks acquisition ~~costs which were~~costs.


4.	Sale of Businesses

The Company recognized ~~by the Company~~a non-operating gain of $6.5 million during the ~~period.~~three months ended March 31, 2019, which resulted from the sale of 22 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary.


5.	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 states which prohibit the corporate practice of medicine, 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.

Based on the provisions of these agreements, Concentra has the ability to direct the activities which most significantly impact the performance of these professional corporations and associations and has an obligation to absorb losses or receive benefits which could potentially be significant to the professional corporations and associations. Accordingly, the professional corporations and associations are variable interest entities for which Concentra is the primary beneficiary.

The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2 million and $177.6 million at December 31, 2018, and March 31, 2019, respectively. The total liabilities of 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 $175.8 million at December 31, 2018, and March 31, 2019, respectively.


6.	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 two, 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 two, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with two, five year renewal options.

For the three months ended March 31, 2019, the Company’s total lease cost was as follows (in thousands):



	Unrelated Parties			Related Parties		Total
Operating lease cost	$	66,836		$	1,342	$	68,178
Finance lease cost:
Amortization of right-of-use assets	36			—		36
Interest on lease liabilities	97			—		97
Short-term lease cost	592			—		592
Variable lease cost	11,836			156		11,992
Sublease income	(2,488		)	—		(2,488		)
Total lease cost	$	76,909		$	1,498	$	78,407

For the three months ended March 31, 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	$	68,352
Operating cash flows for finance leases	97
Financing cash flows for finance leases	85
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	1,080,992

_______________________________________________________________________________


(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 March 31, 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	$	962,186	$	20,430	$	982,616

Current operating lease liabilities	$	200,420	$	4,725	$	205,145
Non-current operating lease liabilities	801,094		18,913		820,007
Total operating lease liabilities	$	1,001,514	$	23,638	$	1,025,152



	Finance Leases
	Unrelated Parties			Related Parties		Total
Property and equipment, gross	$	2,813		$	—	$	2,813
Accumulated depreciation	(36		)	—		(36		)
Property and equipment, net	$	2,777		$	—	$	2,777

Current portion of long-term debt and notes payable	$	167		$	—	$	167
Long-term debt, net of current portion	4,214			—		4,214
Total finance lease liabilities	$	4,381		$	—	$	4,381

As of March 31, 2019, the weighted average remaining lease terms and discount rates was as follows:



Weighted average remaining lease term (in years):
Operating leases	8.1
Finance leases	13.7
Weighted average discount rate:
Operating leases	5.9	%
Finance leases	9.0	%

As of March 31, 2019, maturities of lease liabilities were approximately as follows (in thousands):



	Operating Leases		Finance Leases		Total
2019	$	196,381	$	431	$	196,812
2020	230,500		526		231,026
2021	192,525		537		193,062
2022	151,581		548		152,129
2023	111,167		558		111,725
Thereafter	501,279		5,075		506,354
Total undiscounted cash flows	1,383,433		7,675		1,391,108
Less: Imputed interest	358,281		3,294		361,575
Total discounted lease liabilities	$	1,025,152	$	4,381	$	1,029,533

4.In accordance with ASC Topic 840, Leases~~Intangible Assets~~, and as disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties as of December 31, 2018, were approximately as follows (in thousands):



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


7.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra Total
(in thousands)
Balance as of December 31, 2017 $ 1,045,220
$ 415,528
$ 647,522
$ 674,542
$ 2,782,812
Acquired —
1,118
2,465
536,945
540,528
Measurement period adjustment —
—
—
(2,472 ) (2,472 )
Sold —
—
(9,409 ) —
(9,409 )
Balance as of September 30, 2018 $ 1,045,220
$ 416,646
$ 640,578
$ 1,209,015
$ 3,311,459



	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	—		6,964		746			937		8,647
Sold	—		—		(5,624		)	—		(5,624		)
Balance as of March 31, 2019	$	1,045,220	$	423,610	$	637,544		$	1,217,375	$	3,323,749

~~_______________________________________________________________________________~~


~~(1)~~	The critical illness recovery hospital reporting unit was previously referred to as the long term acute care reporting unit. The rehabilitation hospital reporting unit was previously referred to as the inpatient rehabilitation reporting unit.

Identifiable Intangible Assets

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


	December 31, 2017							September 30, 2018							December 31, 2018							March 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)														(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,155		—			19,155		19,118		—			19,118		19,174		—			19,174		19,221		—			19,221
Accreditations	1,895		—			1,895		1,857		—			1,857		1,857		—			1,857		1,857		—			1,857
Finite-lived intangible assets:
Trademarks	—		—			—		5,000		(3,333		)	1,667		5,000		(4,583		)	417		5,000		(5,000		)	—
Customer relationships	143,953		(38,281		)	105,672		279,967		(55,760		)	224,207		280,710		(61,900		)	218,810		283,090		(68,150		)	214,940
Favorable leasehold interests(1)	13,295		(4,319		)	8,976		13,553		(5,653		)	7,900		13,553		(6,064		)	7,489		—		—			—
Non-compete agreements	28,023		(3,900		)	24,123		28,953		(5,553		)	23,400		29,400		(6,152		)	23,248		30,483		(6,771		)	23,712
Total identifiable intangible assets	$	373,019	$	(46,500	)	$	326,519	$	515,146	$	(70,299	)	$	444,847	$	516,392	$	(78,699	)	$	437,693	$	506,349	$	(79,921	)	$	426,428

_______________________________________________________________________________


(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, 2018,~~March 31, 2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~8.4~~7.9 years, respectively.

The Company’s finite-lived ~~customer relationships, non-compete agreements, and trademarks~~intangible assets amortize over their estimated useful lives. Amortization expense was ~~$4.4~~$6.4 million and ~~$7.9~~$7.1 million for the three months ended September 30, 2017 and 2018, respectively. Amortization expense was $13.1 million and $22.1 million for the nine months ended September 30, 2017 and 2018, respectively. The Company’s leasehold interests have finite lives and 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.

~~Estimated amortization expense for the Company’s finite-lived customer relationships, non-compete agreements, and trademarks for the remaining period of~~March 31, 2018 and ~~each of the four succeeding years is as follows:~~2019, respectively.

2018 2019 2020 2021 2022
(in thousands)
Amortization expense $ 7,811
$ 26,490
$ 25,864
$ 25,648
$ 25,443


5.8.	Long-Term Debt and Notes Payable

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

As of ~~September 30, 2018,~~March 31, 2019, the Company’s long-term debt and notes payable ~~are~~were as follows (in thousands):


	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value		Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	607		$	(5,122	)	$	705,485	$	718,875	$	710,000	$	493		$	(4,162	)	$	706,331	$	711,775
Credit facilities:
Revolving facility	65,000		—			—			65,000		59,800		160,000		—			—			160,000		147,200
Term loans	1,132,750		(11,000		)	(11,058		)	1,110,692		1,139,830
Term loan													1,031,068		(9,267		)	(8,827		)	1,012,974		1,024,624
Other	49,004		—			(508		)	48,496		48,496		64,808		—			(464		)	64,344		64,344
Total Select debt	1,956,754		(10,393		)	(16,688		)	1,929,673		1,967,001		1,965,876		(8,774		)	(13,453		)	1,943,649		1,947,943
Concentra:
Credit facilities:
Term loans	1,414,175		(3,078		)	(20,417		)	1,390,680		1,427,181		1,380,297		(2,555		)	(16,877		)	1,360,865		1,373,545
Other	9,355		—			—			9,355		9,355
Other debt, including finance leases													6,918		—			—			6,918		6,918
Total Concentra debt	1,423,530		(3,078		)	(20,417		)	1,400,035		1,436,536		1,387,215		(2,555		)	(16,877		)	1,367,783		1,380,463
Total debt	$	3,380,284	$	(13,471	)	$	(37,105	)	$	3,329,708	$	3,403,537	$	3,353,091	$	(11,329	)	$	(30,330	)	$	3,311,432	$	3,328,406

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


	2018		2019		2020		2021		2022		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	710,000	$	—	$	—	$	710,000	$	—	$	—	$	710,000	$	—	$	—	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		65,000		—		65,000		—		—		—		160,000		—		—		160,000
Term loans	2,875		11,500		11,500		11,500		11,500		1,083,875		1,132,750
Term loan															—		—		—		—		—		1,031,068		1,031,068
Other	3,992		5,391		24,285		221		—		15,115		49,004		9,262		27,211		1,781		—		—		26,554		64,808
Total Select debt	6,867		16,891		35,785		721,721		76,500		1,098,990		1,956,754		9,262		27,211		711,781		160,000		—		1,057,622		1,965,876
Concentra:
Credit facilities:
Term loans	—		—		5,719		12,365		1,156,091		240,000		1,414,175		—		—		—		1,140,298		239,999		—		1,380,297
Other	1,341		3,625		346		346		324		3,373		9,355
Other debt, including finance leases															1,644		754		330		358		363		3,469		6,918
Total Concentra debt	1,341		3,625		6,065		12,711		1,156,415		243,373		1,423,530		1,644		754		330		1,140,656		240,362		3,469		1,387,215
Total debt	$	8,208	$	20,516	$	41,850	$	734,432	$	1,232,915	$	1,342,363	$	3,380,284	$	10,906	$	27,965	$	712,111	$	1,300,656	$	240,362	$	1,061,091	$	3,353,091

As of December 31, ~~2017,~~2018, the Company’s long-term debt and notes payable ~~are~~were as follows (in thousands):


	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value		Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	778		$	(6,553	)	$	704,225	$	727,750	$	710,000	$	550		$	(4,642	)	$	705,908	$	706,450
Credit facilities:
Revolving facility	230,000		—			—			230,000		211,600		20,000		—			—			20,000		18,400
Term loans	1,141,375		(12,445		)	(12,500		)	1,116,430		1,154,215
Term loan													1,129,875		(9,690		)	(9,321		)	1,110,864		1,076,206
Other	36,877		—			(533		)	36,344		36,344		56,415		—			(484		)	55,931		55,931
Total Select debt	2,118,252		(11,667		)	(19,586		)	2,086,999		2,129,909		1,916,290		(9,140		)	(14,447		)	1,892,703		1,856,987
Concentra:
Credit facilities:
Term loans	619,175		(2,257		)	(10,668		)	606,250		625,173		1,414,175		(2,765		)	(18,648		)	1,392,762		1,357,802
Other	6,653		—			—			6,653		6,653
Other debt, including finance leases													7,916		—			—			7,916		7,916
Total Concentra debt	625,828		(2,257		)	(10,668		)	612,903		631,826		1,422,091		(2,765		)	(18,648		)	1,400,678		1,365,718
Total debt	$	2,744,080	$	(13,924	)	$	(30,254	)	$	2,699,902	$	2,761,735	$	3,338,381	$	(11,905	)	$	(33,095	)	$	3,293,381	$	3,222,705

Excess Cash Flow Payment

During the three months ended March 31, 2019, Select ~~Credit Facilities~~

~~On March 22, 2018, Select entered into Amendment No. 1 to~~made a principal prepayment of approximately $98.8 million associated with its term loans in accordance with the ~~senior secured credit agreement (the “Select credit agreement”) dated March 6, 2017. The~~provision in the Select credit ~~agreement originally provided for $1.6 billion in senior secured credit~~ facilities ~~comprised~~that requires mandatory prepayments of ~~$1.15 billion in~~ term loans ~~(the “Select term loans”) and~~as a $450.0 million revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuanceresult of ~~standby letters of credit.~~

~~Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as~~annual excess cash flow, as defined in the Select credit ~~agreement and subject to an Adjusted LIBO floor~~facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the Select term loan until maturity on March 6, 2025.

During the three months ended March 31, 2019, Concentra made a principal prepayment of ~~1.00%) plus 3.50% to~~approximately $33.9 million associated with its term loans in accordance with the ~~Adjusted LIBO Rate plus~~provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a ~~percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as~~result of annual excess cash flow, as defined in the ~~Select~~Concentra credit ~~agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus~~facilities. The principal prepayment was applied against future payments sequentially; as a ~~percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate~~result, no further loan amortization payments will be required on the terms loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.

~~Concentra Credit Facilities~~

~~Concentra First Lien Credit Agreement~~

On February 1, 2018, Concentra entered into an amendment to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015, by and among Concentra, as the borrower, Concentra Holdings, Inc., a subsidiary of Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other lenders party thereto. Concentra used borrowings under the Concentra first lien credit agreement ~~and the Concentra second lien credit agreement, as described below, together with cash~~until maturity on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement (as described in Note 3), as well as to pay fees and expenses associated with the financing.

Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

~~Concentra Second Lien Credit Agreement~~

On February 1, 2018, Concentra entered into a second lien credit agreement (the “Concentra second lien credit agreement” and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”) with Concentra Holdings, Inc., Wells Fargo Bank, National Association, as the administrative agent and the collateral agent, and the other lenders party thereto.

The Concentra second lien credit agreement provided for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.

Concentra will be required to prepay borrowings under the Concentra second lien term loan 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 the payment of certain indebtedness secured by liens, (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 Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.

The Concentra second lien credit agreement also contains a number of 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 Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.

~~Loss on Early Retirement of Debt~~

The amendments to the Select credit facilities and Concentra credit facilities resulted in losses on early retirement of debt totaling $10.3 million for the nine months ended September 30, 2018. The losses on early retirement of debt consisted of $0.5 million of debt extinguishment losses and $9.8 million of debt modification losses during the nine months ended September 30, 2018.2022.

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% senior notes and for its 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% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.


9.	Segment Information

~~6. Segment Information~~

The Company identifies its operating segments according to how the chief operating decision maker evaluates financial performance and allocates resources. During the year ended December 31, 2017, the Company changed its internal segment reporting structure which is reflective of how the Company now manages its business operations, reviews operating performance, and allocates resources. The Company’s reportable segments include the critical illness recovery hospital segment, ~~(previously referred to as the long term acute care segment),~~ rehabilitation hospital segment, ~~(previously referred to as the inpatient rehabilitation segment),~~ outpatient rehabilitation segment, and Concentra segment. Prior year results for the three and nine months ended September 30, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.

Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.

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, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), 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 results of Holdings are identical to those of Select.


