SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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

SELECT MEDICAL HOLDINGS ~~CORPORATION~~CORPORATION

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

Indicate by check mark whether the Registrant has 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 Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging Growth Company	☐

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. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October 31, 2019,~~June 30, 2020, Select Medical Holdings Corporation had outstanding ~~134,326,112~~133,970,064 shares of common stock.

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 Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and its subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra.

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

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

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	For the Nine Months Ended September 30,							For the Six Months Ended June 30,
	2018			2019				2019		2020
Net operating revenues	$	3,816,575		$	4,079,338		Net operating revenues	$	2,685,995	$	2,647,350
Costs and expenses:							Costs and expenses:
Cost of services, exclusive of depreciation and amortization	3,247,606			3,465,353			Cost of services, exclusive of depreciation and amortization	2,282,242		2,282,827
General and administrative	90,951			94,401			General and administrative	60,016		67,292
Depreciation and amortization	149,022			160,072			Depreciation and amortization	107,131		104,023
Total costs and expenses	3,487,579			3,719,826			Total costs and expenses	2,449,389		2,454,142
Other operating income (Note 12)							Other operating income (Note 12)	—		54,988
Income from operations	328,996			359,512			Income from operations	236,606		248,196
Other income and expense:							Other income and expense:
Loss on early retirement of debt	(10,255		)	(18,643		)

Equity in earnings of unconsolidated subsidiaries	14,914			18,710			Equity in earnings of unconsolidated subsidiaries	11,760		10,912
Gain on sale of businesses (Note 5)	9,016			6,532
Gain on sale of businesses							Gain on sale of businesses	6,532		7,547
Interest expense	(147,991		)	(156,611		)	Interest expense	(102,275)		(83,473)
Income before income taxes	194,680			209,500			Income before income taxes	152,623		183,182
Income tax expense	47,460			52,140			Income tax expense	39,293		45,248
Net income	147,220			157,360			Net income	113,330		137,934
Less: Net income attributable to non-controlling interests	34,053			40,978			Less: Net income attributable to non-controlling interests	27,680		33,159
Net income attributable to Select Medical Holdings Corporation	$	113,167		$	116,382		Net income attributable to Select Medical Holdings Corporation	$	85,650	$	104,775
Earnings per common share (Note 12):
Earnings per common share (Note 10):							Earnings per common share (Note 10):
Basic	$	0.84		$	0.86		Basic	$	0.63	$	0.78
Diluted	$	0.84		$	0.86		Diluted	$	0.63	$	0.78

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

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income


	For the Six Months Ended June 30, 2020

		Total Stockholders’ Equity
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Retained Earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance at December 31, 2019	134,328	$	134	$	491,038	$	279,800	$	770,972	$	158,063	$	929,035
Net income attributable to Select Medical Holdings Corporation						53,125		53,125				53,125
Net income attributable to non-controlling interests								—		10,067		10,067
Issuance of restricted stock	2	0		0				—				—
Forfeitures of unvested restricted stock	(15)	0		0				—				—
Vesting of restricted stock				6,136				6,136				6,136
Repurchase of common shares	(492)	0		(5,350)		(3,341)		(8,691)				(8,691)
Issuance of non-controlling interests								—		1,679		1,679
Distributions to and purchases of non-controlling interests						(2,726)		(2,726)		(4,048)		(6,774)
Redemption adjustment on non-controlling interests						(10,123)		(10,123)				(10,123)
Other						(55)		(55)		420		365
Balance at March 31, 2020	133,823	$	134	$	491,824	$	316,680	$	808,638	$	166,181	$	974,819
Net income attributable to Select Medical Holdings Corporation						51,650		51,650				51,650
Net income attributable to non-controlling interests								—		12,572		12,572
Issuance of restricted stock	200	0		0				—				—
Forfeitures of unvested restricted stock	(7)	0		0				—				—
Vesting of restricted stock				6,262				6,262				6,262
Repurchase of common shares	(46)	0		(441)		(283)		(724)				(724)
Issuance of non-controlling interests								—		7		7
Distributions to and purchases of non-controlling interests				(65)				(65)		(418)		(483)
Redemption adjustment on non-controlling interests						127,916		127,916				127,916
Other				(795)		1		(794)		1,205		411
Balance at June 30, 2020	133,970	$	134	$	496,785	$	495,964	$	992,883	$	179,547	$	1,172,430

For the Nine Months Ended September 30, 2019

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

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

40,834
40,834

40,834
Net income attributable to non-controlling interests

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

—

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

259

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

(47,470 ) (47,470 )

(47,470 )
Other

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

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

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

For the Nine Months Ended September 30, 2018

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

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

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

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

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

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

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

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

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

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

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


	For the Six Months Ended June 30, 2019

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

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

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

Net income $ 147,220
$ 157,360

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

Distributions from unconsolidated subsidiaries 10,734
13,609

Depreciation and amortization 149,022
160,072

Provision for bad debts (373 ) 2,344

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

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

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

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

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

Accounts payable (3,507 ) 1,369

Accrued expenses 49,391
22,396

Income taxes 9,072
918

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

Investing activities

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

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

Borrowings on revolving facilities 420,000
700,000

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

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

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

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

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

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

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

Supplemental Information

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

Cash paid for taxes 40,460
58,472

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


	For the Six Months Ended June 30,
	2019		2020
Operating activities
Net income	$	113,330	$	137,934
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	11,148		11,223
Depreciation and amortization	107,131		104,023
Provision for expected credit losses	1,958		253
Equity in earnings of unconsolidated subsidiaries	(11,760)		(10,912)

Gain on sale of assets and businesses	(6,354)		(7,881)
Stock compensation expense	12,613		13,866
Amortization of debt discount, premium and issuance costs	6,326		1,093
Deferred income taxes	(6,290)		(3,416)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(85,873)		13,179
Other current assets	(9,236)		713
Other assets	(939)		11,504
Accounts payable	2,670		4,251
Accrued expenses	(18,156)		4,028
Government advances	—		316,992
Unearned government assistance	—		45,505

Income taxes	16,346		43,743
Net cash provided by operating activities	132,914		686,098
Investing activities
Business combinations, net of cash acquired	(86,062)		(6,961)
Purchases of property and equipment	(89,285)		(71,253)
Investment in businesses	(52,257)		(14,749)
Proceeds from sale of assets and businesses	125		12,401
Net cash used in investing activities	(227,479)		(80,562)
Financing activities
Borrowings on revolving facilities	635,000		470,000
Payments on revolving facilities	(460,000)		(470,000)

Payments on term loans	(132,685)		(39,843)



Borrowings of other debt	14,230		31,487
Principal payments on other debt	(12,680)		(35,733)
Repurchase of common stock	(13,620)		(9,415)
Proceeds from exercise of stock options	459		—
Increase in overdrafts	2,176		—
Proceeds from issuance of non-controlling interests	18,288		1,686
Distributions to and purchases of non-controlling interests	(7,745)		(13,660)
Purchase of membership interests of Concentra Group Holdings Parent (Note 4)	—		(366,203)
Net cash provided by (used in) financing activities	43,423		(431,681)
Net increase (decrease) in cash and cash equivalents	(51,142)		173,855
Cash and cash equivalents at beginning of period	175,178		335,882
Cash and cash equivalents at end of period	$	124,036	$	509,737
Supplemental Information
Cash paid for interest	$	97,909	$	86,124
Cash paid for taxes	29,241		4,920
Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019	66,977		132,125

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

Table of Contents

SELECT MEDICAL HOLDINGS 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~~June 30, ~~2019,~~2020, and for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2019,~~2020, 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~~six months ended ~~September~~June 30, ~~2019,~~2020, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2019.~~2020. 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, ~~2018,~~2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~21, 2019.~~20, 2020.


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.

Recently Adopted Accounting Pronouncements

Financial Instruments

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.

The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the patient. The Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the Company’s accounts receivable at January 1, 2020.

In estimating the Company’s expected credit losses under Topic 326, the Company considers its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.

Table of Contents

As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in 0 adjustments to the allowance for credit losses and 0 cumulative-effect adjustment to retained earnings on the adoption date of the standard.

3. Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and ~~trade~~accounts 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~~its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, ~~the Company verifies~~ insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, ~~the Company verifies~~ insurance coverage is verified or ~~receives~~an authorization is received from the patient’s employer prior to the patient’s visit.

Because of the ~~geographic~~ diversity ofin the Company’s ~~facilities and~~ non-governmental third-party ~~payors,~~payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare ~~represents~~program represent the Company’s only significant concentration of credit risk. Approximately ~~16%~~15% and ~~15%~~13% of the Company’s accounts receivable is from Medicare at December 31, ~~2018,~~2019, and ~~September~~June 30, ~~2019,~~2020, respectively.

~~Leases~~

The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.4. Redeemable Non-Controlling Interests

~~Balance Sheet~~

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

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

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

~~Statement of Operations~~

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

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

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

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

~~Recent Accounting Pronouncements~~

~~Financial Instruments~~

~~In June 2016, the Financial Accounting Standards Board (“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 financial instruments subject to ASU 2016-13 are the Company’s accounts receivable and notes receivable.

The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s financial instruments, the impact of ASU 2016-13 will not be material to the Company’s consolidated financial statements.

~~The Company’s implementation efforts are focused on finalizing the accounting processes and related controls associated with accounting for its financial instruments under the new standard.~~

~~Recently Adopted Accounting Pronouncements~~

~~Leases~~

~~The Company adopted Accounting Standards Codification (“ASC”) Topic 842,~~ ~~Leases~~ using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and continue to be reported in accordance with ASC Topic 840, ~~Leases~~.

The Company elected the 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 of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption.


3.	~~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.

On January 1, 2020, Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and certain other sellers in exchange for an aggregate purchase price of approximately $338.4 million. On February 1, 2020, Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and certain other sellers in exchange for an aggregate purchase price of approximately $27.8 million. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, dated as of February 1, 2018, as amended (the “Concentra LLC Agreement”).

The changes in redeemable non-controlling interests are as follows (in thousands):

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


4.	~~Acquisitions~~

~~U.S. HealthWorks Acquisition~~

On February 1, 2018, Concentra Inc. 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, from Dignity Health Holding Corporation (“DHHC”).