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2017			2018			2017			2018				2018			2019
	(in thousands)												(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital⁽²⁾	$	416,934		$	420,108		$	1,301,251		$	1,327,236
Rehabilitation hospital⁽²⁾	157,499			176,885			453,702			525,428
Critical illness recovery hospital														$	464,676		$	462,159
Rehabilitation hospital														174,774			188,954
Outpatient rehabilitation	246,644			265,927			751,999			790,491				257,381			277,197
Concentra	255,881			404,481			763,357			1,173,420				356,116			396,321
Other	56			—			687			—				17			—
Total Company	$	1,077,014		$	1,267,401		$	3,270,996		$	3,816,575			$	1,252,964		$	1,324,631
Adjusted EBITDA:
Critical illness recovery hospital⁽²⁾	$	46,873		$	53,292		$	194,253		$	186,989
Rehabilitation hospital⁽²⁾	22,581			25,343			62,038			80,314
Critical illness recovery hospital														$	72,972		$	72,998
Rehabilitation hospital														26,776			25,797
Outpatient rehabilitation	29,298			34,531			102,575			107,003				30,525			28,991
Concentra	40,003			68,754			125,656			199,119				57,797			66,258
Other	(22,928		)	(25,292		)	(71,125		)	(75,337		)		(24,838		)	(23,927		)
Total Company	$	115,827		$	156,628		$	413,397		$	498,088			$	163,232		$	170,117
Total assets:
Critical illness recovery hospital⁽²⁾	$	2,008,485		$	1,785,336		$	2,008,485		$	1,785,336
Rehabilitation hospital⁽²⁾	740,276			888,342			740,276			888,342
Critical illness recovery hospital														$	1,862,791		$	2,062,659
Rehabilitation hospital														877,750			1,089,391
Outpatient rehabilitation	945,765			991,105			945,765			991,105				973,122			1,250,015
Concentra	1,332,012			2,201,869			1,332,012			2,201,869				2,143,405			2,464,317
Other	97,269			113,529			97,269			113,529				111,575			155,110
Total Company	$	5,123,807		$	5,980,181		$	5,123,807		$	5,980,181			$	5,968,643		$	7,021,492
Purchases of property and equipment, net:
Critical illness recovery hospital⁽²⁾	$	8,003		$	8,134		$	28,717		$	31,455
Rehabilitation hospital⁽²⁾	29,373			8,769			77,707			29,766
Critical illness recovery hospital														$	10,472		$	10,160
Rehabilitation hospital														12,917			13,183
Outpatient rehabilitation	6,496			7,209			19,370			22,565				7,338			9,040
Concentra	5,369			12,539			21,656			29,281				6,621			15,698
Other	19,257			2,740			26,350			7,972				2,269			992
Total Company	$	68,498		$	39,391		$	173,800		$	121,039			$	39,617		$	49,073

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


	Three Months Ended September 30, 2017																		Three Months Ended March 31, 2018
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	46,873		$	22,581		$	29,298		$	40,003		$	(22,928	)				$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)
Depreciation and amortization	(10,932		)	(4,505		)	(5,964		)	(15,014		)	(2,357		)				(11,058		)	(5,722		)	(6,637		)	(21,147		)	(2,207		)
Stock compensation expense	—			—			—			(212		)	(4,745		)				—			—			—			(211		)	(4,716		)
U.S. HealthWorks acquisition costs																			—			—			—			(2,936		)	—
Income (loss) from operations	$	35,941		$	18,076		$	23,334		$	24,777		$	(30,030	)	$	72,098		$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598
Loss on early retirement of debt																																		(10,255		)
Equity in earnings of unconsolidated subsidiaries																4,431																		4,697
Non-operating gain																																		399
Interest expense																(37,688		)																(47,163		)
Income before income taxes																$	38,841																	$	56,276


	Three Months Ended September 30, 2018																		Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	53,292		$	25,343		$	34,531		$	68,754		$	(25,292	)				$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)
Depreciation and amortization	(11,136		)	(6,079		)	(6,597		)	(24,488		)	(2,227		)				(11,451		)	(6,402		)	(7,032		)	(24,904		)	(2,349		)
Stock compensation expense	—			—			—			(767		)	(5,497		)				—			—			—			(767		)	(5,488		)
Income (loss) from operations	$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837		$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Equity in earnings of unconsolidated subsidiaries																5,432																		4,366
Non-operating gain																2,139																		6,532
Interest expense																(50,669		)																(50,811		)
Income before income taxes																$	56,739																	$	71,811

Nine Months Ended September 30, 2017

Critical Illness Recovery Hospital⁽²⁾

Rehabilitation Hospital⁽²⁾

Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Adjusted EBITDA $ 194,253
$ 62,038
$ 102,575
$ 125,656
$ (71,125 )
Depreciation and amortization (34,891 ) (14,500 ) (18,182 ) (46,566 ) (5,505 )
Stock compensation expense —
—
—
(782 ) (13,445 )
Income (loss) from operations $ 159,362
$ 47,538
$ 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

Nine Months Ended September 30, 2018

Critical Illness Recovery Hospital⁽²⁾

Rehabilitation Hospital⁽²⁾

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
Non-operating gain

9,016
Interest expense

(147,991 )
Income before income taxes

$ 194,680


~~(1)~~10.	~~Net operating revenues were retrospectively conformed to reflect the adoption Topic 606,~~ Revenue from Contracts with ~~Customers.~~ Customers


~~(2)~~	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.

~~7. Revenue from Contracts with Customers~~

Net operating revenues consist primarily of patient service revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues ~~by operating segment~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2018:~~2019:


	Three Months Ended September 30, 2017								Three Months Ended March 31, 2018
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra
	(in thousands)								(in thousands)
Patient service revenues:
Medicare	$	217,116	$	64,227	$	36,821	$	472	$	240,992	$	72,841	$	38,190	$	628
Non-Medicare	195,872		53,054		179,171		253,437		220,006		61,902		188,900		353,252
Total patient services revenues	412,988		117,281		215,992		253,909		460,998		134,743		227,090		353,880
Other revenues	3,946		40,218		30,652		1,972		3,678		40,031		30,291		2,236
Total net operating revenues	$	416,934	$	157,499	$	246,644	$	255,881	$	464,676	$	174,774	$	257,381	$	356,116

Three Months Ended September 30, 2018

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra
(in thousands)
Patient service revenues:
Medicare $ 210,101
$ 71,564
$ 40,563
$ 455
Non-Medicare 206,629
64,322
185,787
401,537
Total patient services revenues 416,730
135,886
226,350
401,992
Other revenues 3,378
40,999
39,577
2,489
Total net operating revenues $ 420,108
$ 176,885
$ 265,927
$ 404,481


	Nine Months Ended September 30, 2017								Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra
	(in thousands)								(in thousands)
Patient service revenues:
Medicare	$	682,286	$	183,820	$	111,638	$	1,588	$	238,169	$	74,579	$	40,278	$	555
Non-Medicare	610,372		151,731		551,983		755,345		216,959		70,642		187,914		393,236
Total patient services revenues	1,292,658		335,551		663,621		756,933		455,128		145,221		228,192		393,791
Other revenues	8,593		118,151		88,378		6,424		7,031		43,733		49,005		2,530
Total net operating revenues	$	1,301,251	$	453,702	$	751,999	$	763,357	$	462,159	$	188,954	$	277,197	$	396,321

Nine Months Ended September 30, 2018

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra
(in thousands)
Patient service revenues:
Medicare $ 676,950
$ 217,459
$ 120,228
$ 1,600
Non-Medicare 639,718
188,611
569,298
1,164,711
Total patient services revenues 1,316,668
406,070
689,526
1,166,311
Other revenues 10,568
119,358
100,965
7,109
Total net operating revenues $ 1,327,236
$ 525,428
$ 790,491
$ 1,173,420

~~_______________________________________________________________________________~~


~~(1)~~11.	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.Earnings per Share

~~Patient Services Revenue~~

~~Patient services revenue is recognized when obligations under~~The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the ~~terms~~Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the ~~contract are satisfied; generally, this occurs~~Company’s two-class method is as the Company provides healthcare services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. These amounts are due from patients; third-party payors, including health insurers and government programs; and other payors.

~~Medicare~~: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end stage renal disease. Amounts we receive for treatment of patients covered by the Medicare program are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided.

~~Non-Medicare~~: The Company is reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these payors using a variety of payment methodologies and the amounts the Company receives are generally less than the standard billing rates.

In the critical illness recovery hospital and rehabilitation hospital segments, the Company recognizes revenue based on known contractual provisions associated with the specific payor or, where the Company has a relatively homogeneous patient population, the Company will monitor individual payors’ historical reimbursement rates to derive a per diem rate which is used to determine the amount of revenue to be recognized for services rendered.

In the outpatient rehabilitation and Concentra segments, the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. The Company performs provision testing, using internally developed systems, whereby the Company monitors a payors’ historical reimbursement rates and compares them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to determine the amount of revenue to be recognized for services rendered.

The Company is subject to potential retrospective adjustments to net operating revenues in future periods for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.

~~Other Revenues~~

The Company recognizes revenue for services provided to healthcare institutions, principally management and employee leasing services, under contractual arrangements with related parties affiliated through the Company’s equity investments and other third-party healthcare institutions. Revenue is recognized when obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.

follows:


8.(i)	~~Income Taxes~~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 no dividends declared or contractual dividends paid for the three months ended March 31, 2018 and 2019.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law which made significant changes to the Internal Revenue Code. These changes included a corporate tax rate decrease from 35.0% to 21.0% effective after December 31, 2017. Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:

Three Months Ended September 30,
2017 2018
Federal income tax at statutory rate 35.0 % 21.0 %
State and local income taxes, less federal income tax benefit 4.0
5.0
Permanent differences 0.8
2.7
Valuation allowance 0.1
(0.1 )
Uncertain tax positions 0.2
0.2
Non-controlling interest (1.6 ) (1.0 )
Stock-based compensation (2.3 ) (2.7 )
Other (0.1 ) (0.3 )
Total effective income tax rate 36.1 % 24.8 %

Nine Months Ended September 30,
2017 2018
Federal income tax at statutory rate 35.0 % 21.0 %
State and local income taxes, less federal income tax benefit 3.8
4.7
Permanent differences 1.1
2.1
Valuation allowance 0.2
(0.1 )
Uncertain tax positions 0.2
0.2
Non-controlling interest (1.8 ) (1.8 )
Stock-based compensation (0.9 ) (2.6 )
Other (0.2 ) 0.9
Total effective income tax rate 37.4 % 24.4 %

~~9. Income per Common Share~~

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.


(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 March 31,				Three Months Ended March 31,
	2018		2019		2018		2019
	(in thousands)
Net income	$	43,982	$	53,344	$	43,982	$	53,344
Less: net income attributable to non-controlling interests	10,243		12,510		10,243		12,510
Net income attributable to the Company	33,739		40,834		33,739		40,834
Less: net income attributable to participating securities	1,111		1,343		1,110		1,343
Net income attributable to common shares	$	32,628	$	39,491	$	32,629	$	39,491

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



	Three Months Ended March 31, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	39,491	130,821	$	0.30	$	39,491	130,861	$	0.30
Participating securities	1,343		4,449	$	0.30	1,343		4,449	$	0.30
Total Company	$	40,834				$	40,834



	Three Months Ended March 31, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	32,628	129,691	$	0.25	$	32,629	129,816	$	0.25
Participating securities	1,111		4,416	$	0.25	1,110		4,416	$	0.25
Total Company	$	33,739				$	33,739

_______________________________________________________________________________

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

Three Months Ended September 30, Nine Months Ended September 30,
2017 2018 2017 2018
(in thousands, except per share amounts)
Numerator:

Net income attributable to Select Medical Holdings Corporation $ 18,462
$ 32,917
$ 76,387
$ 113,167
Less: Earnings allocated to unvested restricted stockholders 608
1,098
2,464
3,732
Net income available to common stockholders $ 17,854
$ 31,819
$ 73,923
$ 109,435
Denominator:

Weighted average shares—basic 129,142
130,387
128,745
129,972
Effect of dilutive securities:

Stock options 180
60
171
94
Weighted average shares—diluted 129,322
130,447
128,916
130,066
Basic income per common share: $ 0.14
$ 0.24
$ 0.57
$ 0.84
Diluted income per common share: $ 0.14
$ 0.24
$ 0.57
$ 0.84

~~10. Commitments and Contingencies~~


12.	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 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 ~~$35.0~~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 the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million 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 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. On October 19, 2015, the 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, LLC (“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 on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and two former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom 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 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 alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all 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 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’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the 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 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 plaintiff-relators ~~have~~ appealed this decision to the ~~District Judge.~~district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.

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.

Wilmington 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, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at 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. In response to the Select defendants’ motion to dismiss the Complaint, in May 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 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. In March 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, 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. 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. 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.

~~11. Subsequent Events~~

~~Amendment to the Select Credit Facilities~~

On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement (“Amendment No. 2”). Among other things, Amendment No. 2 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the currently applicable floor.

~~Amendment to the Concentra Credit Facilities~~

On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement (“Amendment No. 4”). Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra’s first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.

~~12. Condensed Consolidating Financial Information~~


13.	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 Parent 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.

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, 2018~~March 31, 2019

(unaudited)


	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																	(in thousands)
Assets
ASSETS
Current Assets:
Cash and cash equivalents	$	77		$	5,627	$	3,045		$	151,664	$	—			$	160,413		$	78		$	7,454	$	3,353		$	136,930	$	—			$	147,815
Accounts receivable	—			412,454		123,622			210,740		—				746,816			—			444,580		132,312			202,969		—				779,861
Intercompany receivables	—			1,722,475		75,391			—		(1,797,866		)	(a)	—			—			1,723,869		91,005			—		(1,814,874		)	(a)	—
Prepaid income taxes	16,325			—		—			3,527		—				19,852			399			5,132		—			2,833		(655		)	(f)	7,709
Other current assets	15,441			32,281		14,839			33,653		—				96,214			30,152			33,973		10,025			43,350		—				117,500
Total Current Assets	31,843			2,172,837		216,897			399,584		(1,797,866		)		1,023,295			30,629			2,215,008		236,695			386,082		(1,815,529		)		1,052,885
Operating lease right-of-use assets																		34,992			451,905		496,144			305,795		(306,220		)	(a)	982,616
Property and equipment, net	36,947			615,299		90,821			222,323		—				965,390			28,774			622,323		107,147			214,563		—				972,807
Investment in affiliates	4,448,449			123,809		—			—		(4,572,258		)	(b)(c)	—			4,491,439			138,297		—			—		(4,629,736		)	(b)(c)	—
Goodwill	—			2,102,444		—			1,209,015		—				3,311,459			—			2,106,374		—			1,217,375		—				3,323,749
Identifiable intangible assets, net	3			102,423		4,972			337,449		—				444,847			3			99,884		5,108			321,433		—				426,428
Other assets	38,861			137,897		33,902			33,498		(8,968		)	(e)	235,190			36,974			208,431		33,207			19,069		(34,674		)	(a)(e)	263,007
Total Assets	$	4,556,103		$	5,254,709	$	346,592		$	2,201,869	$	(6,379,092	)		$	5,980,181		$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492
Liabilities and Equity
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	23,291		$	—	$	—		$	—	$	—			$	23,291		$	31,133		$	—	$	—		$	—	$	—			$	31,133
Current operating lease liabilities																		6,298			105,809		36,663			67,347		(10,972		)	(a)	205,145
Current portion of long-term debt and notes payable	15,508			268		3,631			4,768		—				24,175			8,656			498		896			2,279		—				12,329
Accounts payable	12,183			76,776		19,948			28,633		—				137,540			12,198			77,245		23,396			27,742		—				140,581
Intercompany payables	1,722,475			75,391		—			—		(1,797,866		)	(a)	—			1,723,869			91,005		—			—		(1,814,874		)	(a)	—
Accrued payroll	12,061			95,717		4,935			63,508		—				176,221			4,080			87,957		2,744			47,508		—				142,289
Accrued vacation	4,394			58,590		13,584			29,458		—				106,026			4,855			64,878		14,953			31,989		—				116,675
Accrued interest	17,775			16		27			5,830		—				23,648			16,915			26		4			5,648		—				22,593
Accrued other	60,190			62,049		16,637			49,203		—				188,079			65,968			60,930		15,355			63,282		—				205,535
Income taxes payable	2,764			—		—			3,365		—				6,129			—			4,197		170			4,945		(655		)	(f)	8,657
Total Current Liabilities	1,870,641			368,807		58,762			184,765		(1,797,866		)		685,109			1,873,972			492,545		94,181			250,740		(1,826,501		)		884,937
Non-current operating lease liabilities																		31,902			370,579		465,664			247,673		(295,811		)	(a)	820,007
Long-term debt, net of current portion	1,871,407			72		38,787			1,395,267		—				3,305,533			1,882,471			37		51,091			1,365,504		—				3,299,103
Non-current deferred tax liability	—			91,487		882			64,826		(8,968		)	(e)	148,227			—			103,314		1,329			58,130		(8,910		)	(e)	153,863
Other non-current liabilities	39,463			62,354		8,730			63,623		—				174,170			32,435			60,464		2,959			35,134		(25,201		)	(a)	105,791
Total Liabilities	3,781,511			522,720		107,161			1,708,481		(1,806,834		)		4,313,039			3,820,780			1,026,939		615,224			1,957,181		(2,156,423		)		5,263,701
Redeemable non-controlling interests	—			—		—			19,402		760,172			(d)	779,574			—			—		—			17,283		815,958			(d)	833,241
Stockholders’ Equity:
Common stock	0			—		—			—		—				0			0			—		—			—		—				0
Capital in excess of par	964,683			—		—			—		—				964,683			975,903			—		—			—		—				975,903
Retained earnings (accumulated deficit)	(190,091		)	1,506,874		(33,181		)	11,504		(1,485,197		)	(c)(d)	(190,091		)	(173,872		)	1,575,968		(28,082		)	24,837		(1,572,723		)	(c)(d)	(173,872		)
Subsidiary investment	—			3,225,115		272,612			456,854		(3,954,581		)	(b)(d)	—			—			3,239,315		291,159			459,625		(3,990,099		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	774,592			4,731,989		239,431			468,358		(5,439,778		)		774,592			802,031			4,815,283		263,077			484,462		(5,562,822		)		802,031
Non-controlling interests	—			—		—			5,628		107,348			(d)	112,976			—			—		—			5,391		117,128			(d)	122,519
Total Equity	774,592			4,731,989		239,431			473,986		(5,332,430		)		887,568			802,031			4,815,283		263,077			489,853		(5,445,694		)		924,550
Total Liabilities and Equity	$	4,556,103		$	5,254,709	$	346,592		$	2,201,869	$	(6,379,092	)		$	5,980,181		$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492


(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 to report prepaid income taxes and income taxes payable by tax jurisdiction in consolidation.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended ~~September 30, 2018~~March 31, 2019

(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	$	—		$	719,830		$	208,480		$	396,321		$	—			$	1,324,631
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	739			624,475			176,048			330,830			—				1,132,092
General and administrative	28,697			(20		)	—			—			—				28,677
Depreciation and amortization	2,231			20,534			4,469			24,904			—				52,138
Total costs and expenses	31,667			644,989			180,517			355,734			—				1,212,907
Income (loss) from operations	(31,667		)	74,841			27,963			40,587			—				111,724
Other income and expense:
Intercompany interest and royalty fees	4,108			(1,102		)	(2,643		)	(363		)	—				—
Intercompany management fees	61,472			(48,770		)	(12,702		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			4,343			23			—			—				4,366
Non-operating gain	—			6,532			—			—			—				6,532
Interest income (expense)	(28,200		)	120			(221		)	(22,510		)	—				(50,811		)
Income before income taxes	5,713			35,964			12,420			17,714			—				71,811
Income tax expense	57			14,225			407			3,778			—				18,467
Equity in earnings of consolidated subsidiaries	35,178			7,211			—			—			(42,389		)	(a)	—
Net income	40,834			28,950			12,013			13,936			(42,389		)		53,344
Less: Net income attributable to non-controlling interests	—			—			4,802			7,708			—				12,510
Net income attributable to Select Medical Corporation	$	40,834		$	28,950		$	7,211		$	6,228		$	(42,389	)		$	40,834

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 $ —
$ 675,059
$ 187,861
$ 404,481
$ —
$ 1,267,401
Costs and expenses:

Cost of services 815
585,110
164,643
336,494
—
1,087,062
General and administrative 29,791
184
—
—
—
29,975
Depreciation and amortization 2,215
19,726
4,098
24,488
—
50,527
Total costs and expenses 32,821
605,020
168,741
360,982
—
1,167,564
Income (loss) from operations (32,821 ) 70,039
19,120
43,499
—
99,837
Other income and expense:

Intercompany interest and royalty fees 6,357
(2,578 ) (3,445 ) (334 ) —
—
Intercompany management fees 50,601
(39,262 ) (11,339 ) —
—
—
Equity in earnings of unconsolidated subsidiaries —
5,424
8
—
—
5,432
Non-operating gain —
2,139
—
—
—
2,139
Interest income (expense) (28,933 ) 99
(207 ) (21,628 ) —
(50,669 )
Income (loss) before income taxes (4,796 ) 35,861
4,137
21,537
—
56,739
Income tax expense (benefit) (1,428 ) 9,923
112
5,453
—
14,060
Equity in earnings of consolidated subsidiaries 36,285
2,861
—
—
(39,146 ) (a) —
Net income 32,917
28,799
4,025
16,084
(39,146 ) 42,679
Less: Net income attributable to non-controlling interests —
—
1,164
8,598
—
9,762
Net income attributable to Select Medical Corporation $ 32,917
$ 28,799
$ 2,861
$ 7,486
$ (39,146 ) $ 32,917


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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Nine Months Ended September 30, 2018~~

~~(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 $ —
$ 2,072,237
$ 570,918
$ 1,173,420
$ —
$ 3,816,575
Costs and expenses:

Cost of services 2,340
1,782,843
486,006
976,417
—
3,247,606
General and administrative 87,806
250
—
2,895
—
90,951
Depreciation and amortization 6,777
59,708
12,205
70,332
—
149,022
Total costs and expenses 96,923
1,842,801
498,211
1,049,644
—
3,487,579
Income (loss) from operations (96,923 ) 229,436
72,707
123,776
—
328,996
Other income and expense:

Intercompany interest and royalty fees 22,029
(10,502 ) (10,685 ) (842 ) —
—
Intercompany management fees 166,749
(132,733 ) (34,016 ) —
—
—
Loss on early retirement of debt (2,229 ) —
—
(8,026 ) —
(10,255 )
Equity in earnings of unconsolidated subsidiaries —
14,884
30
—
—
14,914
Non-operating gain 1,654
7,362
—
—
—
9,016
Interest income (expense) (89,416 ) 220
(544 ) (58,251 ) —
(147,991 )
Income before income taxes 1,864
108,667
27,492
56,657
—
194,680
Income tax expense (benefit) (83 ) 36,112
350
11,081
—
47,460
Equity in earnings of consolidated subsidiaries 111,220
17,984
—
—
(129,204 ) (a) —
Net income 113,167
90,539
27,142
45,576
(129,204 ) 147,220
Less: Net income attributable to non-controlling interests —
97
9,158
24,798
—
34,053
Net income attributable to Select Medical Corporation $ 113,167
$ 90,442
$ 17,984
$ 20,778
$ (129,204 ) $ 113,167

_______________________________________________________________________________


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the ~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019

(unaudited)


	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																			(in thousands)
Operating activities
Net income	$	113,167		$	90,539		$	27,142		$	45,576		$	(129,204	)	(a)	$	147,220		$	40,834		$	28,950		$	12,013		$	13,936		$	(42,389	)	(a)	$	53,344
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			10,700			34			—			—				10,734			—			7,865			7			—			—				7,872
Depreciation and amortization	6,777			59,708			12,205			70,332			—				149,022			2,231			20,534			4,469			24,904			—				52,138
Provision for bad debts	—			(451		)	—			78			—				(373		)	—			21			1,532			14			—				1,567
Equity in earnings of unconsolidated subsidiaries	—			(14,884		)	(30		)	—			—				(14,914		)	—			(4,343		)	(23		)	—			—				(4,366		)
Equity in earnings of consolidated subsidiaries	(111,220		)	(17,984		)	—			—			129,204			(a)	—			(35,178		)	(7,211		)	—			—			42,389			(a)	—
Loss on extinguishment of debt	115			—			—			369			—				484
Loss (gain) on sale of assets and businesses	(1,641		)	(7,493		)	5			—			—				(9,129		)	300			(6,533		)	—			—			—				(6,233		)
Stock compensation expense	15,059			—			—			2,116			—				17,175			5,488			—			—			767			—				6,255
Amortization of debt discount, premium and issuance costs	4,435			—			—			5,410			—				9,845			1,286			—			—			1,945			—				3,231
Deferred income taxes	1,804			2,527			103			(6,526		)	—				(2,092		)	(364		)	2,190			335			(2,242		)	—				(81		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			37,490			(894		)	(13,101		)	—				23,495			—			(46,927		)	(15,161		)	(12,664		)	—				(74,752		)
Other current assets	(2,420		)	(2,100		)	(1,807		)	(3,947		)	—				(10,274		)	(7,386		)	(1,991		)	2,219			(365		)	—				(7,523		)
Other assets	(4,381		)	(8,576		)	1,604			16,181			—				4,828			1,674			28,412			13,292			17,909			(3,968		)	(b)	57,319
Accounts payable	(42		)	(5,155		)	3,059			(1,369		)	—				(3,507		)	(1,785		)	926			2,745			2,438			—				4,324
Accrued expenses	20,379			13,620			6,412			8,980			—				49,391			(480		)	(34,475		)	(14,477		)	(22,999		)	3,268			(b)	(69,163		)
Income taxes	9,622			4,401			1			(4,952		)	—				9,072			9,819			2,410			(20		)	5,621			—				17,830
Net cash provided by operating activities	51,654			162,342			47,834			119,147			—				380,977
Net cash provided by (used in) operating activities																				16,439			(10,172		)	6,931			29,264			(700		)		41,762
Investing activities
Business combinations, net of cash acquired	—			(2,666		)	(22		)	(516,570		)	—				(519,258		)	—			(3,905		)	(410		)	(1,805		)	—				(6,120		)
Purchases of property and equipment	(6,412		)	(60,669		)	(24,677		)	(29,281		)	—				(121,039		)	(953		)	(23,309		)	(9,113		)	(15,698		)	—				(49,073		)
Investment in businesses	—			(12,931		)	—			(5		)	—				(12,936		)	—			(27,608		)	—			—			—				(27,608		)
Proceeds from sale of assets and businesses	1,654			5,029			8			—			—				6,691			—			2			—			—			—				2
Net cash used in investing activities	(4,758		)	(71,237		)	(24,691		)	(545,856		)	—				(646,542		)	(953		)	(54,820		)	(9,523		)	(17,503		)	—				(82,799		)
Financing activities
Borrowings on revolving facilities	420,000			—			—			—			—				420,000			360,000			—			—			—			—				360,000
Payments on revolving facilities	(585,000		)	—			—			—			—				(585,000		)	(220,000		)	—			—			—			—				(220,000		)
Proceeds from term loans (financing costs)	(11		)	—			—			779,915			—				779,904
Payments on term loans	(8,625		)	—			—			—			—				(8,625		)	(98,807		)	—			—			(33,878		)	—				(132,685		)
Revolving facility debt issuance costs	(837		)	—			—			(496		)	—				(1,333		)
Borrowings of other debt	5,542			—			19,935			4,657			—				30,134			5,612			—			2,678			—			—				8,290
Principal payments on other debt	(8,455		)	(540		)	(4,504		)	(4,472		)	—				(17,971		)	(3,140		)	(161		)	(1,113		)	(1,741		)	—				(6,155		)
Dividends paid to Holdings	(5,640		)	—			—			—			—				(5,640		)
Equity investment by Holdings	1,633			—			—			—			—				1,633
Intercompany	140,673			(88,344		)	(34,184		)	(18,145		)	—				—			(65,200		)	67,956			(3,456		)	—			700			(b)	—
Decrease in overdrafts	(6,172		)	—			—			—			—				(6,172		)
Increase in overdrafts																				6,050			—			—			—			—				6,050
Proceeds from issuance of non-controlling interests	—			—			957			1,969			—				2,926			—			—			3,425			—			—				3,425
Distributions to non-controlling interests	—			(1,450		)	(6,863		)	(298,114		)	—				(306,427		)
Distributions to and purchases of non-controlling interests																				—			(2,923		)	—			(2,328		)	—				(5,251		)
Net cash provided by (used in) financing activities	(46,892		)	(90,334		)	(24,659		)	465,314			—				303,429			(15,485		)	64,872			1,534			(37,947		)	700				13,674
Net increase (decrease) in cash and cash equivalents	4			771			(1,516		)	38,605			—				37,864			1			(120		)	(1,058		)	(26,186		)	—				(27,363		)
Cash and cash equivalents at beginning of period	73			4,856			4,561			113,059			—				122,549			77			7,574			4,411			163,116			—				175,178
Cash and cash equivalents at end of period	$	77		$	5,627		$	3,045		$	151,664		$	—			$	160,413		$	78		$	7,454		$	3,353		$	136,930		$	—			$	147,815


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


(b)	Elimination of intercompany balances.