U.S. HealthWorks was acquired for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) 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 estimated fair values in accordance with the provisions of ASC Topic 805, ~~Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.~~

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


	Six Months Ended June 30,
	2019		2020
Balance as of January 1	$	780,488	$	974,541
Net income attributable to redeemable non-controlling interests	7,700		7,256

Distributions to and purchases of redeemable non-controlling interests	(2,771)		(5,687)
Purchase of membership interests of Concentra Group Holdings Parent	—		(366,203)
Redemption adjustment on redeemable non-controlling interests	47,470		10,123
Other	354		347
Balance as of March 31	$	833,241	$	620,377
Net income attributable to redeemable non-controlling interests	11,507		3,264
Distributions to and purchases of redeemable non-controlling interests	(395)		(30)
Redemption adjustment on redeemable non-controlling interests	(270)		(127,916)
Other	339		292
Balance as of June 30	$	844,422	$	495,987

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

Table of Contents

For the three months ended September 30, 2018, U.S. HealthWorks contributed net operating revenues of $133.3 million which is reflected in the Company’s consolidated statement of operations. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks contributed net operating revenues of $362.7 million which is reflected in the Company’s consolidated statement of operations for the nine months ended September 30, 2018. Due to the integrated nature of 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~~5. Variable Interest Entities

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

The Company’s pro forma results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, 2017. Accordingly, for the nine months ended September 30, 2018, pro forma results were adjusted to exclude $2.9 million of U.S. HealthWorks acquisition costs.


5.	~~Sale of Businesses~~

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


6.	~~Variable Interest Entities~~

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

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

The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were ~~$166.2~~$178.4 million and ~~$202.3~~$153.2 million at December 31, ~~2018,~~2019, and ~~September~~June 30, ~~2019,~~2020, 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~~$176.7 million and ~~$200.9~~$151.9 million at December 31, ~~2018,~~2019, and ~~September~~June 30, ~~2019,~~2020, respectively.


7.	~~Leases~~

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

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

~~For the three and nine months ended September 30, 2019, the Company’s total lease cost was as follows (in thousands):~~

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

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

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

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

~~_______________________________________________________________________________~~


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

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

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

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

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

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

~~As of September 30, 2019, the weighted average remaining lease terms and discount rates were as follows:~~



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

~~As of September 30, 2019, maturities of lease liabilities were approximately as follows (in thousands):~~6.

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

Intangible Assets

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

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


8.	~~Intangible Assets~~

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the ~~nine~~six months ended ~~September~~June 30, ~~2019:~~2020:

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


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2019	$	1,078,804	$	430,900	$	649,763	$	1,232,488	$	3,391,955
Acquired	—		—		728		4,567		5,295
Sold	—		—		(6,034)		—		(6,034)
Measurement period adjustment	—		—		—		(20)		(20)
Balance as of June 30, 2020	$	1,078,804	$	430,900	$	644,457	$	1,237,035	$	3,391,196

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, 2019										June 30, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—	$	166,698	$	166,698	$	—	$	166,698
Certificates of need	17,157		—		17,157		18,410		—		18,410
Accreditations	1,874		—		1,874		1,874		—		1,874
Finite-lived intangible assets:
Trademarks	5,000		(5,000)		—		5,000		(5,000)		—
Customer relationships	287,373		(87,346)		200,027		288,963		(100,300)		188,663
Non-compete agreements	32,114		(8,802)		23,312		32,883		(10,262)		22,621
Total identifiable intangible assets	$	510,216	$	(101,148)	$	409,068	$	513,828	$	(115,562)	$	398,266

December 31, 2018 September 30, 2019

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
(in thousands)
Indefinite-lived intangible assets:

Trademarks $ 166,698
$ —
$ 166,698
$ 166,698
$ —
$ 166,698
Certificates of need 19,174
—
19,174
17,166
—
17,166
Accreditations 1,857
—
1,857
1,874
—
1,874
Finite-lived intangible assets:

Trademarks 5,000
(4,583 ) 417
5,000
(5,000 ) —
Customer relationships 280,710
(61,900 ) 218,810
287,880
(81,010 ) 206,870
Favorable leasehold interests⁽¹⁾
13,553
(6,064 ) 7,489
—
—
—
Non-compete agreements 29,400
(6,152 ) 23,248
31,255
(8,100 ) 23,155
Total identifiable intangible assets $ 516,392
$ (78,699 ) $ 437,693
$ 509,873
$ (94,110 ) $ 415,763

~~_______________________________________________________________________________~~Table of Contents


~~(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~~June 30, ~~2019,~~2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~7.4~~6.7 years, respectively.

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was ~~$7.9~~$8.9 million and $6.9 million for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2019,~~2020, respectively. Amortization expense was ~~$22.1~~$16.0 million and ~~$22.9~~$13.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2019,~~2020, respectively.


9. 7.	Long-Term Debt ~~and Notes Payable~~

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

As of ~~September~~June 30, ~~2019,~~2020, the Company’s long-term debt and notes payable were as follows (in thousands):

Principal
Outstanding

Unamortized
Discount

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

6.250% senior notes $ 550,000
$ —
$ (10,582 ) $ 539,418
$ 576,125
Credit facilities:

Term loan 1,531,068
(10,915 ) (11,302 ) 1,508,851
1,532,982
Other debt, including finance leases 70,816
—
(420 ) 70,396
70,396
Total Select debt 2,151,884
(10,915 ) (22,304 ) 2,118,665
2,179,503
Concentra Inc.:

Credit facilities:

Term loan 1,240,298
(2,643 ) (10,008 ) 1,227,647
1,246,499
Other debt, including finance leases 5,850
—
—
5,850
5,850
Total Concentra Inc. debt 1,246,148
(2,643 ) (10,008 ) 1,233,497
1,252,349
Total debt $ 3,398,032
$ (13,558 ) $ (32,312 ) $ 3,352,162
$ 3,431,852


	Principal Outstanding		Unamortized Premium (Discount)		Unamortized Issuance Costs		Carrying Value		Fair Value
Select 6.250% senior notes	$	1,225,000	$	36,890	$	(18,455)	$	1,243,435	$	1,238,353
Select credit facilities:

Select term loan	2,103,437		(9,404)		(10,251)		2,083,782		1,987,748
Other debt, including finance leases	76,984		—		(349)		76,635		76,635
Total debt	$	3,405,421	$	27,486	$	(29,055)	$	3,403,852	$	3,302,736

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

2019 2020 2021 2022 2023 Thereafter Total
Select:

6.250% senior notes $ —
$ —
$ —
$ —
$ —
$ 550,000
$ 550,000
Credit facilities:

Term loan 1,250
5,000
5,000
5,000
5,000
1,509,818
1,531,068
Other debt, including finance leases 3,541
5,502
1,814
18,036
38
41,885
70,816
Total Select debt 4,791
10,502
6,814
23,036
5,038
2,101,703
2,151,884
Concentra Inc.:

Credit facilities:

Term loan 250
1,000
1,000
1,238,048
—
—
1,240,298
Other debt, including finance leases 136
1,194
330
358
363
3,469
5,850
Total Concentra Inc. debt 386
2,194
1,330
1,238,406
363
3,469
1,246,148
Total debt $ 5,177
$ 12,696
$ 8,144
$ 1,261,442
$ 5,401
$ 2,105,172
$ 3,398,032


	2020		2021		2022		2023		2024		Thereafter		Total
Select 6.250% senior notes	$	—	$	—	$	—	$	—	$	—	$	1,225,000	$	1,225,000
Select credit facilities:

Select term loan	—		—		—		4,757		11,150		2,087,530		2,103,437
Other debt, including finance leases	8,745		8,510		3,583		20,715		23,532		11,899		76,984
Total debt	$	8,745	$	8,510	$	3,583	$	25,472	$	34,682	$	3,324,429	$	3,405,421

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

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

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

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

Credit facilities:

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

~~Concentra Credit Facilities~~

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

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

~~Select Credit Facilities~~

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

~~Select 6.250% Senior Notes~~

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

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

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

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

~~Loss on Early Retirement of Debt~~

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


	Principal Outstanding		Unamortized Premium (Discount)		Unamortized Issuance Costs		Carrying Value		Fair Value
Select 6.250% senior notes	$	1,225,000	$	39,988	$	(19,944)	$	1,245,044	$	1,322,020
Select credit facilities:

Select term loan	2,143,280		(10,411)		(11,348)		2,121,521		2,145,959
Other debt, including finance leases	78,941		—		(396)		78,545		78,545
Total debt	$	3,447,221	$	29,577	$	(31,688)	$	3,445,110	$	3,546,524

Excess Cash Flow Payment

In February ~~2019,~~2020, Select made a principal prepayment of approximately ~~$98.8~~$39.8 million associated with its term loans in accordance with the provision in its senior secured credit agreement, dated March 6, 2017 (together with any borrowings thereunder, the ~~Select~~“Select credit ~~facilities~~facilities”) that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select ~~credit facilities.~~

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

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for ~~Select’s~~its 6.250% senior notes due August 15, 2026 (the “senior notes”) and ~~for~~ the Select ~~and Concentra~~ credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

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


~~10.~~	~~Segment Information~~

Table of Contents

8. Segment Information

The Company’s reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries. Prior to 2019, these employee leasing services were reflected in the financial results of the Company’s reportable segments. Net operating revenues have been conformed to the current presentation forFor the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020, the Company’s other activities include other operating income related to the recognition of payments received under the Provider Relief Fund for losses of revenue and health care related expenses attributable to the coronavirus disease 2019 (“COVID-19”). Refer to Note 12 – CARES Act for further information.

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,~~ gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

The following tables summarize selected financial data for the Company’s reportable segments. ~~Prior year results presented herein have been changed to conform to the current presentation.~~


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2020		2019		2020
	(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	461,143	$	519,626	$	918,677	$	1,020,147
Rehabilitation hospital	160,374		168,667		314,932		350,686
Outpatient rehabilitation	261,891		167,138		508,796		422,387
Concentra	413,451		312,338		809,772		710,873
Other	64,505		64,949		133,818		143,257
Total Company	$	1,361,364	$	1,232,718	$	2,685,995	$	2,647,350
Adjusted EBITDA:
Critical illness recovery hospital	$	64,138	$	89,743	$	137,136	$	178,313
Rehabilitation hospital	29,968		27,605		55,765		66,174
Outpatient rehabilitation	42,584		(6,282)		71,575		20,840
Concentra	76,087		41,497		142,345		102,963
Other	(26,544)		26,189		(50,471)		(2,205)
Total Company	$	186,233	$	178,752	$	356,350	$	366,085
Total assets:
Critical illness recovery hospital	$	2,119,574	$	2,115,294	$	2,119,574	$	2,115,294
Rehabilitation hospital	1,107,852		1,135,206		1,107,852		1,135,206
Outpatient rehabilitation	1,265,487		1,267,308		1,265,487		1,267,308
Concentra	2,447,387		2,351,974		2,447,387		2,351,974
Other	166,640		598,676		166,640		598,676
Total Company	$	7,106,940	$	7,468,458	$	7,106,940	$	7,468,458
Purchases of property and equipment:
Critical illness recovery hospital	$	14,488	$	14,970	$	24,648	$	23,935
Rehabilitation hospital	5,356		1,923		18,539		5,248
Outpatient rehabilitation	6,705		6,593		15,745		14,977
Concentra	12,240		6,820		27,938		22,406
Other	1,423		1,739		2,415		4,687
Total Company	$	40,212	$	32,045	$	89,285	$	71,253