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, ~~2017~~2018

(unaudited)


	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																	(in thousands)
Assets
ASSETS
Current Assets:
Cash and cash equivalents	$	73		$	4,856	$	4,561		$	113,059	$	—			$	122,549		$	77		$	7,574	$	4,411		$	163,116	$	—			$	175,178
Accounts receivable	—			449,493		122,728			119,511		—				691,732			—			397,674		118,683			190,319		—				706,676
Intercompany receivables	—			1,598,212		60,707			—		(1,658,919		)	(a)	—			—			1,787,184		83,230			—		(1,870,414		)	(a)	—
Prepaid income taxes	22,704			5,703		31			2,949		—				31,387			10,205			5,711		—			4,623		—				20,539
Other current assets	13,021			30,209		13,031			18,897		—				75,158			17,866			31,181		14,048			27,036		—				90,131
Total Current Assets	35,798			2,088,473		201,058			254,416		(1,658,919		)		920,826			28,148			2,229,324		220,372			385,094		(1,870,414		)		992,524
Property and equipment, net	39,836			623,085		79,013			170,657		—				912,591			30,103			625,947		103,006			220,754		—				979,810
Investment in affiliates	4,524,385			124,104		—			—		(4,648,489		)	(b)(c)	—			4,497,167			127,036		—			—		(4,624,203		)	(b)(c)	—
Goodwill	—			2,108,270		—			674,542		—				2,782,812			—			2,104,288		—			1,216,438		—				3,320,726
Identifiable intangible assets, net	—			104,067		5,046			217,406		—				326,519			3			102,120		5,020			330,550		—				437,693
Other assets	36,494			98,575		35,440			23,898		(9,989		)	(e)	184,418			37,281			145,467		33,417			26,032		(8,685		)	(e)	233,512
Total Assets	$	4,636,513		$	5,146,574	$	320,557		$	1,340,919	$	(6,317,397	)		$	5,127,166		$	4,592,702		$	5,334,182	$	361,815		$	2,178,868	$	(6,503,302	)		$	5,964,265
Liabilities and Equity
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	29,463		$	—	$	—		$	—	$	—			$	29,463		$	25,083		$	—	$	—		$	—	$	—			$	25,083
Current portion of long-term debt and notes payable	16,635			740		2,212			2,600		—				22,187			4,363			248		2,001			37,253		—				43,865
Accounts payable	12,504			85,489		17,475			12,726		—				128,194			14,033			84,343		20,956			27,361		—				146,693
Intercompany payables	1,598,212			60,707		—			—		(1,658,919		)	(a)	—			1,787,184			83,230		—			—		(1,870,414		)	(a)	—
Accrued payroll	16,736			98,887		4,819			40,120		—				160,562			15,533			99,803		5,936			51,114		—				172,386
Accrued vacation	4,083			58,355		12,295			18,142		—				92,875			4,613			60,989		13,942			31,116		—				110,660
Accrued interest	17,479			7		6			2,393		—				19,885			5,996			22		3			6,116		—				12,137
Accrued other	39,219			57,378		12,599			33,970		—				143,166			60,056			61,226		17,098			52,311		—				190,691
Income taxes payable	—			1,302		30			7,739		—				9,071			—			2,366		190			1,115		—				3,671
Total Current Liabilities	1,734,331			362,865		49,436			117,690		(1,658,919		)		605,403			1,916,861			392,227		60,126			206,386		(1,870,414		)		705,186
Long-term debt, net of current portion	2,042,555			127		24,730			610,303		—				2,677,715			1,837,241			448		48,402			1,363,425		—				3,249,516
Non-current deferred tax liability	—			88,376		780			45,750		(9,989		)	(e)	124,917			—			101,214		994			60,372		(8,685		)	(e)	153,895
Other non-current liabilities	36,259			56,721		8,138			44,591		—				145,709			35,558			59,901		9,194			54,287		—				158,940
Total Liabilities	3,813,145			508,089		83,084			818,334		(1,668,908		)		3,553,744			3,789,660			553,790		118,716			1,684,470		(1,879,099		)		4,267,537
Redeemable non-controlling interests	—			—		—			16,270		624,548			(d)	640,818			—			—		—			18,525		761,963			(d)	780,488
Stockholders’ Equity:
Common stock	0			—		—			—		—				0			0			—		—			—		—				0
Capital in excess of par	947,370			—		—			—		—				947,370			970,156			—		—			—		—				970,156
Retained earnings (accumulated deficit)	(124,002		)	1,416,857		(35,942		)	64,626		(1,445,541		)	(c)(d)	(124,002		)	(167,114		)	1,547,018		(29,553		)	12,355		(1,529,820		)	(c)(d)	(167,114		)
Subsidiary investment	—			3,221,628		273,415			437,779		(3,932,822		)	(b)(d)	—			—			3,233,374		272,652			457,974		(3,964,000		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	823,368			4,638,485		237,473			502,405		(5,378,363		)		823,368			803,042			4,780,392		243,099			470,329		(5,493,820		)		803,042
Non-controlling interests	—			—		—			3,910		105,326			(d)	109,236			—			—		—			5,544		107,654			(d)	113,198
Total Equity	823,368			4,638,485		237,473			506,315		(5,273,037		)		932,604			803,042			4,780,392		243,099			475,873		(5,386,166		)		916,240
Total Liabilities and Equity	$	4,636,513		$	5,146,574	$	320,557		$	1,340,919	$	(6,317,397	)		$	5,127,166		$	4,592,702		$	5,334,182	$	361,815		$	2,178,868	$	(6,503,302	)		$	5,964,265


(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, 2017~~March 31, 2018

(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
$ 654,964
$ 166,113
$ 255,881
$ —
$ 1,077,014
Costs and expenses:

Cost of services 667
574,250
148,072
216,090
—
939,079
General and administrative 27,028
37
—
—
—
27,065
Depreciation and amortization 2,355
18,015
3,388
15,014
—
38,772
Total costs and expenses 30,050
592,302
151,460
231,104
—
1,004,916
Income (loss) from operations (29,994 ) 62,662
14,653
24,777
—
72,098
Other income and expense:

Intercompany interest and royalty fees 7,865
(4,328 ) (3,537 ) —
—
—
Intercompany management fees 51,241
(41,031 ) (10,210 ) —
—
—
Equity in earnings of unconsolidated subsidiaries —
4,416
15
—
—
4,431
Interest income (expense) (30,240 ) 271
(20 ) (7,699 ) —
(37,688 )
Income before income taxes (1,128 ) 21,990
901
17,078
—
38,841
Income tax expense (benefit) (1,032 ) 8,562
145
6,342
—
14,017
Equity in earnings of consolidated subsidiaries 18,558
397
—
—
(18,955 ) (a) —
Net income 18,462
13,825
756
10,736
(18,955 ) 24,824
Less: Net income attributable to non-controlling interests —
24
359
5,979
—
6,362
Net income attributable to Select Medical Corporation $ 18,462
$ 13,801
$ 397
$ 4,757
$ (18,955 ) $ 18,462


~~(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			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																			(in thousands)
Net operating revenues	$	687		$	2,019,581		$	487,371		$	763,357		$	—			$	3,270,996		$	17		$	706,412		$	190,419		$	356,116		$	—			$	1,252,964
Costs and expenses:
Cost of services	1,843			1,725,060			423,025			638,483			—				2,788,411
Cost of services, exclusive of depreciation and amortization																				726			608,026			158,531			298,530			—				1,065,813
General and administrative	83,291			124			—			—			—				83,415			28,807			39			—			2,936			—				31,782
Depreciation and amortization	5,503			57,568			10,007			46,566			—				119,644			2,207			19,447			3,970			21,147			—				46,771
Total costs and expenses	90,637			1,782,752			433,032			685,049			—				2,991,470			31,740			627,512			162,501			322,613			—				1,144,366
Income (loss) from operations	(89,950		)	236,829			54,339			78,308			—				279,526			(31,723		)	78,900			27,918			33,503			—				108,598
Other income and expense:
Intercompany interest and royalty fees	24,760			(14,029		)	(10,731		)	—			—				—			8,119			(4,295		)	(3,631		)	(193		)	—				—
Intercompany management fees	176,443			(147,042		)	(29,401		)	—			—				—			60,732			(49,540		)	(11,192		)	—			—				—
Loss on early retirement of debt	(19,719		)	—			—			—			—				(19,719		)	(2,229		)	—			—			(8,026		)	—				(10,255		)
Equity in earnings of unconsolidated subsidiaries	—			15,555			63			—			—				15,618			—			4,684			13			—			—				4,697
Non-operating loss	—			(49		)	—			—			—				(49		)
Interest income (expense)	(93,725		)	270			(105		)	(22,636		)	—				(116,196		)
Income (loss) before income taxes	(2,191		)	91,534			14,165			55,672			—				159,180
Non-operating gain																				—			399			—			—			—				399
Interest expense																				(31,071		)	(67		)	(151		)	(15,874		)	—				(47,163		)
Income before income taxes																				3,828			30,081			12,957			9,410			—				56,276
Income tax expense (benefit)	(3,230		)	42,135			428			20,260			—				59,593			514			11,935			93			(248		)	—				12,294
Equity in earnings of consolidated subsidiaries	75,348			10,131			—			—			(85,479		)	(a)	—			30,425			8,283			—			—			(38,708		)	(a)	—
Net income	76,387			59,530			13,737			35,412			(85,479		)		99,587			33,739			26,429			12,864			9,658			(38,708		)		43,982
Less: Net income attributable to non-controlling interests	—			21			3,606			19,573			—				23,200			—			85			4,581			5,577			—				10,243
Net income attributable to Select Medical Corporation	$	76,387		$	59,509		$	10,131		$	15,839		$	(85,479	)		$	76,387		$	33,739		$	26,344		$	8,283		$	4,081		$	(38,708	)		$	33,739


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018

(unaudited)


	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																			(in thousands)
Operating activities
Net income	$	76,387		$	59,530		$	13,737		$	35,412		$	(85,479	)	(a)	$	99,587		$	33,739		$	26,429		$	12,864		$	9,658		$	(38,708	)	(a)	$	43,982
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	—			14,493			49			—			—				14,542			—			1,334			30			—			—				1,364
Depreciation and amortization	5,503			57,568			10,007			46,566			—				119,644			2,207			19,447			3,970			21,147			—				46,771
Provision for bad debts	—			864			—			50			—				914			—			42			—			43			—				85
Equity in earnings of unconsolidated subsidiaries	—			(15,555		)	(63		)	—			—				(15,618		)	—			(4,684		)	(13		)	—			—				(4,697		)
Equity in earnings of consolidated subsidiaries	(75,348		)	(10,131		)	—			—			85,479			(a)	—			(30,425		)	(8,283		)	—			—			38,708			(a)	—
Loss on extinguishment of debt	6,527			—			—			—			—				6,527			115			—			—			297			—				412
Loss (gain) on sale of assets and businesses	(8		)	(4,824		)	(4,687		)	20			—				(9,499		)	—			(516		)	—			3			—				(513		)
Stock compensation expense	13,445			—			—			782			—				14,227			4,716			—			—			211			—				4,927
Amortization of debt discount, premium and issuance costs	6,113			—			—			2,433			—				8,546			1,837			—			—			1,299			—				3,136
Deferred income taxes	5,014			—			—			(11,140		)	—				(6,126		)	(503		)	1,383			(5		)	(797		)	—				78
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(105,536		)	(22,820		)	(14,952		)	—				(143,308		)	—			(28,475		)	(13,600		)	(3,736		)	—				(45,811		)
Other current assets	1,016			3,857			(6,772		)	(778		)	—				(2,677		)	(5,890		)	(569		)	1,301			(3,787		)	—				(8,945		)
Other assets	1,633			(3,709		)	3,044			439			—				1,407			3,788			(562		)	599			12,808			—				16,633
Accounts payable	2,375			(823		)	1,580			781			—				3,913			731			(3,435		)	(985		)	(2,863		)	—				(6,552		)
Accrued expenses	164			(1,175		)	10,281			9,482			—				18,752			(10,370		)	(2,667		)	735			321			—				(11,981		)
Income taxes	3,776			—			—			15,365			—				19,141			6,897			4,513			(111		)	539			—				11,838
Net cash provided by (used in) operating activities	46,597			(5,441		)	4,356			84,460			—				129,972
Net cash provided by operating activities																				6,842			3,957			4,785			35,143			—				50,727
Investing activities
Business combinations, net of cash acquired	—			(3,356		)	(295		)	(15,720		)	—				(19,371		)	—			(321		)	(22		)	(515,016		)	—				(515,359		)
Purchases of property and equipment	(26,350		)	(102,342		)	(23,452		)	(21,656		)	—				(173,800		)	(2,269		)	(23,912		)	(6,815		)	(6,621		)	—				(39,617		)
Investment in businesses	—			(11,374		)	—			—			—				(11,374		)	—			(1,749		)	—			(5		)	—				(1,754		)
Proceeds from sale of assets and businesses	8			15,007			19,537			3			—				34,555			—			691			—			—			—				691
Net cash used in investing activities	(26,342		)	(102,065		)	(4,210		)	(37,373		)	—				(169,990		)	(2,269		)	(25,291		)	(6,837		)	(521,642		)	—				(556,039		)
Financing activities
Borrowings on revolving facilities	805,000			—			—			—			—				805,000			165,000			—			—			—			—				165,000
Payments on revolving facilities	(705,000		)	—			—			—			—				(705,000		)	(150,000		)	—			—			—			—				(150,000		)
Proceeds from term loans	1,139,487			—			—			—			—				1,139,487
Proceeds from term loans (financing costs)																				(11		)	—			—			779,915			—				779,904
Payments on term loans	(1,153,502		)	—			—			(23,065		)	—				(1,176,567		)	(2,875		)	—			—			—			—				(2,875		)
Revolving facility debt issuance costs	(4,392		)	—			—			—			—				(4,392		)	(837		)	—			—			(496		)	—				(1,333		)
Borrowings of other debt	21,572			—			3,232			2,767			—				27,571			5,549			—			5,326			725			—				11,600
Principal payments on other debt	(10,122		)	(306		)	(2,150		)	(2,534		)	—				(15,112		)	(3,226		)	(145		)	(957		)	(1,581		)	—				(5,909		)
Dividends paid to Holdings	(3,603		)	—			—			—			—				(3,603		)	(122		)	—			—			—			—				(122		)
Equity investment by Holdings	1,634			—			—			—			—				1,634			738			—			—			—			—				738
Intercompany	(101,888		)	107,834			(5,946		)	—			—				—			(10,873		)	22,125			(1,863		)	(9,389		)	—				—
Decrease in overdrafts	(20,439		)	—			—			—			—				(20,439		)	(7,916		)	—			—			—			—				(7,916		)
Proceeds from issuance of non-controlling interests	—			—			8,986			—			—				8,986
Distributions to non-controlling interests	—			(130		)	(4,776		)	(4,370		)	—				(9,276		)	—			—			(1,266		)	(285,375		)	—				(286,641		)
Net cash provided by (used in) financing activities	(31,253		)	107,398			(654		)	(27,202		)	—				48,289			(4,573		)	21,980			1,240			483,799			—				502,446
Net increase (decrease) in cash and cash equivalents	(10,998		)	(108		)	(508		)	19,885			—				8,271			—			646			(812		)	(2,700		)	—				(2,866		)
Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—				99,029			73			4,856			4,561			113,059			—				122,549
Cash and cash equivalents at end of period	$	73		$	6,359		$	4,548		$	96,320		$	—			$	107,300		$	73		$	5,502		$	3,749		$	110,359		$	—			$	119,683

_______________________________________________________________________________


(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 and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;


•	the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;

a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;

acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;

our plans and expectations related to our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;

private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;

the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;

shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;

competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;

the loss of key members of our management team could significantly disrupt our operations;

the effect of claims asserted against us could subject us to substantial uninsured liabilities;

a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and

other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~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 critical illness recovery hospitals, ~~(previously referred to as long term acute care hospitals),~~ rehabilitation hospitals, ~~(previously referred to as inpatient rehabilitation facilities),~~ outpatient rehabilitation clinics and occupational health centers in the United States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment.States. As of ~~September 30, 2018,~~March 31, 2019, we had operations in 47 states and the District of Columbia. We operated 97 critical illness recovery hospitals in 2728 states, 2627 rehabilitation hospitals in 11 states, and ~~1,649~~1,684 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, ~~which is operated through~~ a joint venture subsidiary, operated 525 occupational health centers in 41 states as of ~~September 30, 2018 after giving effect to the closing of the acquisition of U.S. HealthWorks on February 1, 2018.~~March 31, 2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics ~~or “CBOCs.” As of September 30, 2018, we had operations in 47 states~~(“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the ~~District of Columbia.~~

Concentra segment. We had net operating revenues of ~~$3,816.6~~$1,324.6 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. Of this total, we earned approximately ~~34%~~35% of our net operating revenues from our critical illness recovery hospital segment, approximately 14% from our rehabilitation hospital segment, approximately 21% from our outpatient rehabilitation segment, and approximately ~~31%~~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 ~~the Company’s~~our 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 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 that deliver occupational medicine ~~physical therapy, and consumer health~~ services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.