Three Months Ended September 30, Nine Months Ended September 30,
2018 2019 2018 2019
(in thousands)
Net operating revenues:

Critical illness recovery hospital $ 420,108
$ 462,892
$ 1,327,236
$ 1,381,569
Rehabilitation hospital 144,588
173,369
432,675
488,301
Outpatient rehabilitation 245,234
265,330
743,379
774,126
Concentra 404,481
421,900
1,173,420
1,231,672
Other 52,990
69,852
139,865
203,670
Total Company $ 1,267,401
$ 1,393,343
$ 3,816,575
$ 4,079,338
Adjusted EBITDA:

Critical illness recovery hospital $ 53,292
$ 57,247
$ 186,989
$ 194,383
Rehabilitation hospital 25,343
36,780
80,314
92,545
Outpatient rehabilitation 34,531
40,040
107,003
111,615
Concentra 68,754
77,679
199,119
220,024
Other (25,292 ) (29,081 ) (75,337 ) (79,552 )
Total Company $ 156,628
$ 182,665
$ 498,088
$ 539,015
Total assets:

Critical illness recovery hospital $ 1,785,336
$ 2,116,512
$ 1,785,336
$ 2,116,512
Rehabilitation hospital 888,342
1,121,260
888,342
1,121,260
Outpatient rehabilitation 991,105
1,280,712
991,105
1,280,712
Concentra 2,201,869
2,366,227
2,201,869
2,366,227
Other 113,529
270,045
113,529
270,045
Total Company $ 5,980,181
$ 7,154,756
$ 5,980,181
$ 7,154,756
Purchases of property and equipment:

Critical illness recovery hospital $ 8,134
$ 12,254
$ 31,455
$ 36,902
Rehabilitation hospital 8,769
5,293
29,766
23,832
Outpatient rehabilitation 7,209
7,476
22,565
23,221
Concentra 12,539
8,240
29,281
36,178
Other 2,740
1,408
7,972
3,823
Total Company $ 39,391
$ 34,671
$ 121,039
$ 123,956

Table of Contents

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


	Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	64,138	$	29,968	$	42,584	$	76,087	$	(26,544)
Depreciation and amortization	(14,495)		(6,696)		(6,991)		(24,479)		(2,332)
Stock compensation expense	—		—		—		(767)		(5,591)
Income (loss) from operations	$	49,643	$	23,272	$	35,593	$	50,841	$	(34,467)	$	124,882
Equity in earnings of unconsolidated subsidiaries											7,394

Interest expense											(51,464)
Income before income taxes											$	80,812


	Three Months Ended September 30, 2018																			Three Months Ended June 30, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			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	)				Adjusted EBITDA	$	89,743	$	27,605	$	(6,282)	$	41,497	$	26,189
Depreciation and amortization	(11,136		)	(6,079		)	(6,597		)	(24,488		)	(2,227		)				Depreciation and amortization	(13,892)		(6,907)		(7,194)		(21,857)		(2,421)
Stock compensation expense	—			—			—			(767		)	(5,497		)				Stock compensation expense	—		—		—		(701)		(6,262)
Income (loss) from operations	$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837		Income (loss) from operations	$	75,851	$	20,698	$	(13,476)	$	18,939	$	17,506	$	119,518

Equity in earnings of unconsolidated subsidiaries																5,432			Equity in earnings of unconsolidated subsidiaries											8,324
Gain on sale of businesses																2,139
Gain on sale of business																			Gain on sale of business											346
Interest expense																(50,669		)	Interest expense											(37,366)
Income before income taxes																$	56,739		Income before income taxes											$	90,822

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

6,950
Interest expense

(54,336 )
Income before income taxes

$ 56,877


	Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	137,136	$	55,765	$	71,575	$	142,345	$	(50,471)
Depreciation and amortization	(25,946)		(13,098)		(14,023)		(49,383)		(4,681)
Stock compensation expense	—		—		—		(1,534)		(11,079)
Income (loss) from operations	$	111,190	$	42,667	$	57,552	$	91,428	$	(66,231)	$	236,606
Equity in earnings of unconsolidated subsidiaries											11,760
Gain on sale of businesses											6,532
Interest expense											(102,275)
Income before income taxes											$	152,623


	Six Months Ended June 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	178,313	$	66,174	$	20,840	$	102,963	$	(2,205)
Depreciation and amortization	(26,228)		(13,794)		(14,412)		(44,744)		(4,845)
Stock compensation expense	—		—		—		(1,468)		(12,398)
Income (loss) from operations	$	152,085	$	52,380	$	6,428	$	56,751	$	(19,448)	$	248,196

Equity in earnings of unconsolidated subsidiaries											10,912
Gain on sale of businesses											7,547
Interest expense											(83,473)
Income before income taxes											$	183,182

Nine Months Ended September 30, 2018
Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Adjusted EBITDA $ 186,989
$ 80,314
$ 107,003
$ 199,119
$ (75,337 )
Depreciation and amortization (34,146 ) (17,816 ) (19,938 ) (70,332 ) (6,790 )
Stock compensation expense —
—
—
(2,116 ) (15,059 )
U.S. HealthWorks acquisition costs —
—
—
(2,895 ) —

Income (loss) from operations $ 152,843
$ 62,498
$ 87,065
$ 123,776
$ (97,186 ) $ 328,996
Loss on early retirement of debt

(10,255 )
Equity in earnings of unconsolidated subsidiaries

14,914
Gain on sale of businesses

9,016
Interest expense

(147,991 )
Income before income taxes

$ 194,680

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

18,710
Gain on sale of businesses

6,532
Interest expense

(156,611 )
Income before income taxes

$ 209,500

9. Revenue from Contracts with Customers

Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2019:~~2020:


	Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	223,688	$	77,260	$	43,869	$	474	$	—	$	345,291
Non-Medicare	234,616		73,972		198,241		410,277		—		917,106
Total patient services revenues	458,304		151,232		242,110		410,751		—		1,262,397
Other revenues	2,839		9,142		19,781		2,700		64,505		98,967
Total net operating revenues	$	461,143	$	160,374	$	261,891	$	413,451	$	64,505	$	1,361,364


	Three Months Ended June 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	215,508	$	71,510	$	20,049	$	257	$	—	$	307,324
Non-Medicare	301,065		87,697		135,103		309,467		—		833,332
Total patient services revenues	516,573		159,207		155,152		309,724		—		1,140,656
Other revenues	3,053		9,460		11,986		2,614		64,949		92,062
Total net operating revenues	$	519,626	$	168,667	$	167,138	$	312,338	$	64,949	$	1,232,718


	Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	461,857	$	151,839	$	84,147	$	1,029	$	—	$	698,872
Non-Medicare	451,575		144,614		386,155		803,513		—		1,785,857
Total patient services revenues	913,432		296,453		470,302		804,542		—		2,484,729
Other revenues	5,245		18,479		38,494		5,230		133,818		201,266
Total net operating revenues	$	918,677	$	314,932	$	508,796	$	809,772	$	133,818	$	2,685,995


	Six Months Ended June 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	457,017	$	162,262	$	60,881	$	729	$	—	$	680,889
Non-Medicare	557,012		169,133		331,993		704,500		—		1,762,638
Total patient services revenues	1,014,029		331,395		392,874		705,229		—		2,443,527
Other revenues	6,118		19,291		29,513		5,644		143,257		203,823
Total net operating revenues	$	1,020,147	$	350,686	$	422,387	$	710,873	$	143,257	$	2,647,350

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

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

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

Table of Contents

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

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the 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 Company’s two-class method is as follows:

(i)Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were 0 dividends declared or contractual dividends paid for the three and six months ended June 30, 2019 and 2020.

(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.

(iii)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 net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.


	Basic EPS				Diluted EPS					Basic EPS						Diluted EPS
	Three Months Ended September 30,				Three Months Ended September 30,					Three Months Ended June 30,						Three Months Ended June 30,
	2018		2019		2018		2019			2019		2020		2019		2020
	(in thousands)									(in thousands)
Net income	$	42,679	$	44,030	$	42,679	$	44,030	Net income	$	59,986	$	67,486	$	59,986	$	67,486
Less: net income attributable to non-controlling interests	9,762		13,298		9,762		13,298		Less: net income attributable to non-controlling interests	15,170		15,836		15,170		15,836
Net income attributable to the Company	32,917		30,732		32,917		30,732		Net income attributable to the Company	44,816		51,650		44,816		51,650
Less: net income attributable to participating securities	1,098		1,052		1,098		1,052		Less: net income attributable to participating securities	1,484		1,778		1,484		1,778
Net income attributable to common shares	$	31,819	$	29,680	$	31,819	$	29,680	Net income attributable to common shares	$	43,332	$	49,872	$	43,332	$	49,872

Basic EPS Diluted EPS
Nine Months Ended September 30, Nine Months Ended September 30,
2018 2019 2018 2019
(in thousands)
Net income $ 147,220
$ 157,360
$ 147,220
$ 157,360

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

Net income attributable to the Company 113,167
116,382
113,167
116,382

Less: net income attributable to participating securities 3,732
3,889
3,729
3,888

Net income attributable to common shares $ 109,435
$ 112,493
$ 109,438
$ 112,494


	Basic EPS						Diluted EPS
	Six Months Ended June 30,						Six Months Ended June 30,
	2019		2020		2019		2020
	(in thousands)
Net income	$	113,330	$	137,934	$	113,330	$	137,934
Less: net income attributable to non-controlling interests	27,680		33,159		27,680		33,159
Net income attributable to the Company	85,650		104,775		85,650		104,775
Less: net income attributable to participating securities	2,827		3,596		2,826		3,596
Net income attributable to common shares	$	82,823	$	101,179	$	82,824	$	101,179

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


	Three Months Ended June 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	43,332	130,525	$	0.33	$	43,332	130,562	$	0.33
Participating securities	1,484		4,471	$	0.33	1,484		4,471	$	0.33
Total Company	$	44,816				$	44,816


	Three Months Ended June 30, 2020
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	49,872	129,319	$	0.39	$	49,872	129,319	$	0.39
Participating securities	1,778		4,610	$	0.39	1,778		4,610	$	0.39
Total Company	$	51,650				$	51,650

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

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

(1) Represents the weighted average share count outstanding during the period.

11. Commitments and Contingencies

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 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~~designed a separate insurance program that ~~are designed to respond~~responds to the risks of the specific joint venture. The Company’s joint ventures are insured under a master program with an annual aggregate limit ~~under these programs ranges~~of up to $80.0 million, subject to a sublimit aggregate ranging from ~~$5.0~~$23.0 million to ~~$20.0 million.~~$33.0 million for each specific joint venture. 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~~Table 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 2 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.Contents

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 appealed this decision to the 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.

In October 2019, the Company entered into a settlement agreement with the United States government and the plaintiff-relators. Under the terms of the settlement, the Company agreed to make payments to the government, the plaintiff-relators and their counsel. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the government and the plaintiff-relators released all defendants from liability for all conduct alleged in the complaint, and the Company admitted no liability or wrongdoing.