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 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, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), 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,						Three Months Ended March 31,
	2017			2018			2017			2018			2018			2019
	(in thousands)												(in thousands)
Net income	$	24,824		$	42,679		$	99,587		$	147,220		$	43,982		$	53,344
Income tax expense	14,017			14,060			59,593			47,460			12,294			18,467
Interest expense	37,688			50,669			116,196			147,991			47,163			50,811
Non-operating loss (gain)	—			(2,139		)	49			(9,016		)
Non-operating gain													(399		)	(6,532		)
Equity in earnings of unconsolidated subsidiaries	(4,431		)	(5,432		)	(15,618		)	(14,914		)	(4,697		)	(4,366		)
Loss on early retirement of debt	—			—			19,719			10,255			10,255			—
Income from operations	72,098			99,837			279,526			328,996			108,598			111,724
Stock compensation expense:
Included in general and administrative	4,079			4,683			11,603			12,720			3,990			4,748
Included in cost of services	878			1,581			2,624			4,455			937			1,507
Depreciation and amortization	38,772			50,527			119,644			149,022			46,771			52,138
U.S. HealthWorks acquisition costs	—			—			—			2,895			2,936			—
Adjusted EBITDA	$	115,827		$	156,628		$	413,397		$	498,088		$	163,232		$	170,117

Summary Financial Results

Three Months Ended ~~September 30, 2018~~March 31, 2019

For the three months ended ~~September 30, 2018,~~March 31, 2019, our net operating revenues increased ~~17.7%~~5.7% to ~~$1,267.4~~$1,324.6 million, compared to ~~$1,077.0~~$1,253.0 million for the three months ended ~~September 30, 2017.~~March 31, 2018. Income from operations increased ~~38.5%~~2.9% to ~~$99.8~~$111.7 million for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$72.1~~$108.6 million for the three months ended ~~September 30, 2017.~~March 31, 2018.

Net income increased ~~71.9%~~21.3% to ~~$42.7~~$53.3 million for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$24.8~~$44.0 million for the three months ended ~~September 30, 2017.~~March 31, 2018. Net income ~~for the three months ended September 30, 2018~~ included a pre-tax non-operating gain of ~~$2.1 million.~~

~~Adjusted EBITDA increased 35.2% to $156.6~~$6.5 million for the three months ended ~~September 30, 2018, compared to $115.8~~March 31, 2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, a pre-tax non-operating gain of $0.4 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the three months ended ~~September 30, 2017.~~March 31, 2018.

Adjusted EBITDA increased 4.2% to $170.1 million for the three months ended March 31, 2019, compared to $163.2 million for the three months ended March 31, 2018. Our Adjusted EBITDA margin was ~~12.4%~~12.8% for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~10.8%~~13.0% for the three months ended ~~September 30, 2017.~~

March 31, 2018.

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


	Three Months Ended September 30, 2018																		Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues	$	420,108		$	176,885		$	265,927		$	404,481		$	—		$	1,267,401		$	462,159		$	188,954		$	277,197		$	396,321		$	—		$	1,324,631
Operating expenses	366,816			151,542			231,396			336,494			30,789			1,117,037			389,161			163,157			248,206			330,830			29,415			1,160,769
Depreciation and amortization	11,136			6,079			6,597			24,488			2,227			50,527			11,451			6,402			7,032			24,904			2,349			52,138
Income (loss) from operations	$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837		$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Depreciation and amortization	11,136			6,079			6,597			24,488			2,227			50,527			11,451			6,402			7,032			24,904			2,349			52,138
Stock compensation expense	—			—			—			767			5,497			6,264			—			—			—			767			5,488			6,255
U.S. HealthWorks acquisition costs	—			—			—			—			—			—
Adjusted EBITDA	$	53,292		$	25,343		$	34,531		$	68,754		$	(25,292	)	$	156,628		$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)	$	170,117
Adjusted EBITDA margin	12.7		%	14.3		%	13.0		%	17.0		%	N/M			12.4		%	15.8		%	13.7		%	10.5		%	16.7		%	N/M			12.8		%


	Three Months Ended September 30, 2017																		Three Months Ended March 31, 2018
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues	$	416,934		$	157,499		$	246,644		$	255,881		$	56		$	1,077,014		$	464,676		$	174,774		$	257,381		$	356,116		$	17		$	1,252,964
Operating expenses	370,061			134,918			217,346			216,090			27,729			966,144			391,704			147,998			226,856			301,466			29,571			1,097,595
Depreciation and amortization	10,932			4,505			5,964			15,014			2,357			38,772			11,058			5,722			6,637			21,147			2,207			46,771
Income (loss) from operations	$	35,941		$	18,076		$	23,334		$	24,777		$	(30,030	)	$	72,098		$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598
Depreciation and amortization	10,932			4,505			5,964			15,014			2,357			38,772			11,058			5,722			6,637			21,147			2,207			46,771
Stock compensation expense	—			—			—			212			4,745			4,957			—			—			—			211			4,716			4,927
U.S. HealthWorks acquisition costs																			—			—			—			2,936			—			2,936
Adjusted EBITDA	$	46,873		$	22,581		$	29,298		$	40,003		$	(22,928	)	$	115,827		$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)	$	163,232
Adjusted EBITDA margin	11.2		%	14.3		%	11.9		%	15.6		%	N/M			10.8		%	15.7		%	15.3		%	11.9		%	16.2		%	N/M			13.0		%

The following table summarizes changes in segment performance measures for the three months ended ~~September 30, 2018,~~March 31, 2019, compared to the three months ended ~~September 30, 2017:~~March 31, 2018:


	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	0.8	%	12.3	%	7.8	%	58.1	%	N/M		17.7	%	(0.5	)%	8.1	%	7.7	%	11.3	%	N/M		5.7	%
Change in income from operations	17.3	%	6.6	%	19.7	%	75.6	%	(9.9	)%	38.5	%	(0.6	)%	(7.9	)%	(8.1	)%	21.1	%	(0.0	)%	2.9	%
Change in Adjusted EBITDA	13.7	%	12.2	%	17.9	%	71.9	%	(10.3	)%	35.2	%	0.0	%	(3.7	)%	(5.0	)%	14.6	%	3.7	%	4.2	%


~~(1)~~	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.

N/M — Not meaningful.

~~Nine Months Ended September 30, 2018~~

For the nine months ended September 30, 2018, our net operating revenues increased 16.7% to $3,816.6 million, compared to $3,271.0 million for the nine months ended September 30, 2017. Income from operations increased 17.7% to $329.0 million for the nine months ended September 30, 2018, compared to $279.5 million for the nine months ended September 30, 2017.

Net income increased 47.8% to $147.2 million for the nine months ended September 30, 2018, compared to $99.6 million for the nine months ended September 30, 2017. Net income for the nine months ended September 30, 2018 included a pre-tax loss on early retirement of debt of $10.3 million, pre-tax non-operating gains of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million. Net income for the nine months ended September 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million.

Adjusted EBITDA increased 20.5% to $498.1 million for the nine months ended September 30, 2018, compared to $413.4 million for the nine months ended September 30, 2017. Our Adjusted EBITDA margin was 13.1% for the nine months ended September 30, 2018, compared to 12.6% for the nine months ended September 30, 2017.

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

Nine Months Ended September 30, 2018

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Net operating revenues $ 1,327,236
$ 525,428
$ 790,491
$ 1,173,420
$ —
$ 3,816,575
Operating expenses 1,140,247
445,114
683,488
979,312
90,396
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 % 15.3 % 13.5 % 17.0 % N/M
13.1 %

Nine Months Ended September 30, 2017

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Net operating revenues $ 1,301,251
$ 453,702
$ 751,999
$ 763,357
$ 687
$ 3,270,996
Operating expenses 1,106,998
391,664
649,424
638,483
85,257
2,871,826
Depreciation and amortization 34,891
14,500
18,182
46,566
5,505
119,644
Income (loss) from operations $ 159,362
$ 47,538
$ 84,393
$ 78,308
$ (90,075 ) $ 279,526
Depreciation and amortization 34,891
14,500
18,182
46,566
5,505
119,644
Stock compensation expense —
—
—
782
13,445
14,227
Adjusted EBITDA $ 194,253
$ 62,038
$ 102,575
$ 125,656
$ (71,125 ) $ 413,397
Adjusted EBITDA margin 14.9 % 13.7 % 13.6 % 16.5 % N/M
12.6 %

~~The following table summarizes changes in segment performance measures for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017:~~

Critical Illness Recovery Hospital⁽¹⁾

Rehabilitation Hospital⁽¹⁾

Outpatient
Rehabilitation
Concentra Other Total
Change in net operating revenues 2.0 % 15.8 % 5.1 % 53.7 % N/M
16.7 %
Change in income from operations (4.1 )% 31.5 % 3.2 % 58.1 % (7.9 )% 17.7 %
Change in Adjusted EBITDA (3.7 )% 29.5 % 4.3 % 58.5 % (5.9 )% 20.5 %


~~(1)~~	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.

~~N/M — Not meaningful.~~

~~Significant Events~~

~~Acquisition of U.S. HealthWorks~~

On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care provider, pursuant to the terms of the Purchase Agreement.

Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.

Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC, to finance the redemption and reorganization transactions executed under the Purchase Agreement, and to pay fees and expenses associated with the financing.

~~Amendment to the Concentra Credit Facilities~~

On February 1, 2018, in connection with the transactions executed under the Purchase Agreement, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

In addition, Concentra entered into the Concentra second lien credit agreement that provided for $240.0 million in term loans with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement. Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate),or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra’s first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.

~~Amendment to the Select Credit Facilities~~

On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.

On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment No. 2 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the currently applicable floor.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on February ~~22, 2018,~~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 27% of our net operating revenues for both the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, and ~~30% of our net operating revenues~~ for the year ended December 31, ~~2017.~~2018.

Medicare Reimbursement of ~~Critical Illness Recovery Hospital~~LTCH Services

There have been significant regulatory changes affecting our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”), that have affected 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 of CMS. All Medicare payments to our critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). ~~Proposed rules specifically related to LTCH-PPS are generally published in May, finalized in August and effective on October 1 of each year.~~

The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.

~~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.

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.~~Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was 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.

Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate was set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a 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 ~~further below)~~herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, ~~which is~~ a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid 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 April 23, 2019, CMS released an advanced copy of the proposed policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard federal rate would be set at $42,951, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020, if adopted, includes a market basket increase of 3.2%, less a productivity adjustment of 0.5%. The standard federal rate also includes an area wage budget neutrality factor of 1.0064747 and a temporary, one-time budget neutrality adjustment of 0.999856 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, if adopted, would be set at $29,997, which is an increase 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, if adopted, would be set at $26,994, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH discharges occurring in cost reporting periods beginning in FY 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate.

25 Percent Rule

The “25 Percent Rule” was a downward payment adjustment that 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) exceeded the applicable percentage admissions threshold during a particular cost reporting period. Specifically, the payment rate for only Medicare patients above the percentage admissions threshold were subject to a downward payment adjustment. For Medicare patients above the applicable percentage admissions threshold, the LTCH was reimbursed at a rate equivalent to that under general acute care hospital inpatient prospective payment system, or “IPPS,” which was generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital did not count toward the admissions threshold and were paid under LTCH-PPS.

CMS was precluded 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, the law applied higher percentage admissions thresholds for most LTCHs operating as a hospital within a hospital (“HIH”) and satellites 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 most HIHs and satellites the percentage admissions threshold was 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 were 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 includes a temporary, one-time adjustment ~~of 0.990878~~ to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-time adjustment ~~of 0.990737~~ to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment ~~of 0.991249~~ to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.

~~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 Medicare severity long-term care diagnosis-related group (“MS-LTC-DRG”), referred to as a short stay outlier, or “SSO.” For discharges before October 1, 2017, SSO cases were 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.

The SSO rule also had a category referred to as a “very short stay outlier,” which applied to cases with a length of stay that is less than the average length of stay plus one standard deviation for the same Medicare severity diagnosis-related group (“MS-DRG”) under IPPS, referred to as the so-called “IPPS comparable threshold.” The LTCH payment for very short stay outlier cases was equivalent to the general acute care hospital IPPS per diem rate.

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 (i.e., the fourth option under the prior policy). 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-DRG standard federal payment rate increases and the percentage of the payment based on the IPPS comparable amount decreases. In addition, the very short stay outlier category was eliminated.

Medicare Reimbursement of ~~Rehabilitation Hospital~~IRF Services

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

The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.

~~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.

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. The standard payment conversion factor for fiscal year 2018 was 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.

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 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 increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.

Fiscal Year 2020. On April 17, 2019, CMS released an advanced copy of the proposed policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 would be set at $16,573, 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, if adopted, would include a market basket increase of 3.0%, less a productivity adjustment of 0.5%. CMS proposed to increase the outlier threshold amount for fiscal year 2020 to $9,935 from $9,402 established in the 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 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. MIPS and APM applies to physicians and other practitioners included within the definition of “eligible clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the Medicare Physician Fee Schedule proposed rule for calendar year 2019, CMS proposes to include physical therapists and occupational therapists as “eligible clinicians” which, if the proposed rule is adopted, would require physical therapists and occupational therapists to participate in these programs beginning in 2021. CMS requested public comment on requiring speech-language pathologists to participate in these programs beginning in 2021. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, remain subject to future notice and comment rule‑making.

~~Therapy Caps~~

Outpatient therapy providers reimbursed under the Medicare physician fee schedule have been subject to annual limits for therapy expenses. For example, for the calendar year beginning January 1, 2017, the annual limit on outpatient therapy services was $1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy services. The Bipartisan Budget Act of 2018 repealed the annual limits on outpatient therapy.

The annual limits for therapy expenses historically did not apply to services furnished and billed by outpatient hospital departments. However, the Medicare Access and CHIP Reauthorization Act of 2015, and prior legislation, extended the annual limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limits to hospital outpatient department settings sunset on December 31, 2017.

Prior to calendar year 2028, all therapy claims exceeding $3,000 are subject to a manual medical review process. The $3,000 threshold is applied to physical therapy and speech therapy services combined and separately applied to occupational therapy. CMS will continue to require that an appropriate modifier be included on claims over the current exception threshold indicating that the therapy services are medically necessary. Beginning in 2028 and in each calendar year thereafter, the threshold amount for claims requiring manual medical review will increase by the percentage increase in the Medicare Economic Index.

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

In the Medicare Physician Fee Schedule ~~proposed~~final rule for calendar year 2019, CMS ~~proposes to establish~~established two new ~~therapy~~ modifiers to identify ~~the~~ services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”) ~~beginning January 1, 2020. This change, which was~~. These modifiers were mandated by the Bipartisan Budget Act of 2018, ~~establishes modifiers to be used whenever a PTA or OTA furnishes all~~which requires that claims for outpatient therapy services furnished in whole or part ~~of any covered outpatient~~by therapy ~~service.~~assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to ~~develop~~implement a ~~proposed planned~~ payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning ~~in calendar year 2022. CMS proposes the creation of a voluntary reporting system for the new modifiers beginning in 2019.~~

~~Critical Accounting Matters~~

~~Revenue Adjustments~~

Net operating revenues include amounts estimated by us to be reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided. Additionally, we are reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. We are reimbursed by these payors using a variety of payment methodologies.