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”~~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~~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~~plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at ~~SSH‑Wilmington,~~SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at ~~SSH‑Wilmington.~~SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, 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~~plaintiff-relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.

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

Ann Arbor Complaint.On May 12, 2020, the United States District Court for the Eastern District of Michigan unsealed qui tam Complaints in United States of America and State of Michigan ex rel. Neal Elkin v. Select Medical Holdings Corp., Select Medical, and Select Specialty Hospital – Ann Arbor, Inc. (“SSH-Ann Arbor”), No. 12-cv-13984. An initial Complaint was filed under seal in September 2012 and a First Amended Complaint was filed under seal in September 2019. Both Complaints were unsealed after the United States and State of Michigan filed a Notice of Election to Decline Intervention in May 2020. In the First Amended Complaint, the plaintiff-relator, a physician formerly practicing at SSH-Ann Arbor, alleges that the defendants had a policy to keep respiratory patients on ventilators longer than medically necessary in order to increase reimbursement, and that, after he complained of this practice, SSH-Ann Arbor retaliated by refusing to assign new patients to him. The First Amended Complaint has not yet been served on the defendants. If the plaintiff-relator serves the First Amended Complaint and pursues this action, the Company intends to vigorously defend this action; however, at this time the Company is unable to predict the timing and outcome of this matter.

~~14. Supplemental Financial Information~~

Table of ~~Concentra Group Holdings Parent~~Contents

12. CARES Act

Provider Relief Funds

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. These health care related expenses could include costs associated with constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce and trainings.

The ~~following tables summarize selected financial information~~Company’s consolidated subsidiaries received approximately $100.5 million of ~~Concentra Group Holdings Parent.~~payments under the Provider Relief Fund as of June 30, 2020. Under the Company’s accounting policy, it will recognize these payments as other operating income when it is probable that it has complied with the terms and conditions of the funds. Other operating income will be recognized as the Company incurs a loss of revenues or health care related expenses attributable to COVID-19. For the three and six months ended June 30, 2020, the Company has recognized approximately $55.0 million as other operating income on the accompanying condensed consolidated statement of operations. The remaining Provider Relief Fund payments of approximately $45.5 million are recorded within “unearned government assistance” on the accompanying condensed consolidated balance sheet and will be recognized as other operating income in future periods when the Company incurs additional lost revenues or health care related expenses attributable to COVID-19. There is uncertainty regarding whether all payments received by the Company’s consolidated subsidiaries will be recognized as other operating income in future periods; such funds may need to be repaid to the government to the extent that payments received exceed lost revenues and health care related expenses attributable to COVID-19.

Medicare Accelerated and Advance Payments Program

December 31, 2018 September 30, 2019
(in thousands)
Assets
Current assets $ 385,094
$ 287,514
Non-current assets 1,793,774
2,078,713
Total Assets $ 2,178,868
$ 2,366,227
Liabilities and Equity

Current liabilities $ 206,386
$ 232,035
Non-current liabilities 1,478,084
1,587,721
Total Liabilities 1,684,470
1,819,756
Redeemable non-controlling interests 18,525
17,268
Members' Equity of Concentra Group Holdings Parent 470,329
523,814
Non-controlling interests 5,544
5,389
Total Equity 475,873
529,203
Total Liabilities and Equity $ 2,178,868
$ 2,366,227
In accordance with the CARES Act, CMS temporarily expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. The Company’s consolidated subsidiaries received approximately $317.0 million of advanced payments under this program. The majority of these payments were received in April 2020. Amounts received under the Accelerated and Advance Payment Program are reflected in “government advances” on the accompanying condensed consolidated balance sheet.

For the Company’s critical illness recovery hospitals and rehabilitation hospitals, repayment of amounts received under the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued. Failure to repay the advanced payments when due results in interest charges on the outstanding balance owed. CMS has the ability to recoup the advanced payments through future Medicare claims billed by the Company’s hospitals, beginning 121 days after the advanced payment was issued.

Employer Payroll Tax Deferral

In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022. As of June 30, 2020, the Company deferred approximately $33.1 million of payroll taxes. These amounts are reflected in “other non-current liabilities” on the accompanying condensed consolidated balance sheet.

13. Income Taxes

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million and resulted from a correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and the provision for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. The legislation related to net operating losses did not impact the Company’s deferred tax balances.

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

Table of Contents

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

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, including the potential impact of the COVID-19 pandemic on those 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:

•developments related to the COVID-19 pandemic including, but not limited to, the duration and severity of the pandemic, additional measures taken by government authorities and the private sector to limit the spread of COVID-19, and further legislative and regulatory actions which impact healthcare providers, including actions that may impact the Medicare program;

•changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

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

•

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

•~~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, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, could increase our operating costs significantly or limit our ability to staff our facilities;

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

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

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

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

Table of Contents

•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, ~~2018,~~2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, as such risk factors may be updated from time to time in our periodic filings with the ~~SEC.~~

SEC, including the risk factors discussed in Item 1A. Risk Factors on this Form 10-Q.

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, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of ~~September~~June 30, ~~2019,~~2020, we had operations in 47 states and the District of Columbia. We operated ~~100~~101 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and ~~1,707~~1,757 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated ~~523~~522 occupational health centers in 41 states as of ~~September~~June 30, ~~2019.~~2020. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenues of ~~$4,079.3~~$2,647.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Of this total, we earned approximately ~~34%~~39% of our net operating revenues from our critical illness recovery hospital segment, approximately ~~12%~~13% from our rehabilitation hospital segment, approximately ~~19%~~16% from our outpatient rehabilitation segment, and approximately ~~30%~~27% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. 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 consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs. ~~During 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part~~

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

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”).~~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,~~ gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2020		2019		2020
	(in thousands)
Net income	$	59,986	$	67,486	$	113,330	$	137,934
Income tax expense	20,826		23,336		39,293		45,248
Interest expense	51,464		37,366		102,275		83,473
Gain on sale of businesses	—		(346)		(6,532)		(7,547)
Equity in earnings of unconsolidated subsidiaries	(7,394)		(8,324)		(11,760)		(10,912)

Income from operations	124,882		119,518		236,606		248,196
Stock compensation expense:
Included in general and administrative	4,796		5,451		9,544		10,888
Included in cost of services	1,562		1,512		3,069		2,978
Depreciation and amortization	54,993		52,271		107,131		104,023
Adjusted EBITDA	$	186,233	$	178,752	$	356,350	$	366,085

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

Included in general and administrative 4,683
5,305
12,720
14,849
Included in cost of services 1,581
1,513
4,455
4,582
Depreciation and amortization 50,527
52,941
149,022
160,072
U.S. HealthWorks acquisition costs —
—
2,895
—
Adjusted EBITDA $ 156,628
$ 182,665
$ 498,088
$ 539,015
Effects of the COVID-19 Pandemic on our Results of Operations

The continuing implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We have provided net operating revenues and certain operating statistics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the three and six months ended June 30, 2020. Please refer to our risk factors discussed in Item 1A. “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 for further discussion.

Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key component of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which apply to our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our critical illness recovery hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor.

The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of critical illness recovery hospitals we operated at the end of each period.


	One Month Ended																								Three Months Ended June 30	Six Months Ended June 30
	January 31			February 28			March 31			April 30			May 31			June 30
2020
Critical illness recovery hospital
Net operating revenues	$	163,238		$	165,375		$	171,908		$	171,445		$	178,223		$	169,958		$	519,626		$	1,020,147
Patient days	90,783			87,844			91,831			90,710			95,191			90,988			276,889			547,347
Occupancy rate	69		%	72		%	70		%	71		%	72		%	71		%	72		%	71		%
Number of hospitals owned	100			100			100			100			100			100			100			100

2019
Critical illness recovery hospital
Net operating revenues	$	149,799		$	145,586		$	162,149		$	156,231		$	156,422		$	148,490		$	461,143		$	918,677
Patient days	86,238			80,806			91,085			88,357			89,350			85,153			262,860			520,989
Occupancy rate	69		%	71		%	73		%	70		%	69		%	68		%	69		%	70		%
Number of hospitals owned	96			96			96			99			99			99			99			99


The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented.


	One Month Ended																								Three Months Ended June 30	Six Months Ended June 30
	January 31			February 28			March 31			April 30			May 31			June 30
Critical illness recovery hospital
Net operating revenues	9.0		%	13.6		%	6.0		%	9.7		%	13.9		%	14.5		%	12.7		%	11.0		%
Patient days	5.3		%	8.7		%	0.8		%	2.7		%	6.5		%	6.9		%	5.3		%	5.1		%

Table of Contents

Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals in order to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our rehabilitation hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. At the beginning of the pandemic, elective surgeries at hospitals and other facilities were suspended, which reduced the need for inpatient rehabilitation services. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our rehabilitation hospitals.

The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of rehabilitation hospitals we operated at the end of each period.


	One Month Ended																								Three Months Ended June 30	Six Months Ended June 30
	January 31			February 28			March 31			April 30			May 31			June 30
2020
Rehabilitation hospital
Net operating revenues	$	61,673		$	60,690		$	59,656		$	45,878		$	57,815		$	64,974		$	168,667		$	350,686
Patient days	32,111			31,813			30,644			23,553			29,787			30,741			84,081			178,649
Occupancy rate	79		%	84		%	76		%	61		%	73		%	78		%	71		%	75		%
Number of hospitals owned	19			19			19			19			19			19			19			19

2019
Rehabilitation hospital
Net operating revenues	$	50,615		$	48,080		$	55,863		$	51,991		$	56,019		$	52,364		$	160,374		$	314,932
Patient days	27,434			25,442			29,940			28,266			29,730			28,529			86,525			169,341
Occupancy rate	74		%	76		%	78		%	76		%	75		%	73		%	75		%	76		%
Number of hospitals owned	17			17			18			18			19			19			19			19


The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented.


	One Month Ended																								Three Months Ended June 30	Six Months Ended June 30
	January 31			February 28			March 31			April 30			May 31			June 30
Rehabilitation hospital
Net operating revenues	21.8		%	26.2		%	6.8		%	(11.8)		%	3.2		%	24.1		%	5.2		%	11.4		%
Patient days	17.0		%	25.0		%	2.4		%	(16.7)		%	0.2		%	7.8		%	(2.8)		%	5.5		%

Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. By the end of March, most states had implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits, combined with recommendations of social distancing and the other items noted above, have had significant effects on our patient visit volumes. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our outpatient rehabilitation clinics. Additionally, most physician offices have reopened for routine office visits. While some of our volume has recovered, our outpatient rehabilitation segment continues to experience reduced volume of patients seeking rehabilitation services for employment injuries and sports activities.

Table of Contents

The following table shows the trend in net operating revenues and patient visit volume for each of the periods presented, as well as the number of working days for each period.


	One Month Ended																Three Months Ended June 30	Six Months Ended June 30
	January 31		February 28		March 31		April 30		May 31		June 30
2020
Outpatient Rehabilitation
Net operating revenues	$	90,924	$	88,239	$	76,086	$	49,084	$	51,186	$	66,868	$	167,138	$	422,387
Visits	757,171		739,061		626,433		386,108		409,703		546,456		1,342,267		3,464,932
Working days⁽¹⁾	22		20		22		22		20		22		64		128
2019
Outpatient Rehabilitation
Net operating revenues	$	83,185	$	78,573	$	85,147	$	90,230	$	90,272	$	81,389	$	261,891	$	508,796
Visits	687,007		658,610		708,866		762,914		759,829		680,762		2,203,505		4,257,988
Working days⁽¹⁾	22		20		21		22		22		20		64		127

(1) Represents the number of days in which normal business operations were conducted during the periods presented.

The following table summarizes the changes in our net operating revenues and patient visit volume for 2020, as compared to the same period in 2019, for each of the periods presented below.


















	One Month Ended																Three Months Ended June 30	Six Months Ended June 30
	January 31		February 28		March 31		April 30		May 31		June 30
Outpatient Rehabilitation
Net operating revenues	9.3	%	12.3	%	(10.6)	%	(45.6)	%	(43.3)	%	(17.8)	%	(36.2)	%	(17.0)	%
Visits	10.2	%	12.2	%	(11.6)	%	(49.4)	%	(46.1)	%	(19.7)	%	(39.1)	%	(18.6)	%

Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. By the end of March, most states implemented significant restrictions on businesses, causing many employers to furlough their workforce and temporarily cease or significantly reduce their operations. These actions have had significant effects on our patient visit volumes. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and employers began to increase their workforce, which has resulted in an increased need for our occupational health services.

The following table shows the trend in net operating revenues and patient visit volume for each of the periods presented, as well as the number of working days for each period.


	One Month Ended																Three Months Ended June 30	Six Months Ended June 30
	January 31		February 28		March 31		April 30		May 31		June 30
2020
Concentra
Net operating revenues	$	141,236	$	133,690	$	123,609	$	91,178	$	99,228	$	121,932	$	312,338	$	710,873
Visits	1,032,069		965,741		879,585		610,555		674,629		865,896		2,151,080		5,028,475
Working days⁽¹⁾	22		20		22		22		20		22		64		128
2019
Concentra
Net operating revenues	$	133,507	$	126,309	$	136,505	$	140,050	$	143,183	$	130,218	$	413,451	$	809,772
Visits	985,598		919,065		1,006,944		1,040,543		1,073,763		988,783		3,103,089		6,014,696
Working days⁽¹⁾	22		20		21		22		22		20		64		127

(1) Represents the number of days in which normal business operations were conducted during the periods presented.

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The following table summarizes the changes in our net operating revenues and patient visit volume for 2020, as compared to the same period in 2019, for each of the periods presented below.


















	One Month Ended																Three Months Ended June 30	Six Months Ended June 30
	January 31		February 28		March 31		April 30		May 31		June 30
Concentra
Net operating revenues	5.8	%	5.8	%	(9.4)	%	(34.9)	%	(30.7)	%	(6.4)	%	(24.5)	%	(12.2)	%
Visits	4.7	%	5.1	%	(12.6)	%	(41.3)	%	(37.2)	%	(12.4)	%	(30.7)	%	(16.4)	%

Please refer to “Summary Financial Results” and “Results of Operations” for further discussion of our segment performance measures for the three and six months ended June 30, 2019 and 2020. Please refer to “Operating Statistics” for further discussion regarding the uses and calculations of the metrics provided above, as well as the operating statistics data for each segment for the three and six months ended June 30, 2019 and 2020.

The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could have a materially adverse impact our business, results of operations, and overall financial performance in future periods. See Item 1A. “Risk Factors” of this Form 10-Qfor further discussion of the possible impact of the COVID-19 pandemic on our business.

Other Significant Events

Purchase of Concentra Interest

On January 1, 2020, Select, WCAS, and DHHC entered into an agreement pursuant to which Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $338.4 million.

On February 1, 2020, Select, WCAS and DHHC entered into an agreement pursuant to which Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $27.8 million.

Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Concentra LLC Agreement.

Table of Contents

Summary Financial Results

Three Months Ended ~~September~~June 30, ~~2019~~2020

For the three months ended ~~September~~June 30, ~~2019,~~2020, our net operating revenues ~~increased 9.9% to $1,393.3~~were $1,232.7 million, compared to ~~$1,267.4~~$1,361.4 million for the three months ended ~~September~~June 30, ~~2018.~~2019. Income from operations ~~increased 23.1% to $122.9~~was $119.5 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$99.8~~$124.9 million for the three months ended ~~September~~June 30, ~~2018.~~2019. For the three months ended June 30, 2020, income from operations included other operating income of $55.0 million related to the recognition of payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19.

Net income increased ~~3.2%~~12.5% to ~~$44.0~~$67.5 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$42.7~~$60.0 million for the three months ended ~~September 30, 2018. Net income included pre-tax losses on early retirement of debt of $18.6 million for the three months ended September~~June 30, 2019. Net income included a pre-tax gain on sale of businesses of ~~$2.1~~$0.3 million for the three months ended ~~September~~June 30, ~~2018.~~2020.

Adjusted EBITDA ~~increased 16.6% to $182.7~~was $178.8 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$156.6~~$186.2 million for the three months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin was ~~13.1%~~14.5% for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~12.4%~~13.7% for the three months ended ~~September~~June 30, ~~2018.~~2019.

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


	Three Months Ended June 30, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)
Net operating revenues	$	519,626		$	168,667		$	167,138		$	312,338		$	64,949	$	1,232,718
Operating expenses	(429,883)			(141,062)			(173,420)			(272,331)			(99,221)		(1,115,917)
Depreciation and amortization	(13,892)			(6,907)			(7,194)			(21,857)			(2,421)		(52,271)
Other operating income	—			—			—			789			54,199		54,988
Income (loss) from operations	$	75,851		$	20,698		$	(13,476)		$	18,939		$	17,506	$	119,518
Depreciation and amortization	13,892			6,907			7,194			21,857			2,421		52,271
Stock compensation expense	—			—			—			701			6,262		6,963
Adjusted EBITDA	$	89,743		$	27,605		$	(6,282)		$	41,497		$	26,189	$	178,752
Adjusted EBITDA margin	17.3		%	16.4		%	(3.8)		%	13.3		%	N/M		14.5		%


	Three Months Ended September 30, 2019																			Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total				Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)																			(in thousands)
Net operating revenues	$	462,892		$	173,369		$	265,330		$	421,900		$	69,852		$	1,393,343		Net operating revenues	$	461,143		$	160,374		$	261,891		$	413,451		$	64,505	$	1,361,364
Operating expenses	405,645			136,589			225,290			344,989			104,983			1,217,496			Operating expenses	(397,005)			(130,406)			(219,307)			(338,131)			(96,640)		(1,181,489)
Depreciation and amortization	12,484			7,234			6,887			23,989			2,347			52,941			Depreciation and amortization	(14,495)			(6,696)			(6,991)			(24,479)			(2,332)		(54,993)

Income (loss) from operations	$	44,763		$	29,546		$	33,153		$	52,922		$	(37,478	)	$	122,906		Income (loss) from operations	$	49,643		$	23,272		$	35,593		$	50,841		$	(34,467)	$	124,882
Depreciation and amortization	12,484			7,234			6,887			23,989			2,347			52,941			Depreciation and amortization	14,495			6,696			6,991			24,479			2,332		54,993
Stock compensation expense	—			—			—			768			6,050			6,818			Stock compensation expense	—			—			—			767			5,591		6,358
Adjusted EBITDA	$	57,247		$	36,780		$	40,040		$	77,679		$	(29,081	)	$	182,665		Adjusted EBITDA	$	64,138		$	29,968		$	42,584		$	76,087		$	(26,544)	$	186,233
Adjusted EBITDA margin	12.4		%	21.2		%	15.1		%	18.4		%	N/M			13.1		%	Adjusted EBITDA margin	13.9		%	18.7		%	16.3		%	18.4		%	N/M		13.7		%

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

Table of Contents

The following table summarizes changes in segment performance measures for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to the three months ended ~~September~~June 30, ~~2018:~~2019:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total			Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	10.2	%	19.9	%	8.2	%	4.3	%	31.8	%	9.9	%	Change in net operating revenues	12.7	%	5.2	%	(36.2)	%	(24.5)	%	0.7	%	(9.4)	%
Change in income from operations	6.2	%	53.4	%	18.7	%	21.7	%	(13.5	)%	23.1	%	Change in income from operations	52.8	%	(11.1)	%	(137.9)	%	(62.7)	%	N/M		(4.3)	%
Change in Adjusted EBITDA	7.4	%	45.1	%	16.0	%	13.0	%	(15.0	)%	16.6	%	Change in Adjusted EBITDA	39.9	%	(7.9)	%	(114.8)	%	(45.5)	%	N/M		(4.0)	%

~~_______________________________________________________________________________~~

N/M — Not meaningful.


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

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, our net operating revenues ~~increased 6.9% to $4,079.3~~were $2,647.4 million, compared to ~~$3,816.6~~$2,686.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Income from operations increased ~~9.3%~~4.9% to ~~$359.5~~$248.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$329.0~~$236.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. For the six months ended June 30, 2020, income from operations included other operating income of $55.0 million related to the recognition of payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19.

Net income increased ~~6.9%~~21.7% to ~~$157.4~~$137.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$147.2~~$113.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Net income included ~~pre-tax losses on early retirement of debt of $18.6 million and~~ a pre-tax gain on sale of businesses of $7.5 million and $6.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, pre-tax gains on sales of businesses of $9.0 million,~~2020 and ~~pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the nine months ended September 30, 2018.~~2019, respectively.

Adjusted EBITDA increased ~~8.2%~~2.7% to ~~$539.0~~$366.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$498.1~~$356.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin was ~~13.2%~~13.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~13.1%~~13.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~

2019.