On January 1, ~~2018, we adopted Topic 606,~~ ~~Revenue from Contracts with Customer~~s (“Topic 606”). Under Topic 606, we recognize a contractual allowance for fixed discounts based on the difference between our standard billing rates and the fees legislated, negotiated or otherwise arranged between us and our patients. Additionally, we are subject to potential retrospective adjustments to net operating revenues in future periods, such as for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are recognized as a constraint to revenue in the period services are rendered. Under the previous standard, these adjustments were classified as a component of bad debt expense.

In the critical illness recovery hospital and rehabilitation hospital segments, we estimate our contractual allowances based on known contractual provisions associated with the specific payor or, where we have a relatively homogeneous patient population, we will monitor individual payors’ historical reimbursement rates to estimate a per diem rate. The estimated per diem rate is used to derive the contractual allowance recognized in the period services are rendered. In the outpatient rehabilitation and Concentra segments, we estimate our contractual allowances based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. We estimate our contractual allowances using internally developed systems in which we monitor a payors’ historical reimbursement rates and compare them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is used to estimate the contractual allowance recognized in the period services are rendered. In each of our segments, estimates for potential retrospective adjustments are recognized as an additional contractual allowance during the period services are rendered.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,
2017 2018 2017 2018
Critical illness recovery hospital data:⁽¹⁾

Number of hospitals owned—start of period 101
98
102
99
Number of hospitals acquired —
—
1
—
Number of hospital start-ups 1
—
1
1
Number of hospitals closed/sold (2 ) (1 ) (4 ) (3 )
Number of hospitals owned—end of period 100
97
100
97
Number of hospitals managed—end of period 1
—
1
—
Total number of hospitals (all)—end of period 101
97
101
97
Available licensed beds⁽²⁾
4,146
4,095
4,146
4,095
Admissions⁽²⁾
8,670
8,651
26,880
27,605
Patient days⁽²⁾
248,002
243,891
754,401
765,863
Average length of stay (days)⁽²⁾
29
28
28
28
Net revenue per patient day^(2)(3)(5)
$ 1,661
$ 1,705
$ 1,708
$ 1,716
Occupancy rate⁽²⁾
65 % 65 % 66 % 68 %
Percent patient days—Medicare⁽²⁾
53 % 53 % 54 % 53 %
Rehabilitation hospital data:⁽¹⁾

Number of facilities owned—start of period 13
17
13
16
Number of facilities acquired —
—
—
—
Number of facilities start-ups 1
—
1
1
Number of facilities closed/sold —
—
—
—
Number of facilities owned—end of period 14
17
14
17
Number of facilities managed—end of period 8
9
8
9
Total number of facilities (all)—end of period 22
26
22
26
Available licensed beds⁽²⁾
1,013
1,189
1,013
1,189
Admissions⁽²⁾
4,816
5,370
13,762
16,219
Patient days⁽²⁾
68,168
79,232
196,018
233,537
Average length of stay (days)⁽²⁾
14
15
14
15
Net revenue per patient day^(2)(3)(5)
$ 1,573
$ 1,582
$ 1,554
$ 1,604
Occupancy rate⁽²⁾
73 % 72 % 72 % 73 %
Percent patient days—Medicare⁽²⁾
53 % 53 % 53 % 54 %
Outpatient rehabilitation data:

Number of clinics owned—start of period 1,441
1,435
1,445
1,447
Number of clinics acquired 4
—
5
14
Number of clinic start-ups 3
8
17
26
Number of clinics closed/sold (13 ) (23 ) (32 ) (67 )
Number of clinics owned—end of period 1,435
1,420
1,435
1,420
Number of clinics managed—end of period 169
229
169
229
Total number of clinics (all)—end of period 1,604
1,649
1,604
1,649
Number of visits⁽²⁾
1,986,213
2,039,462
6,168,763
6,251,582
Net revenue per visit^(2)(4)(5)
$ 102
$ 103
$ 101
$ 103



	Three Months Ended March 31,
	2018			2019
Critical illness recovery hospital data:
Number of hospitals owned—start of period	99			96
Number of hospital start-ups	1			—
Number of hospitals closed/sold	(1		)	—
Number of hospitals owned—end of period	99			96
Number of hospitals managed—end of period	—			1
Total number of hospitals (all)—end of period	99			97
Available licensed beds⁽¹⁾	4,158			4,071
Admissions⁽¹⁾	9,833			9,456
Patient days⁽¹⁾	265,840			258,129
Average length of stay (days)⁽¹⁾	27			28
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,730		$	1,759
Occupancy rate⁽¹⁾	71		%	71		%
Percent patient days—Medicare⁽¹⁾	53		%	53		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	16			17
Number of hospitals acquired	—			1
Number of hospitals owned—end of period	16			18
Number of hospitals managed—end of period	8			9
Total number of hospitals (all)—end of period	24			27
Available licensed beds⁽¹⁾	1,133			1,239
Admissions⁽¹⁾	5,394			5,836
Patient days⁽¹⁾	76,890			82,816
Average length of stay (days)⁽¹⁾	14			14
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,623		$	1,633
Occupancy rate⁽¹⁾	75		%	76		%
Percent patient days—Medicare⁽¹⁾	54		%	52		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,447			1,423
Number of clinics acquired	3			4
Number of clinic start-ups	8			11
Number of clinics closed/sold	(9		)	(31		)
Number of clinics owned—end of period	1,449			1,407
Number of clinics managed—end of period	168			277
Total number of clinics (all)—end of period	1,617			1,684
Number of visits⁽¹⁾	2,067,465			2,054,483
Net revenue per visit⁽¹⁾⁽³⁾	$	103		$	103
Concentra data:
Number of centers owned—start of period	312			524
Number of centers acquired	219			1
Number of centers owned—end of period	531			525
Number of onsite clinics operated—end of period	124			129
Number of CBOCs owned—end of period	32			31
Number of visits⁽¹⁾	2,596,059			2,911,607
Net revenue per visit⁽¹⁾⁽³⁾	$	124		$	124

Three Months Ended September 30, Nine Months Ended September 30,
2017 2018 2017 2018
Concentra data:

Number of centers owned—start of period 315
527
300
312
Number of centers acquired —
1
11
220
Number of clinic start-ups —
—
4
—
Number of centers closed/sold (3 ) (3 ) (3 ) (7 )
Number of centers owned—end of period 312
525
312
525
Number of visits⁽²⁾
1,979,481
2,984,832
5,848,551
8,605,012
Net revenue per visit^(2)(4)(5)
$ 113
$ 124
$ 114
$ 124


(1)	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.


~~(2)~~	Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded.


~~(3)~~(2)	Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days.


~~(4)~~(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.


~~(5)~~	~~Net revenue per patient day and net revenue per visit were retrospectively conformed to reflect the impact of Topic 606,~~ ~~Revenue from Contracts with Customers.~~

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,				Three Months Ended March 31,
	2017		2018		2017		2018		2018		2019
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services⁽¹⁾	87.2		85.8		85.2		85.1
Cost of services, exclusive of depreciation and amortization⁽¹⁾									85.1		85.5
General and administrative	2.5		2.4		2.6		2.4		2.5		2.2
Depreciation and amortization	3.6		3.9		3.7		3.9		3.7		3.9
Income from operations	6.7		7.9		8.5		8.6		8.7		8.4
Loss on early retirement of debt	—		—		(0.6	)	(0.3	)	(0.8	)	—
Equity in earnings of unconsolidated subsidiaries	0.4		0.4		0.5		0.4		0.4		0.3
Non-operating gain (loss)	—		0.2		(0.0	)	0.2
Non-operating gain									0.0		0.5
Interest expense	(3.5	)	(4.0	)	(3.5	)	(3.8	)	(3.8	)	(3.8	)
Income before income taxes	3.6		4.5		4.9		5.1		4.5		5.4
Income tax expense	1.3		1.1		1.9		1.2		1.0		1.4
Net income	2.3		3.4		3.0		3.9		3.5		4.0
Net income attributable to non-controlling interests	0.6		0.8		0.7		0.9		0.8		0.9
Net income attributable to Holdings and Select	1.7	%	2.6	%	2.3	%	3.0	%	2.7	%	3.1	%

_______________________________________________________________________________


(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,								Three Months Ended March 31,
	2017			2018			% Change		2017			2018			% Change		2018			2019			% Change
	(in thousands)																(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital⁽²⁾	$	416,934		$	420,108		0.8	%	$	1,301,251		$	1,327,236		2.0	%
Rehabilitation hospital⁽²⁾	157,499			176,885			12.3		453,702			525,428			15.8
Critical illness recovery hospital																	$	464,676		$	462,159		(0.5	)%
Rehabilitation hospital																	174,774			188,954			8.1
Outpatient rehabilitation	246,644			265,927			7.8		751,999			790,491			5.1		257,381			277,197			7.7
Concentra	255,881			404,481			58.1		763,357			1,173,420			53.7		356,116			396,321			11.3
Other⁽³⁾	56			—			N/M		687			—			N/M
Other⁽¹⁾																	17			—			N/M
Total Company	$	1,077,014		$	1,267,401		17.7	%	$	3,270,996		$	3,816,575		16.7	%	$	1,252,964		$	1,324,631		5.7	%
Income (loss) from operations:
Critical illness recovery hospital⁽²⁾	$	35,941		$	42,156		17.3	%	$	159,362		$	152,843		(4.1	)%
Rehabilitation hospital⁽²⁾	18,076			19,264			6.6		47,538			62,498			31.5
Critical illness recovery hospital																	$	61,914		$	61,547		(0.6	)%
Rehabilitation hospital																	21,054			19,395			(7.9	)
Outpatient rehabilitation	23,334			27,934			19.7		84,393			87,065			3.2		23,888			21,959			(8.1	)
Concentra	24,777			43,499			75.6		78,308			123,776			58.1		33,503			40,587			21.1
Other⁽³⁾	(30,030		)	(33,016		)	(9.9	)	(90,075		)	(97,186		)	(7.9	)
Other⁽¹⁾																	(31,761		)	(31,764		)	(0.0	)
Total Company	$	72,098		$	99,837		38.5	%	$	279,526		$	328,996		17.7	%	$	108,598		$	111,724		2.9	%
Adjusted EBITDA:
Critical illness recovery hospital⁽²⁾	$	46,873		$	53,292		13.7	%	$	194,253		$	186,989		(3.7	)%
Rehabilitation hospital⁽²⁾	22,581			25,343			12.2		62,038			80,314			29.5
Critical illness recovery hospital																	$	72,972		$	72,998		0.0	%
Rehabilitation hospital																	26,776			25,797			(3.7	)
Outpatient rehabilitation	29,298			34,531			17.9		102,575			107,003			4.3		30,525			28,991			(5.0	)
Concentra	40,003			68,754			71.9		125,656			199,119			58.5		57,797			66,258			14.6
Other⁽³⁾	(22,928		)	(25,292		)	(10.3	)	(71,125		)	(75,337		)	(5.9	)
Other⁽¹⁾																	(24,838		)	(23,927		)	3.7
Total Company	$	115,827		$	156,628		35.2	%	$	413,397		$	498,088		20.5	%	$	163,232		$	170,117		4.2	%
Adjusted EBITDA margins:
Critical illness recovery hospital⁽²⁾	11.2		%	12.7		%			14.9		%	14.1		%
Rehabilitation hospital⁽²⁾	14.3			14.3					13.7			15.3
Critical illness recovery hospital																	15.7		%	15.8		%
Rehabilitation hospital																	15.3			13.7
Outpatient rehabilitation	11.9			13.0					13.6			13.5					11.9			10.5
Concentra	15.6			17.0					16.5			17.0					16.2			16.7
Other⁽³⁾	N/M			N/M					N/M			N/M
Other⁽¹⁾																	N/M			N/M
Total Company	10.8		%	12.4		%			12.6		%	13.1		%			13.0		%	12.8		%
Total assets:
Critical illness recovery hospital⁽²⁾	$	2,008,485		$	1,785,336				$	2,008,485		$	1,785,336
Rehabilitation hospital⁽²⁾	740,276			888,342					740,276			888,342
Critical illness recovery hospital																	$	1,862,791		$	2,062,659
Rehabilitation hospital																	877,750			1,089,391
Outpatient rehabilitation	945,765			991,105					945,765			991,105					973,122			1,250,015
Concentra	1,332,012			2,201,869					1,332,012			2,201,869					2,143,405			2,464,317
Other⁽³⁾	97,269			113,529					97,269			113,529
Other⁽¹⁾																	111,575			155,110
Total Company	$	5,123,807		$	5,980,181				$	5,123,807		$	5,980,181				$	5,968,643		$	7,021,492
Purchases of property and equipment, net:
Critical illness recovery hospital⁽²⁾	$	8,003		$	8,134				$	28,717		$	31,455
Rehabilitation hospital⁽²⁾	29,373			8,769					77,707			29,766
Critical illness recovery hospital																	$	10,472		$	10,160
Rehabilitation hospital																	12,917			13,183
Outpatient rehabilitation	6,496			7,209					19,370			22,565					7,338			9,040
Concentra	5,369			12,539					21,656			29,281					6,621			15,698
Other⁽³⁾	19,257			2,740					26,350			7,972
Other⁽¹⁾																	2,269			992
Total Company	$	68,498		$	39,391				$	173,800		$	121,039				$	39,617		$	49,073


(1)	~~Net operating revenues were retrospectively conformed to reflect the adoption Topic 606,~~ ~~Revenue from Contracts with Customers.~~


~~(2)~~	The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.


~~(3)~~	Other includes our corporate ~~services~~administration and shared services. Total assets include certain ~~other~~ non-consolidating joint ventures and minority investments in other healthcare related businesses.

N/M — Not meaningful.

Three Months Ended ~~September 30, 2018,~~March 31, 2019, Compared to Three Months Ended ~~September 30, 2017~~

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

~~Net Operating Revenues~~

~~Our net operating revenues increased 17.7% to $1,267.4 million for the three months ended September 30,~~March 31, 2018 ~~compared to $1,077.0 million for the three months ended September 30, 2017.~~

~~Critical Illness Recovery Hospital Segment.~~ Net operating revenues increased 0.8% to $420.1 million for the three months ended September 30, 2018, compared to $416.9 million for the three months ended September 30, 2017. Our net revenue per patient day increased 2.6% to $1,705 for the three months ended September 30, 2018, compared to $1,661 for the three months ended September 30, 2017. The increase principally resulted from changes we experienced in our non-Medicare net revenue per patient day during the three months ended September 30, 2018. We had 243,891 patient days for the three months ended September 30, 2018, compared to 248,002 days for the three months ended September 30, 2017.

~~Rehabilitation Hospital Segment.~~ Net operating revenues increased 12.3% to $176.9 million for the three months ended September 30, 2018, compared to $157.5 million for the three months ended September 30, 2017. The increase in net operating revenues was principally attributable to an increase in patient volumes during the three months ended September 30, 2018. Our patient days increased 16.2% to 79,232 days for the three months ended September 30, 2018, compared to 68,168 days for the three months ended September 30, 2017. The increase in patient days was principally due to the maturation of our rehabilitation hospitals which commenced operations during 2016 and 2017. We also experienced an increase in our net revenue per patient day, which increased 0.6% to $1,582 for the three months ended September 30, 2018, compared to $1,573 for the three months ended September 30, 2017.

~~Outpatient Rehabilitation Segment.~~ Net operating revenues increased 7.8% to $265.9 million for the three months ended September 30, 2018, compared to $246.6 million for the three months ended September 30, 2017. The increase in net operating revenues was primarily attributable to an increase in visits, which increased 2.7% to 2,039,462 visits for the three months ended September 30, 2018, compared to 1,986,213 visits for the three months ended September 30, 2017. The increase in visits resulted from both start-up and newly acquired outpatient rehabilitation clinics, as well as growth within our existing clinics. Our net revenue per visit increased 1.0% to $103 for the three months ended September 30, 2018, compared to $102 for the three months ended September 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. During the three months ended September 30, 2018, we also experienced an increase in net operating revenues related to contracted labor services provided to our equity investments. Our net operating revenues for the three months ended September 30, 2017 were impacted by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues.

~~Concentra Segment.~~ Net operating revenues increased 58.1% to $404.5 million for the three months ended September 30, 2018, compared to $255.9 million for the three months ended September 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $133.3 million of net operating revenues during the quarter. Visits in our centers increased 50.8% to 2,984,832 visits for the three months ended September 30, 2018, compared to 1,979,481 visits for the three months ended September 30, 2017. Net revenue per visit increased 9.7% to $124 for the three months ended September 30, 2018, compared to $113 for the three months ended September 30, 2017. The increase in net revenue per visit was driven principally by U.S. HealthWorks visits, which yield higher per visit rates, as well as an increase in workers’ compensation and employer services reimbursement rates in our existing Concentra centers. Our net operating revenues for the three months ended September 30, 2017 were impacted by Hurricanes Harvey and Irma, which caused an estimated $1.2 million decrease in net operating revenues.

~~Operating Expenses~~

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,117.0 million, or 88.2% of net operating revenues, for the three months ended September 30, 2018, compared to $966.1 million, or 89.7% of net operating revenues, for the three months ended September 30, 2017. Our cost of services, a major component of which is labor expense, was $1,087.1 million, or 85.8% of net operating revenues, for the three months ended September 30, 2018, compared to $939.1 million, or 87.2% of net operating revenues, for the three months ended September 30, 2017. The decrease in our operating expenses relative to our net operating revenues was principally due to the improved operating performance of our critical illness recovery hospital and outpatient rehabilitation segments during the three months ended September 30, 2018. We also experienced lower relative operating costs within our Concentra segment as a result of the U.S. HealthWorks acquisition. Facility rent expense was $68.4 million for the three months ended September 30, 2018, compared to $57.9 million for the three months ended September 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and administrative expenses were $30.0 million, or 2.4% of net operating revenues, for the three months ended September 30, 2018, compared to $27.1 million, or 2.5% of net operating revenues, for the three months ended September 30, 2017.

~~Adjusted EBITDA~~

~~Critical Illness Recovery Hospital Segment.~~ Adjusted EBITDA increased 13.7% to $53.3 million for the three months ended September 30, 2018, compared to $46.9 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.7% for the three months ended September 30, 2018, compared to 11.2% for the three months ended September 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin increased principally as a result of an increase in net revenue per patient day, as discussed above under “~~Net Operating Revenues~~,”~~without a corresponding increase in operating costs.~~

~~Rehabilitation Hospital Segment.~~ Adjusted EBITDA increased 12.2% to $25.3 million for the three months ended September 30, 2018, compared to $22.6 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 14.3% for both the third quarters ended September 30, 2018 and 2017. The increase in Adjusted EBITDA for our rehabilitation hospital segment was primarily driven by an increase in patient volume, as discussed above under “~~Net Operating Revenues.” Adjusted EBITDA losses in our start-up hospitals were $0.8 million for the three months ended September 30, 2018, compared to $1.3 million for the three months ended September 30, 2017.~~

~~Outpatient Rehabilitation Segment.~~ Adjusted EBITDA increased 17.9% to $34.5 million for the three months ended September 30, 2018, compared to $29.3 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.0% for the three months ended September 30, 2018, compared to 11.9% for the three months ended September 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin increased as a result of an increase in net revenue per visit, as discussed above under “~~Net Operating Revenues~~,”~~and a reduction in operating expenses. Adjusted EBITDA for the three months ended September 30, 2017 was impacted by Hurricanes Harvey and Irma, as discussed above under “Net Operating Revenues~~.”

~~Concentra Segment.~~ Adjusted EBITDA increased 71.9% to $68.8 million for the three months ended September 30, 2018, compared to $40.0 million for the three months ended September 30, 2017. The increase in Adjusted EBITDA was principally due to the operating results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.0% for the three months ended September 30, 2018, compared to 15.6% for the three months ended September 30, 2017. The increase in Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses. Adjusted EBITDA for the three months ended September 30, 2017 was impacted by Hurricanes Harvey and Irma, as discussed above under “~~Net Operating Revenues~~.”

~~Other.~~ The Adjusted EBITDA loss was $25.3 million for the three months ended September 30, 2018, compared to an Adjusted EBITDA loss of $22.9 million for the three months ended September 30, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

~~Depreciation and Amortization~~

Depreciation and amortization expense was $50.5 million for the three months ended September 30, 2018, compared to $38.8 million for the three months ended September 30, 2017.The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.

~~Income from Operations~~

For the three months ended September 30, 2018, we had income from operations of $99.8 million, compared to $72.1 million for the three months ended September 30, 2017. The increase in income from operations resulted principally from the growth of our Concentra segment, as discussed above.

~~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, 2018, we had equity in earnings of unconsolidated subsidiaries of $5.4 million, compared to $4.4 million for the three months ended September 30, 2017.

~~Non-Operating Gain~~

We recognized a non-operating gain of $2.1 million during the three months ended September 30, 2018. The non-operating gain was attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.

~~Interest Expense~~

Interest expense was $50.7 million for the three months ended September 30, 2018, compared to $37.7 million for the three months ended September 30, 2017. The increase in interest expense was principally due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.

~~Income Taxes~~

We recorded income tax expense of $14.1 million for the three months ended September 30, 2018, which represented an effective tax rate of 24.8%. We recorded income tax expense of $14.0 million for the three months ended September 30, 2017, which represented an effective tax rate of 36.1%. The lower effective tax rate for the three months ended September 30, 2018 resulted primarily from the effects of the federal tax reform legislation enacted on December 22, 2017.

~~Net Income Attributable to Non-Controlling Interests~~

Net income attributable to non-controlling interests was $9.8 million for the three months ended September 30, 2018, compared to $6.4 million for the three months ended September 30, 2017. The increase resulted principally from the growth of our Concentra segment.

~~Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017~~

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, ~~(loss),~~ interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~16.7%~~5.7% to ~~$3,816.6~~$1,324.6 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$3,271.0~~$1,253.0 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

Critical Illness Recovery Hospital Segment. Net operating revenues ~~increased 2.0% to $1,327.2~~were $462.2 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$1,301.3~~$464.7 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Our patient days ~~increased 1.5% to 765,863~~were 258,129 days for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~754,401~~265,840 days for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018. The decline in patient days, which was the ~~principal~~primary cause of the decrease in net operating revenues, was principally attributable to three hospitals that have closed since March 31, 2018, as well as the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. This decrease in net operating revenues from these closures was offset in part by an increase in net revenue per patient day. Net revenue per patient day increased 1.7% to $1,759 for the three months ended March 31, 2019, compared to $1,730 for the three months ended March 31, 2018. We also experienced an increase in net operating revenues related to contracted labor services provided to an entity in which we have made an equity investment during the ~~nine~~three months ended September 30, 2018. Our net revenue per patient day increased to $1,716 for the nine months ended September 30, 2018, compared to $1,708 for the nine months ended September 30, 2017. The increase principally resulted from changes we experienced in our non-Medicare net revenue per patient day during the nine months ended September 30, 2018.March 31, 2019.

Rehabilitation Hospital Segment. Net operating revenues increased ~~15.8%~~8.1% to ~~$525.4~~$189.0 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$453.7~~$174.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase in net operating revenues resulted primarily from an increase in patient volumes during the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. Our patient days increased ~~19.1%~~7.7% to ~~233,537~~82,816 days for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~196,018~~76,890 days for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase in patient days ~~was principally attributable to~~occurred within our two new rehabilitation hospitals, which commenced operations ~~during 2016~~after March 31, 2018, and ~~2017.~~within our existing hospitals. Our net revenue per patient day increased ~~3.2%~~0.6% to ~~$1,604~~$1,633 for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$1,554~~$1,623 for the ~~nine~~three months ended ~~September 30, 2017.~~

~~Outpatient Rehabilitation Segment.~~ ~~Net operating revenues increased 5.1% to $790.5 million for~~March 31, 2018. During the ~~nine~~three months ended September 30, 2018, compared to $752.0 million for the nine months ended September 30, 2017. The increase in net operating revenues was principally attributable to an increase in our net revenue per visit, which increased 2.0% to $103 for the nine months ended September 30, 2018, compared to $101 for the nine months ended September 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. Additionally, visits increased 1.3% to 6,251,582 for the nine months ended September 30, 2018, compared to 6,168,763 visits for the nine months ended September 30, 2017. The increase in visits resulted from both start-up and newly acquired outpatient rehabilitation clinics, as well as growth within our existing clinics. During the nine months ended September 30, 2018,March 31, 2019, we also experienced an increase in net operating revenues related to contracted labor services provided to ~~our~~entities in which we have made equity investments.

Outpatient Rehabilitation Segment. Net operating revenues increased 7.7% to $277.2 million for the three months ended March 31, 2019, compared to $257.4 million for the three months ended March 31, 2018. The increase in net operating revenues was principally attributable to an increase in contracted labor services provided to entities in which we have made equity investments and an increase in management fee revenues. Our net revenue per visit was $103 for both the three months ended March 31, 2019 and 2018. Our visits were 2,054,483 for the three months ended March 31, 2019, compared to 2,067,465 visits for the three months ended March 31, 2018. The decrease in visits was principally due to the sales of outpatient rehabilitation clinics to non-consolidating subsidiaries since March 31, 2018. These clinics contributed 99,766 visits during the three months ended March 31, 2018.

Concentra Segment. Net operating revenues increased ~~53.7%~~11.3% to ~~$1,173.4~~$396.3 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$763.4~~$356.1 million for the ~~nine~~three months ended September 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $362.7 million of net operating revenues during the period.March 31, 2018. Visits in our centers increased ~~47.1%~~12.2% to ~~8,605,012~~2,911,607 for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~5,848,551~~2,596,059 visits for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018. Net revenue per visit ~~increased 8.8% to~~was $124 for both the ~~nine~~three months ended September 30, 2018, compared to $114 for the nine months ended September 30, 2017. The increase in net revenue per visit was driven principally by U.S. HealthWorks visits, which yield higher per visit rates, as well as an increase in workers’ compensationMarch 31, 2019 and ~~employer services reimbursement rates in our existing Concentra centers.~~2018.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were ~~$3,338.6~~$1,160.8 million, or ~~87.5%~~87.7% of net operating revenues, for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$2,871.8~~$1,097.6 million, or ~~87.8%~~87.6% of net operating revenues, for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Our cost of services, a major component of which is labor expense, was ~~$3,247.6~~$1,132.1 million, or 85.5% of net operating revenues, for the three months ended March 31, 2019, compared to $1,065.8 million, or 85.1% of net operating revenues, for the ~~nine~~three months ended ~~September 30, 2018, compared to $2,788.4 million, or 85.2% of net operating revenues, for the nine months ended September 30, 2017. The decrease in our~~March 31, 2018. Our operating expenses, relative to our net operating revenues, ~~was principally due to~~were impacted by an increase in expenses incurred by our start-up rehabilitation hospitals and the ~~improved operating performance~~recognition of approximately $1.5 million of bad debt expense, which is included in cost of services, by our rehabilitation hospital ~~segment. Facility rent expense was $200.5 million for~~segment during the ~~nine~~three months ended September 30, 2018, compared to $171.7 million for the nine months ended September 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks.March 31, 2019. General and administrative expenses were ~~$91.0~~$28.7 million, or ~~2.4%~~2.2% of net operating revenues, for the ~~nine~~three months ended ~~September 30, 2018, which~~March 31, 2019. General and administrative expenses were $31.8 million, or 2.5% of net operating revenues, for the three months ended March 31, 2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition ~~costs. General and administrative expenses were $83.4 million, or 2.6% of net operating revenues,~~costs for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA was ~~$187.0~~$73.0 million ~~for~~for both the ~~nine~~three months ended ~~September 30, 2018, compared to $194.3 million for the nine months ended September 30, 2017.~~March 31, 2019 and March 31, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~14.1%~~15.8% for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~14.9%~~15.7% for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Our critical illness recovery hospital segment experienced a decrease in Adjusted EBITDA ~~and Adjusted EBITDA margin were impacted by increases in wages, benefits, and other operating costs, relative to our net operating revenues,~~of $1.6 million during the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, as compared to the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018, as a result of the temporary closure of our hospital located in Panama City, Florida. The temporary closure resulted from damage sustained from Hurricane Michael in October 2018.

Rehabilitation Hospital Segment. Adjusted EBITDA ~~increased 29.5% to $80.3~~was $25.8 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$62.0~~$26.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 13.7% for the three months ended March 31, 2019, compared to 15.3% for the ~~nine~~three months ended ~~September 30, 2018, compared to 13.7% for the nine months ended September 30, 2017.~~March 31, 2018. The ~~increases~~decreases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven by increases in patient volume within our rehabilitation hospitals that commenced operations during 2016 and 2017, which allowed our facilities to operate at lower relative costs compared to the prior period. The increases in Adjusted EBITDA and Adjusted EBITDA margins also resulted from an increase in ~~net revenue per patient day, as discussed above under “Net Operating Revenues.~~” Adjusted EBITDA losses in our start-up hospitals and the write-off of uncollectible accounts in one of our joint venture subsidiaries during the three months ended March 31, 2019, as described above under “Operating Expenses.” Adjusted EBITDA start-up losses were ~~$3.8~~$2.8 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$4.5~~$0.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA ~~increased 4.3% to $107.0~~was $29.0 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$102.6~~$30.5 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~13.5%~~10.5% for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~13.6%~~11.9% for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, our Adjusted EBITDA ~~increased~~and Adjusted EBITDA margin were impacted by increases in employee costs relative to our net operating revenues. We also experienced a decrease in Adjusted EBITDA margin as a result of an increase in ~~patient visits and net revenue per visit, as discussed above under “Net Operating Revenues.~~”our contracted labor services, which we provide at cost.