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


	Nine Months Ended September 30, 2019																			Six Months Ended June 30, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total				Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)																			(in thousands)
Net operating revenues	$	1,381,569		$	488,301		$	774,126		$	1,231,672		$	203,670		$	4,079,338		Net operating revenues	$	1,020,147		$	350,686		$	422,387		$	710,873		$	143,257	$	2,647,350
Operating expenses	1,187,186			395,756			662,511			1,013,950			300,351			3,559,754			Operating expenses	(841,834)			(284,512)			(401,547)			(610,167)			(212,059)		(2,350,119)
Depreciation and amortization	38,430			20,332			20,910			73,372			7,028			160,072			Depreciation and amortization	(26,228)			(13,794)			(14,412)			(44,744)			(4,845)		(104,023)
Other operating income																			Other operating income	—			—			—			789			54,199		54,988
Income (loss) from operations	$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709	)	$	359,512		Income (loss) from operations	$	152,085		$	52,380		$	6,428		$	56,751		$	(19,448)	$	248,196
Depreciation and amortization	38,430			20,332			20,910			73,372			7,028			160,072			Depreciation and amortization	26,228			13,794			14,412			44,744			4,845		104,023
Stock compensation expense	—			—			—			2,302			17,129			19,431			Stock compensation expense	—			—			—			1,468			12,398		13,866
Adjusted EBITDA	$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552	)	$	539,015		Adjusted EBITDA	$	178,313		$	66,174		$	20,840		$	102,963		$	(2,205)	$	366,085
Adjusted EBITDA margin	14.1		%	19.0		%	14.4		%	17.9		%	N/M			13.2		%	Adjusted EBITDA margin	17.5		%	18.9		%	4.9		%	14.5		%	N/M		13.8		%

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

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	Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)
Net operating revenues	$	918,677		$	314,932		$	508,796		$	809,772		$	133,818	$	2,685,995
Operating expenses	(781,541)			(259,167)			(437,221)			(668,961)			(195,368)		(2,342,258)
Depreciation and amortization	(25,946)			(13,098)			(14,023)			(49,383)			(4,681)		(107,131)

Income (loss) from operations	$	111,190		$	42,667		$	57,552		$	91,428		$	(66,231)	$	236,606
Depreciation and amortization	25,946			13,098			14,023			49,383			4,681		107,131
Stock compensation expense	—			—			—			1,534			11,079		12,613
Adjusted EBITDA	$	137,136		$	55,765		$	71,575		$	142,345		$	(50,471)	$	356,350
Adjusted EBITDA margin	14.9		%	17.7		%	14.1		%	17.6		%	N/M		13.3		%

The following table summarizes changes in segment performance measures for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total			Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	4.1	%	12.9	%	4.1	%	5.0	%	45.6	%	6.9	%	Change in net operating revenues	11.0	%	11.4	%	(17.0)	%	(12.2)	%	7.1	%	(1.4)	%
Change in income from operations	2.0	%	15.5	%	4.2	%	16.6	%	(6.7	)%	9.3	%	Change in income from operations	36.8	%	22.8	%	(88.8)	%	(37.9)	%	N/M		4.9	%
Change in Adjusted EBITDA	4.0	%	15.2	%	4.3	%	10.5	%	(5.6	)%	8.2	%	Change in Adjusted EBITDA	30.0	%	18.7	%	(70.9)	%	(27.7)	%	N/M		2.7	%

~~_______________________________________________________________________________~~

N/M — Not meaningful.


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

~~Significant Events~~

~~Select 6.250% Senior Notes~~

~~On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount~~

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

~~Select Credit Facilities~~

~~Concentra Credit Facilities~~

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on February ~~21, 2019,~~20, 2020, 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 26% of our net operating revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, and ~~27%~~26% of our net operating revenues for the year ended December 31, ~~2018.~~2019.

Federal Health Care Program Changes in Response to the COVID-19 Pandemic

On January 31, 2020, the Secretary of Health and Human Services (“HHS”) declared a public health emergency under section 319 of the Public Health Service Act, 42 U.S.C. § 247d, in response to the COVID-19 outbreak in the United States. On March 13, 2020, President Trump declared a national emergency due to the COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of certain requirements under the Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) pursuant to section 1135 of the Social Security Act. Under this authority, CMS issued a number of blanket waivers that excuse health care providers or suppliers from specific program requirements. The following blanket waivers, while in effect, may impact our results of operations:

i.Inpatient rehabilitation facilities (“IRFs”), IRF units, and hospitals and units applying to be classified as IRFs, can exclude patients admitted solely to respond to the emergency from the calculation of the “60 percent rule” thresholds to receive payment as an IRF.

ii.Long-term care hospitals (“LTCHs”) are exempt from the greater-than-25-day average length of stay requirement for all cost reporting periods that include the COVID-19 public health emergency period. Hospitals seeking LTCH classification can exclude patient stays from the greater-than-25-day average length of stay requirement where the patient was admitted or discharged to meet the demands of the COVID-19 public health emergency.

iii.Medicare will not require out-of-state physician and non-physician practitioners to be licensed in the state where they are providing services when they are licensed in another state, subject to certain conditions and state or local licensure requirements.

iv.Many requirements under the hospital conditions of participation (“CoPs”) are waived during the emergency period to give hospitals more flexibility in treating COVID-19 patients.

v.Hospitals can operate temporary expansion locations without meeting the provider-based entity requirements or certain requirements in the physical environment CoP for hospitals during the emergency. This waiver also allows hospitals to change the status of their current provider-based department locations to meet patient needs as part of the state or local pandemic plan.

vi.IRFs, LTCHs and certain other providers do not need to submit quality data to Medicare for October 1, 2019 through June 30, 2020 to comply with the quality reporting programs.

vii.The HHS Secretary waived sanctions under the physician self-referral law (i.e., Stark law) for certain types of remuneration and referral arrangements that are related to a COVID-19 purpose. The Office of the Inspector General (“OIG”) will also exercise enforcement discretion to not impose administrative sanctions under the federal anti-kickback statute for many payments covered by the Stark law waivers.

CMS also approved section 1135 waivers for 54 state Medicaid programs (including the District of Columbia, Puerto Rico, and other territories), 45 temporary changes to Medicaid or CHIP state plan amendments, and 1 traditional change to a Medicaid state plan amendment. CMS will consider specific waiver requests from providers and suppliers. We have submitted one or more specific waiver requests to make it easier for our operators or referral partners to treat COVID-19 patients, and we may submit others in the future.

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Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS has waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) can receive telehealth services, including in their homes, beginning on March 6, 2020. CMS issued additional waivers to permit more than 130 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.

In addition to these agency actions, the CARES Act was enacted on March 27, 2020. It provides additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 public health emergency. Some of the CARES Act provisions that may impact our operations include:

i.$100 billion in appropriations for the Public Health and Social Services Emergency Fund to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Half of the fund is allocated for general distribution to Medicare providers. The first $30 billion was distributed to health care providers that received Medicare fee-for-service payments in 2019. The remaining $20 billion is being distributed to Medicare providers in a manner that makes the entire $50 billion general distribution proportional to providers’ share of 2018 net patient revenue. The other half of the fund is for targeted allocations to providers in high impact COVID-19 areas ($10 billion), rural providers ($10 billion), Indian Health Service ($400 million), and unspecified allocations for treatment of uninsured COVID-19 patients and providers who need additional funding such as skilled nursing facilities, dentists, and providers that only treat Medicaid patients.

ii.Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers. CMS has the ability to recoup the advanced payments through future Medicare claims, beginning 121 days after the advanced payment was issued. Repayment of amounts received under the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued.

iii.Temporary suspension of the 2% cut to Medicare payments due to sequestration so that, for the period of May 1, 2020 to December 31, 2020, the Medicare program will be exempt from any sequestration order.

iv.Two waivers of Medicare statutory requirements regarding site neutral payment to LTCHs. The first waives the LTCH discharge payment percentage requirement (i.e., 50% rule) for the cost reporting period(s) that include the emergency period. The second waives application of the site neutral payment rate so that all LTCH cases admitted during the emergency period will be paid the LTCH-PPS standard federal rate.

v.Waiver of the IRF 3-hour rule so that IRF services provided during the public health emergency period do not need to meet the coverage requirement that patients receive at least 3 hours of therapy a day or 15 hours of therapy per week.

The CARES Act also provides for a 20% increase in the payment weight for Medicare payments to hospitals paid under the inpatient hospital prospective payment system (“IPPS”) for treating COVID-19 patients. We are monitoring developments related to this provision, in case CMS provides a similar payment add-on for LTCHs and IRFs.

Medicare Reimbursement of LTCH Services

The following is a summary of significant regulatory changes ~~affecting~~to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as ~~long term care hospitals (“LTCHs”),~~LTCHs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”).

~~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 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 Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further impacted 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~~document 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 herein).~~Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, 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.

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Fiscal Year 2020. On August 16, 2019, CMS published the final rule updating 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). Certain errors in the final rule were corrected in a ~~final rule~~document published October 8, 2019. The standard federal rate was set at $42,678, 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 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. The standard federal rate also included an area wage budget neutrality factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of 0.999858 in connection with the elimination of the 25 Percent ~~Rule (discussed herein).~~Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $26,778, a decrease from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,552, 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. However, the CARES Act waives the site neutral payment rate for patients admitted during such coronavirus emergency period and in response to the public health emergency, as discussed above.

~~25 Percent Rule~~

~~The “25 Percent Rule” was a downward~~Fiscal Year 2021. On May 29, 2020, CMS published the proposed policies and payment ~~adjustment that applied if~~rates for 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 particularLTCH-PPS for fiscal year 2021 (affecting discharges and cost reporting ~~period.~~

~~For~~periods beginning on or after October 1, 2020 through September 30, 2021). The standard federal rate for fiscal year ~~2018, CMS~~2021, if 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~~would be set at $43,849, an increase from the standard federal ~~payment rates down such that~~rate applicable during fiscal year 2020 of $42,678. The update to the ~~projection~~standard federal rate for fiscal year 2021, if adopted, includes a market basket increase of ~~aggregate LTCH payments~~2.9%, less a productivity adjustment of 0.4%. The standard federal rate would ~~equal the projection~~also include an area wage budget neutrality factor of ~~aggregate LTCH payments that would have been paid if the moratorium ended~~1.0018755 and ~~the 25 Percent Rule went into effect on October 1, 2018. As~~ a ~~result,~~permanent, one-time budget neutrality adjustment of 1.000517 in connection with the elimination of the 25 Percent ~~Rule includes a temporary, one-time adjustment to~~Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS, if adopted, would be set at $30,515, an increase from the fixed-loss amount in the 2020 fiscal year ~~2019 LTCH-PPS standard federal~~of $26,778. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate, ~~a temporary, one-time adjustment to~~if adopted, would be set at $30,006, an increase from the fixed-loss amount in the 2020 fiscal year ~~2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.~~of $26,552.

Medicare Reimbursement of IRF Services

The following is a summary of significant regulatory changes ~~affecting~~to the Medicare prospective payment system for our rehabilitation hospitals, which are certified by Medicare as ~~inpatient rehabilitation facilities (“IRFs”),~~IRFs, which have affected our results of operations, 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 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 by the Medicare Access and CHIP Reauthorization Act of 2015, which 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 August 8, 2019, CMS published the final rule updating 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 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS decreased the outlier threshold amount for fiscal year 2020 to $9,300 from $9,402 established in the final rule for fiscal year 2019.