Concentra Segment. Adjusted EBITDA increased ~~58.5%~~14.6% to ~~$199.1~~$66.3 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$125.7~~$57.8 million for the ~~nine~~three months ended ~~September 30, 2017. The increase in Adjusted EBITDA was principally due to~~March 31, 2018, which included the operating results of U.S. HealthWorks ~~which we acquired on~~beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was ~~17.0%~~16.7% for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~16.5%~~16.2% for the ~~nine~~three months ended ~~September 30, 2017. The~~March 31, 2018.The increase in Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

Other. The Adjusted EBITDA loss was ~~$75.3~~$23.9 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to an Adjusted EBITDA loss of ~~$71.1~~$24.8 million for the ~~nine~~three months ended ~~September 30, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.~~March 31, 2018.

Depreciation and Amortization

Depreciation and amortization expense was ~~$149.0~~$52.1 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$119.6~~$46.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase principally occurred within our Concentra segment due to the acquisition of U.S. ~~HealthWorks.~~

HealthWorks, which we acquired on February 1, 2018.

Income from Operations

For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we had income from operations of ~~$329.0~~$111.7 million, compared to ~~$279.5~~$108.6 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase in income from operations resulted principally from ~~the improved performance of our rehabilitation hospital segment and the growth of~~ our Concentra ~~segment, as discussed above.~~segment.

Loss on Early Retirement of Debt

During the ~~nine~~three months ended ~~September 30,~~March 31, 2018, we amended both Select’s senior secured credit facilities and Concentra’s first lien credit ~~facilities, as discussed above under “Significant Events~~,”agreement which resulted in losses on early retirement of debt of $10.3 ~~million.~~

~~During~~million during the ~~nine~~three months ended ~~September 30, 2017, we refinanced Select’s senior secured credit facilities which resulted in a loss on early retirement of debt of $19.7 million.~~March 31, 2018.

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~~three months ended ~~September 30, 2018,~~March 31, 2019, we had equity in earnings of unconsolidated subsidiaries of ~~$14.9~~$4.4 million, compared to ~~$15.6~~$4.7 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

Non-Operating Gain

We recognized a non-operating ~~gains~~gain of ~~$9.0~~$6.5 million during the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The non-operating ~~gains were principally~~gain was attributable to the ~~sales~~sale of outpatient rehabilitation clinics to a non-consolidating ~~subsidiaries.~~subsidiary.

Interest Expense

Interest expense was ~~$148.0~~$50.8 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$116.2~~$47.2 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase in interest expense was principally due to an increase in our indebtedness as a result of the acquisition of U.S. ~~HealthWorks.~~HealthWorks on February 1, 2018.

Income Taxes

We recorded income tax expense of ~~$47.5~~$18.5 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019, which represented an effective tax rate of 25.7%. We recorded income tax expense of $12.3 million for the three months ended March 31, 2018, which represented an effective tax rate of ~~24.4%~~21.8%. ~~We recorded income tax expense of $59.6 million for~~For the ~~nine~~three months ended ~~September 30, 2017, which represented an effective tax rate of 37.4%. The~~March 31, 2018, the lower effective tax rate ~~for the nine months ended September 30, 2018~~ resulted ~~primarily~~principally from ~~the effects of the federal tax reform legislation enacted on December 22, 2017 and~~ the discrete tax benefits realized from certain equity interests ~~that were~~ redeemed ~~as part of~~at our Concentra subsidiary and completed in connection with the closing of the U.S. HealthWorks ~~transaction during the first quarter of 2018.~~acquisition.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$34.1~~$12.5 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$23.2~~$10.2 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The increase was principally due to the improved operating performance of ~~several~~our Concentra segment. During the three months ended March 31, 2018, Concentra incurred costs associated with the acquisition of ~~our joint venture rehabilitation hospitals~~U.S. HealthWorks and the ~~growth~~amendment of ~~our Concentra segment.~~Concentra’s first lien credit agreement.

Liquidity and Capital Resources

Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2018~~March 31, 2019 and ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 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,						Three Months Ended March 31,
	2017			2018			2018			2019
	(in thousands)						(in thousands)
Cash flows provided by operating activities	$	129,972		$	380,977		$	50,727		$	41,762
Cash flows used in investing activities	(169,990		)	(646,542		)	(556,039		)	(82,799		)
Cash flows provided by financing activities	48,289			303,429
Net increase in cash and cash equivalents	8,271			37,864
Net cash provided by financing activities							502,446			13,674
Net decrease in cash and cash equivalents							(2,866		)	(27,363		)
Cash and cash equivalents at beginning of period	99,029			122,549			122,549			175,178
Cash and cash equivalents at end of period	$	107,300		$	160,413		$	119,683		$	147,815

Operating activities provided ~~$381.0~~$41.8 million of cash flows for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to ~~$130.0~~$50.7 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The ~~increase~~decrease in operating cash flows for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, compared to the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, was principally driven by the change in our accounts ~~receivable~~receivable. We experienced an increase in ~~their respective periods.Our~~ days sales outstanding ~~decreased from~~to 53 days at March 31, 2019, compared to 51 days at December 31, 2018. We experienced a decline in days sales outstanding to 56 days at March 31, 2018, compared to 58 days at December 31, 2017 to 54 days at September 30, 2018 while our days sales outstanding increased from 51 days at December 31, 2016 to 61 days at September 30, 2017. The decrease in days sales outstanding during the nine months ended September 30, 2018 resulted from the recoupment of Medicare periodic interim underpayments from prior periods. The increase in days sales outstanding during the nine months ended September 30, 2017 was caused by the significant underpayments we received through the Medicare periodic interim payment program in our critical illness recovery hospitals. Additionally, we received overpayments during 2016 which were repaid during the first quarter of 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at March 31, 2019 and December 31, 2018.

Investing activities used ~~$646.5~~$82.8 million of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2019. The principal uses of cash were $49.1 million for purchases of property and equipment and $33.7 million for investments in and acquisitions of businesses. Investing activities used $556.0 million of cash flows for the three months ended March 31, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and ~~$121.0~~$39.6 million for purchases of property and equipment. ~~Investing~~

Financing activities ~~used $170.0~~provided $13.7 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. The principal ~~uses~~source of cash ~~were $173.8~~was net borrowings of $140.0 million on the Select revolving facility. This was offset in party by $98.8 million and $33.9 million for ~~purchases~~mandatory prepayments of ~~property~~term loans under the Select credit facilities and ~~equipment and $19.4 million for acquisition-related payments, offset in part by $34.6 million of proceeds from the sale of assets.~~Concentra credit facilities, respectively.

Financing activities provided ~~$303.4~~$502.4 million of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2018. The principal ~~source~~sources of cash ~~was~~were from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 ~~million.~~million and $15.0 million of net borrowings under the Select revolving facility. This was offset in part by ~~$306.4~~$286.6 million of distributions to non-controlling interests, of which ~~$294.9~~$285.4 million related to the redemption and reorganization transactions executed ~~under the Purchase Agreement~~ in connection with the acquisition of U.S. ~~HealthWorks by our Concentra segment, and $165.0 million of net repayments under the Select revolving credit facility.~~HealthWorks.

Financing activities provided $48.3 million of cash flows for the nine months ended September 30, 2017. The principal source of cash was net borrowings under the Select revolving facility of $100.0 million, 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 a term loan payment associated with the Select credit facilities, and $9.2 million of cash used for financing costs.

Capital Resources

Working capital. We had net working capital of ~~$338.2~~$167.9 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$315.4~~$287.3 million at December 31, ~~2017.~~2018. The ~~increase~~decrease in net working capital was ~~primarily~~principally due to the ~~acquisition~~recognition of ~~U.S. HealthWorks and an increase in our accounts receivable.~~current operating lease liabilities upon the adoption of ASC Topic 842, Leases, on January 1, 2019.

Select credit facilities.

OnDuring the three months ended March ~~22, 2018,~~31, 2019, Select ~~entered into Amendment No. 1 to~~made a principal prepayment of $98.8 million associated with its term loans in accordance with the provision in the Select credit ~~agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select~~facilities that requires mandatory prepayments of term loans ~~from the Adjusted LIBO Rate (as~~as a result of annual excess cash flow, as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.

At ~~September 30, 2018,~~March 31, 2019, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,132.8~~$1,031.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of ~~$22.1~~$18.1 million) and borrowings of ~~$65.0~~$160.0 million (excluding letters of credit) under the Select revolving facility. At ~~September 30, 2018,~~March 31, 2019, Select had ~~$347.5~~$251.6 million of availability under the Select revolving facility after giving effect to ~~$37.5~~$38.4 million of outstanding letters of credit.

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, it is included in Select’s consolidated financial statements.

~~On February 1, 2018,~~During the three months ended March 31, 2019, Concentra made a principal prepayment of $33.9 million associated with its term loans in ~~connection~~accordance with the acquisition of U.S. HealthWorks, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as definedprovision in the Concentra ~~first lien~~ credit ~~agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor~~facilities that requires mandatory prepayments of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans ~~created under the Concentra first lien credit agreement.~~

In addition, on February 1, 2018, Concentra entered into the Concentra second lien credit agreement. The Concentra second lien credit agreement provided for a $240.0 million Concentra second lien term loan with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

~~Concentra will be required to prepay borrowings under the Concentra second lien term loan 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 the payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% ofannual excess cash flow, (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.

The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra ~~second lien~~ credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.

Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement.facilities.

At ~~September 30, 2018,~~March 31, 2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of ~~$1,414.2~~$1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$23.5~~$19.4 million). Concentra did not have any borrowings under the Concentra revolving facility. At ~~September 30, 2018,~~March 31, 2019, Concentra had $62.3 million of availability under its revolving facility after giving effect to $12.7 million of outstanding letters of credit.

On April 8, 2019, Concentra entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5 extends the maturity date of the Concentra revolving credit facility from June 1, 2020 to June 1, 2021 and increases the aggregate commitments available under the Concentra revolving credit facility from $75.0 million to $100.0 million.

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, 2019, 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 the three months ended ~~September 30, 2018.~~March 31, 2019. Since the inception of the program through ~~September 30, 2018,~~March 31, 2019, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 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 rehabilitation hospitals and occupational health 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 acquisition of U.S. HealthWorks.~~acquisitions.

Recent Accounting Pronouncements

~~Lease~~Refer to Note 2 – Accounting

~~Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”) which established Topic 842,~~ ~~Leases~~ (the “standard”). This standard includes a lessee accounting model that recognizes two types of leases: finance and operating. This standard 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 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 the standard 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 Policies of the beginning of an interim or annual reporting period. There are two transition approaches available under the standard: a modified retrospective approach for leases that exist, or are entered into, after the beginning of the earliest comparative period in the financial statements or a cumulative-effect approach with an adjustmentnotes to ~~the opening balance of retained earnings in the period of adoption.~~

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.

~~Cloud Computing Arrangements~~

~~Recently Adopted Accounting Pronouncements~~

~~Revenue from Contracts with Customers~~

~~Beginning in May 2014, the FASB issued several ASUs which established Topic 606,~~ ~~Revenue from Contracts with Customers~~ (the “revenue recognition standard”). This revenue recognition standard supersedes existing revenue recognition requirements and seeks to eliminate most industry-specific guidance under current GAAP. 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.

The Company adopted the new revenue recognition standard on January 1, 2018, using the full retrospective transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:

~~_____________________________________________________________~~


~~(1)~~	~~Bad debt expense is now included in cost of services on the condensed consolidated statements of operations.~~

~~The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7 of the Company’s~~our condensed consolidated financial ~~statements.~~statements included herein for information regarding recent accounting pronouncements.

~~Income Taxes~~

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.

At ~~September 30, 2018,~~March 31, 2019, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,132.8~~$1,031.1 million ofin Select term loans (excluding unamortized discounts and debt issuance costs of ~~$22.1~~$18.1 million) and borrowings of ~~$65.0~~$160.0 million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates.

At ~~September 30, 2018,~~March 31, 2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of ~~$1,414.2~~$1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$23.5~~$19.4 million), which bear interest at variable rates. Concentra did not have any borrowings under the Concentra revolving facility.

As of ~~September 30, 2018,~~March 31, 2019, each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra’s variable rate debt by ~~$6.5~~$6.4 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, 2018,~~March 31, 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 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.

~~U.S. HealthWorks Acquisition~~

On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition.

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~~first quarter ended ~~September 30, 2018,~~March 31, 2019, that has materially affected, or is reasonably likely to materially ~~affect, our internal control over financial reporting.~~

On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. Effective from that date, we began integrating U.S. HealthWorks into our existing control procedures. The U.S. HealthWorks integration may lead us to modify certain controls in future periods, but we do not expect changes to significantly 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 II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

~~Knoxville Litigation.~~ On July 13, 2015, 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 States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene 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 the federal False Claims Act 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 the 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 asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff‑relator’s claims must be dismissed under the public disclosure bar, 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, but the District Court denied such request. In December 2017, the Court of Appeals, relying on the public disclosure bar, denied the appeal of the plaintiff‑relator and affirmed the judgment of the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018, and in July 2018, the deadline expired for the plaintiff-relator to file a petition for certiorari to the Supreme Court of the United States.

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.

ITEM 1A. RISK FACTORS

There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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, 2019, ~~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. During the three months ended March 31, 2019, Holdings did not repurchase shares ~~during the three months ended September 30, 2018~~ 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, 2018. As set forth below, the shares repurchased during the three months ended September 30, 2018 relate entirely to shares~~repurchase program has available capacity of ~~common stock surrendered to us to satisfy tax withholding obligations associated with the vesting~~$185.2 million as of ~~restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.~~

Total Number of
Shares Purchased

Average Price
Paid Per Share

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, 2018 —
$ —
—
$ 185,249,408
August 1 - August 31, 2018 235,782
20.15
—
185,249,408
September 1 - September 30, 2018 —
—
—
185,249,408
Total 235,782
$ 20.15
—
$ 185,249,408

March 31, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Number		Description
99.1		Amendment No. 2, dated January 4, 2019, to the Select Medical Holdings Corporation 2016 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed on January 4, 2019).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.SCH		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.

SIGNATURES

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



	SELECT MEDICAL 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 1, 2018~~May 2, 2019



	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 1, 2018~~May 2, 2019

6549



	Three Months Ended September 30, 2017
	As Reported		As Adjusted⁽¹⁾		Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,097,166	$	1,077,014	$	(20,152	)
Bad debt expense	20,321		169		(20,152		)



	December 31, 2017
	As Reported		As Adjusted		Adoption Impact
	(in thousands)
Condensed Consolidated Balance Sheets
Accounts receivable	$	767,276	$	691,732	$	(75,544	)
Allowance for doubtful accounts	75,544		—		(75,544		)
Accounts receivable	$	691,732	$	691,732	$	—



	Fair Value		Weighted Average Amortization Period
	(in thousands)		(in years)
Customer relationships	$	135,000	15.0 years
Trademarks	5,000		1.0 year
Favorable leasehold interests	406		2.9 years
Identifiable intangible assets	$	140,406



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			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
Non-operating gain																9,016
Interest expense																(147,991		)
Income before income taxes																$	194,680



	Total Number of Shares Purchased	Average Price Paid Per Share		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, 2018	—	$	—	—	$	185,249,408
August 1 - August 31, 2018	235,782	20.15		—	185,249,408
September 1 - September 30, 2018	—	—		—	185,249,408
Total	235,782	$	20.15	—	$	185,249,408