Fiscal Year 2021. On April 21, 2020, CMS published the proposed policies and payment rates for the IRF-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, 2020 through September 30, 2021). The standard payment conversion factor for discharges for fiscal year 2021 would be set at $16,847, an increase from the standard payment conversion factor applicable during fiscal year 2020 of $16,489. The update to the standard payment conversion factor for fiscal year 2021, if adopted, would include a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS proposed to decrease the outlier threshold amount for fiscal year 2021 to $8,102 from $9,300 established in the final rule for fiscal year 2020.

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Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

Outpatient rehabilitation providers enroll in Medicare as a rehabilitation agency, a clinic, or a public health agency. 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 was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the ~~Merit‑Based~~Merit-Based Incentive Payment System (“MIPS”). In 2019, CMS added physical and occupational therapists to the list of MIPS eligible clinicians. For these therapists in private practice, payments under the fee schedule are subject to adjustment in a later year based on their performance in MIPS according to established performance standards. Calendar year 2021 is the first year that payments are adjusted, based upon the therapist’s performance under MIPS in 2019. Providers in facility-based outpatient therapy settings are excluded from MIPS eligibility and therefore not subject to this payment adjustment. 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 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 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 clinician’s payment for a year. Each year from 2019 through 2024 eligible clinicians who receive a significant share of their revenues through an advanced 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.

In the final 2020 Medicare physician fee schedule, CMS revised coding, documentation guidelines, and valuation for evaluation and management (“E/M”) office visit codes. Because the Medicare physician fee schedule is budget-neutral, any revaluation of E/M services that will increase spending by more than $20 million will require a budget neutrality adjustment. To increase values for the E/M codes while maintaining budget neutrality under the fee schedule, CMS proposed cuts to other codes to make up the difference, beginning in 2021. Under the proposal, physical and occupational therapy services could see code reductions that may result in an estimated 8% decrease in payment. However, many providers have opposed the proposed cuts, and CMS has not yet determined the actual cuts to each code.

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

In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers (CQ and CO) to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning on January 1, 2022.In the final 2020 Medicare physician fee schedule rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the PTA provides skilled therapy alongside the physical therapist, the CQ modifier is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS will apply the de minimis standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service, allowing the separate reporting, on two different claim lines, of the number of units to which the new modifiers apply and the number of units to which the modifiers do not apply.

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Operating Statistics

The following table sets forth operating statistics for each of our segments for the periods presented. The operating statistics reflect data for the period of time we managed these operations. Our operating statistics include metrics we believe provide relevant insight about the number of facilities we operate, volume of services we provide to our patients, and average payment rates for services we provide. These metrics are utilized by management to monitor trends and performance in our businesses and therefore may be important to investors because management may assess our performance based in part on such metrics. Other healthcare providers may present similar statistics, and these statistics are susceptible to varying definitions. Our statistics as presented may not be comparable to other similarly titled statistics of other companies.


	Three Months Ended June 30,									Six Months Ended June 30,
	2019			2020			2019			2020
Critical illness recovery hospital data:
Number of hospitals owned—start of period	96			100			96			100
Number of hospitals acquired	3			—			3			—


Number of hospitals owned—end of period	99			100			99			100
Number of hospitals managed—end of period	1			1			1			1
Total number of hospitals (all)—end of period	100			101			100			101
Available licensed beds⁽¹⁾	4,230			4,308			4,230			4,308
Admissions⁽¹⁾⁽²⁾	9,172			9,167			18,628			18,700
Patient days⁽¹⁾⁽³⁾	262,860			276,889			520,989			547,347
Average length of stay (days)⁽¹⁾⁽⁴⁾	28			30			28			30
Net revenue per patient day⁽¹⁾⁽⁵⁾	$	1,739		$	1,867		$	1,749		$	1,853
Occupancy rate⁽¹⁾⁽⁶⁾	69		%	72		%	70		%	71		%
Percent patient days—Medicare⁽¹⁾⁽⁷⁾	50		%	42		%	52		%	46		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	18			19			17			19

Number of hospital start-ups	1			—			2			—

Number of hospitals owned—end of period	19			19			19			19
Number of hospitals managed—end of period	9			10			9			10
Total number of hospitals (all)—end of period	28			29			28			29
Available licensed beds⁽¹⁾	1,299			1,309			1,299			1,309
Admissions⁽¹⁾⁽²⁾	6,017			5,713			11,853			12,046
Patient days⁽¹⁾⁽³⁾	86,525			84,081			169,341			178,649
Average length of stay (days)⁽¹⁾⁽⁴⁾	14			15			14			15
Net revenue per patient day⁽¹⁾⁽⁵⁾	$	1,635		$	1,831		$	1,634		$	1,778
Occupancy rate⁽¹⁾⁽⁶⁾	75		%	71		%	76		%	75		%
Percent patient days—Medicare⁽¹⁾⁽⁷⁾	50		%	43		%	51		%	48		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,407			1,471			1,423			1,461
Number of clinics acquired	10			1			14			3
Number of clinic start-ups	11			13			22			25
Number of clinics closed/sold	(9)			(10)			(40)			(14)
Number of clinics owned—end of period	1,419			1,475			1,419			1,475
Number of clinics managed—end of period	276			282			276			282
Total number of clinics (all)—end of period	1,695			1,757			1,695			1,757
Number of visits⁽¹⁾⁽⁸⁾	2,203,505			1,342,267			4,257,988			3,464,932
Net revenue per visit⁽¹⁾⁽⁹⁾	$	102		$	106		$	103		$	105

Table of Contents

Three Months Ended September 30, Nine Months Ended September 30,
2018 2019 2018 2019
Critical illness recovery hospital data:

Number of hospitals owned—start of period 98
99
99
96
Number of hospitals acquired —
—
—
3
Number of hospital start-ups —
—
1
—
Number of hospitals closed/sold (1 ) —
(3 ) —
Number of hospitals owned—end of period 97
99
97
99
Number of hospitals managed—end of period —
1
—
1
Total number of hospitals (all)—end of period 97
100
97
100
Available licensed beds⁽¹⁾
4,095
4,230
4,095
4,230
Admissions⁽¹⁾
8,651
9,051
27,605
27,679
Patient days⁽¹⁾
243,891
258,089
765,863
779,078
Average length of stay (days)⁽¹⁾
28
28
28
28
Net revenue per patient day⁽¹⁾⁽²⁾
$ 1,705
$ 1,773
$ 1,716
$ 1,757
Occupancy rate⁽¹⁾
65 % 67 % 68 % 69 %
Percent patient days—Medicare⁽¹⁾
53 % 49 % 53 % 51 %
Rehabilitation hospital data:
Number of hospitals owned—start of period 17
19
16
17
Number of hospitals start-ups —
—
1
2
Number of hospitals owned—end of period 17
19
17
19
Number of hospitals managed—end of period 9
10
9
10
Total number of hospitals (all)—end of period 26
29
26
29
Available licensed beds⁽¹⁾
1,189
1,309
1,189
1,309
Admissions⁽¹⁾
5,370
6,400
16,219
18,253
Patient days⁽¹⁾
79,232
89,454
233,537
258,795
Average length of stay (days)⁽¹⁾
15
14
15
14
Net revenue per patient day⁽¹⁾⁽²⁾
$ 1,582
$ 1,724
$ 1,604
$ 1,665
Occupancy rate⁽¹⁾
72 % 75 % 73 % 75 %
Percent patient days—Medicare⁽¹⁾
53 % 53 % 54 % 51 %
Outpatient rehabilitation data:

Number of clinics owned—start of period 1,435
1,419
1,447
1,423
Number of clinics acquired —
3
14
17
Number of clinic start-ups 8
14
26
36
Number of clinics closed/sold (23 ) (7 ) (67 ) (47 )
Number of clinics owned—end of period 1,420
1,429
1,420
1,429
Number of clinics managed—end of period 229
278
229
278
Total number of clinics (all)—end of period 1,649
1,707
1,649
1,707
Number of visits⁽¹⁾
2,039,462
2,204,328
6,251,582
6,462,316
Net revenue per visit⁽¹⁾⁽³⁾
$ 103
$ 103
$ 103
$ 103
Concentra data:

Number of centers owned—start of period 527
526
312
524
Number of centers acquired 1
1
220
6
Number of centers closed/sold (3 ) (4 ) (7 ) (7 )
Number of centers owned—end of period 525
523
525
523
Number of onsite clinics operated—end of period 123
131
123
131
Number of CBOCs owned—end of period 30
32
30
32
Number of visits⁽¹⁾
2,984,832
3,150,903
8,605,012
9,165,599
Net revenue per visit⁽¹⁾⁽³⁾
$ 124
$ 120
$ 124
$ 122


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2020		2019		2020
Concentra data:
Number of centers owned—start of period	525		523		524		521
Number of centers acquired	4		—		5		4

Number of centers closed/sold	(3)		(1)		(3)		(3)
Number of centers owned—end of period	526		522		526		522
Number of onsite clinics operated—end of period	129		129		129		129
Number of CBOCs owned—end of period	33		33		33		33
Number of visits⁽¹⁾⁽⁸⁾	3,103,089		2,151,080		6,014,696		5,028,475
Net revenue per visit⁽¹⁾⁽⁹⁾	$	121	$	124	$	122	$	124


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


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


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

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

(2)Represents the number of patients admitted to our hospitals during the periods presented.

(3)Each patient day represents one patient occupying one bed for one day during the periods presented.

(4)Represents the average number of days in which patients were admitted to our hospitals. Average length of stay is calculated by dividing the number of patient days, as presented above, by the number of patients discharged from our hospitals during the periods presented.

(5)Represents the average amount of revenue recognized for each patient day. Net revenue per patient day is calculated by dividing patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.

(6)Represents the portion of our hospitals being utilized for patient care during the periods presented. Occupancy rate is calculated using the number of patient days, as presented above, divided by the total number of bed days available during the period. Bed days available is derived by adding the daily number of available licensed beds for each of the periods presented.

(7)Represents the portion of our patient days which are paid by Medicare. The Medicare patient day percentage is calculated by dividing the total number of patient days which are paid by Medicare by the total number of patient days, as presented above.

(8)Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics and Concentra centers during the periods presented.

(9)Represents the average amount of revenue recognized for each patient visit. Net revenue per visit is calculated by dividing patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits.

Table of Contents

Results of Operations

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2020		2019		2020
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of services, exclusive of depreciation and amortization⁽¹⁾	84.5		87.8		85.0		86.2
General and administrative	2.3		2.7		2.2		2.5
Depreciation and amortization	4.0		4.3		4.0		4.0
Total costs and expenses	90.8		94.8		91.2		92.7
Other operating income	—		4.5		—		2.1
Income from operations	9.2		9.7		8.8		9.4

Equity in earnings of unconsolidated subsidiaries	0.5		0.7		0.5		0.4
Gain on sale of businesses	—		0.0		0.2		0.3
Interest expense	(3.8)		(3.0)		(3.8)		(3.2)
Income before income taxes	5.9		7.4		5.7		6.9
Income tax expense	1.5		1.9		1.5		1.7
Net income	4.4		5.5		4.2		5.2
Net income attributable to non-controlling interests	1.1		1.3		1.0		1.2
Net income attributable to Select Medical Holdings Corporation	3.3	%	4.2	%	3.2	%	4.0	%

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

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


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

Table of Contents

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


	Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended June 30,														Six Months Ended June 30,
	2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change			2019			2020			% Change		2019			2020			% Change
	(in thousands)
Net operating revenues:																	Net operating revenues:
Critical illness recovery hospital	$	420,108		$	462,892		10.2	%	$	1,327,236		$	1,381,569		4.1	%	Critical illness recovery hospital	$	461,143		$	519,626		12.7	%	$	918,677		$	1,020,147		11.0	%
Rehabilitation hospital	144,588			173,369			19.9		432,675			488,301			12.9		Rehabilitation hospital	160,374			168,667			5.2		314,932			350,686			11.4
Outpatient rehabilitation	245,234			265,330			8.2		743,379			774,126			4.1		Outpatient rehabilitation	261,891			167,138			(36.2)		508,796			422,387			(17.0)
Concentra	404,481			421,900			4.3		1,173,420			1,231,672			5.0		Concentra	413,451			312,338			(24.5)		809,772			710,873			(12.2)
Other⁽¹⁾	52,990			69,852			31.8		139,865			203,670			45.6		Other⁽¹⁾	64,505			64,949			0.7		133,818			143,257			7.1
Total Company	$	1,267,401		$	1,393,343		9.9	%	$	3,816,575		$	4,079,338		6.9	%	Total Company	$	1,361,364		$	1,232,718		(9.4)	%	$	2,685,995		$	2,647,350		(1.4)	%
Income (loss) from operations:																	Income (loss) from operations:
Critical illness recovery hospital	$	42,156		$	44,763		6.2	%	$	152,843		$	155,953		2.0	%	Critical illness recovery hospital	$	49,643		$	75,851		52.8	%	$	111,190		$	152,085		36.8	%
Rehabilitation hospital	19,264			29,546			53.4		62,498			72,213			15.5		Rehabilitation hospital	23,272			20,698			(11.1)		42,667			52,380			22.8
Outpatient rehabilitation	27,934			33,153			18.7		87,065			90,705			4.2		Outpatient rehabilitation	35,593			(13,476)			(137.9)		57,552			6,428			(88.8)
Concentra	43,499			52,922			21.7		123,776			144,350			16.6
Other⁽¹⁾	(33,016		)	(37,478		)	(13.5	)	(97,186		)	(103,709		)	(6.7	)
Concentra⁽²⁾																	Concentra⁽²⁾	50,841			18,939			(62.7)		91,428			56,751			(37.9)
Other⁽¹⁾⁽²⁾																	Other⁽¹⁾⁽²⁾	(34,467)			17,506			N/M		(66,231)			(19,448)			N/M
Total Company	$	99,837		$	122,906		23.1	%	$	328,996		$	359,512		9.3	%	Total Company	$	124,882		$	119,518		(4.3)	%	$	236,606		$	248,196		4.9	%
Adjusted EBITDA:																	Adjusted EBITDA:
Critical illness recovery hospital	$	53,292		$	57,247		7.4	%	$	186,989		$	194,383		4.0	%	Critical illness recovery hospital	$	64,138		$	89,743		39.9	%	$	137,136		$	178,313		30.0	%
Rehabilitation hospital	25,343			36,780			45.1		80,314			92,545			15.2		Rehabilitation hospital	29,968			27,605			(7.9)		55,765			66,174			18.7
Outpatient rehabilitation	34,531			40,040			16.0		107,003			111,615			4.3		Outpatient rehabilitation	42,584			(6,282)			(114.8)		71,575			20,840			(70.9)
Concentra	68,754			77,679			13.0		199,119			220,024			10.5
Other⁽¹⁾	(25,292		)	(29,081		)	(15.0	)	(75,337		)	(79,552		)	(5.6	)
Concentra⁽²⁾																	Concentra⁽²⁾	76,087			41,497			(45.5)		142,345			102,963			(27.7)
Other⁽¹⁾⁽²⁾																	Other⁽¹⁾⁽²⁾	(26,544)			26,189			N/M		(50,471)			(2,205)			N/M
Total Company	$	156,628		$	182,665		16.6	%	$	498,088		$	539,015		8.2	%	Total Company	$	186,233		$	178,752		(4.0)	%	$	356,350		$	366,085		2.7	%
Adjusted EBITDA margins:																	Adjusted EBITDA margins:
Critical illness recovery hospital	12.7		%	12.4		%			14.1		%	14.1		%			Critical illness recovery hospital	13.9		%	17.3		%			14.9		%	17.5		%
Rehabilitation hospital	17.5			21.2					18.6			19.0					Rehabilitation hospital	18.7			16.4					17.7			18.9
Outpatient rehabilitation	14.1			15.1					14.4			14.4					Outpatient rehabilitation	16.3			(3.8)					14.1			4.9
Concentra	17.0			18.4					17.0			17.9
Other⁽¹⁾	N/M			N/M					N/M			N/M
Concentra⁽²⁾																	Concentra⁽²⁾	18.4			13.3					17.6			14.5
Other⁽¹⁾⁽²⁾																	Other⁽¹⁾⁽²⁾	N/M			N/M					N/M			N/M
Total Company	12.4		%	13.1		%			13.1		%	13.2		%			Total Company	13.7		%	14.5		%			13.3		%	13.8		%
Total assets:																	Total assets:
Critical illness recovery hospital	$	1,785,336		$	2,116,512				$	1,785,336		$	2,116,512				Critical illness recovery hospital	$	2,119,574		$	2,115,294				$	2,119,574		$	2,115,294
Rehabilitation hospital	888,342			1,121,260					888,342			1,121,260					Rehabilitation hospital	1,107,852			1,135,206					1,107,852			1,135,206
Outpatient rehabilitation	991,105			1,280,712					991,105			1,280,712					Outpatient rehabilitation	1,265,487			1,267,308					1,265,487			1,267,308
Concentra	2,201,869			2,366,227					2,201,869			2,366,227					Concentra	2,447,387			2,351,974					2,447,387			2,351,974
Other⁽¹⁾	113,529			270,045					113,529			270,045					Other⁽¹⁾	166,640			598,676					166,640			598,676
Total Company	$	5,980,181		$	7,154,756				$	5,980,181		$	7,154,756				Total Company	$	7,106,940		$	7,468,458				$	7,106,940		$	7,468,458
Purchases of property and equipment:																	Purchases of property and equipment:
Critical illness recovery hospital	$	8,134		$	12,254				$	31,455		$	36,902				Critical illness recovery hospital	$	14,488		$	14,970				$	24,648		$	23,935
Rehabilitation hospital	8,769			5,293					29,766			23,832					Rehabilitation hospital	5,356			1,923					18,539			5,248
Outpatient rehabilitation	7,209			7,476					22,565			23,221					Outpatient rehabilitation	6,705			6,593					15,745			14,977
Concentra	12,539			8,240					29,281			36,178					Concentra	12,240			6,820					27,938			22,406
Other⁽¹⁾	2,740			1,408					7,972			3,823					Other⁽¹⁾	1,423			1,739					2,415			4,687
Total Company	$	39,391		$	34,671				$	121,039		$	123,956				Total Company	$	40,212		$	32,045				$	89,285		$	71,253

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

(2) For the three and six months ended June 30, 2020, we recognized approximately $55.0 million of other operating income related to payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19. $54.2 million and $0.8 million of other operating income is included within the operating results of our other activities and our Concentra segment, respectively.

N/M — Not meaningful.

Three Months Ended ~~September~~June 30, ~~2019,~~2020, Compared to Three Months Ended ~~September~~June 30, ~~2018~~2019

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

Please refer to “Effects of the COVID-19 Pandemic on our Results of Operations” above for further discussion.

Net Operating Revenues

Our net operating revenues ~~increased 9.9% to $1,393.3~~were $1,232.7 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$1,267.4~~$1,361.4 million for the three months ended ~~September~~June 30, ~~2018.~~2019.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~10.2%~~12.7% to ~~$462.9~~$519.6 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$420.1~~$461.1 million for the three months ended ~~September~~June 30, ~~2018.~~2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the three months ended June 30, 2020. Our patient days increased 5.3% to 276,889 days for the three months ended June 30, 2020, compared to 262,860 days for the three months ended June 30, 2019. We experienced a 4.5% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable to the four critical illness recovery hospitals we acquired in 2019. Occupancy in our critical illness recovery hospitals increased to 72% during the three months ended June 30, 2020, compared to 69% for the three months ended June 30, 2019. Net revenue per patient day increased 7.4% to $1,867 for the three months ended June 30, 2020, compared to $1,739 for the three months ended June 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from an increase in patient acuity.

Rehabilitation Hospital Segment. Net operating revenues increased 5.2% to $168.7 million for the three months ended June 30, 2020, compared to $160.4 million for the three months ended June 30, 2019. The increase in net operating revenues resulted from increases in net revenue per patient day. Our net revenue per patient day increased 12.0% to $1,831 for the three months ended June 30, 2020, compared to $1,635 for the three months ended June 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. During the three months ended June 30, 2020, we had 84,081 patient days, compared to 86,525 days for the three months ended June 30, 2019. The decline in patient days occurred during April 2020 and was principally driven by our rehabilitation hospitals in New Jersey and South Florida that temporarily restricted their admissions as a result of the COVID-19 pandemic. Certain of our other rehabilitation hospitals also experienced overall lower patient volumes due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Our rehabilitation hospitals began to see improvement in patient volume during May 2020 and, during June 2020, our patient days increased 7.8% as compared to June 2019.

Outpatient Rehabilitation Segment. Net operating revenues were $167.1 million for the three months ended June 30, 2020, compared to $261.9 million for the three months ended June 30, 2019. The decrease in net operating revenues was attributable to a decline in visits, which were 1,342,267 for the three months ended June 30, 2020, compared to 2,203,505 visits for the three months ended June 30, 2019. For the three months ended June 30, 2020, the decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19. Our outpatient rehabilitation clinics experienced less demand for services due to a decline in patient referrals from physicians, a reduction in workers’ compensation injury visits due to the temporary closure of businesses, the suspension of elective surgeries at hospitals and other facilities, which resulted in less demand for outpatient rehabilitation services, and mandated social distancing measures. Our outpatient rehabilitation clinics experienced a 47.7% decrease in visits during April and May 2020 as compared to the same period in 2019. Patient volume in our outpatient rehabilitation clinics began to improve during June 2020 as compared to April and May 2020. During June 2020, we experienced a 19.7% decrease in visits as compared to the same period in 2019. As of June 30, 2020, we have 66 outpatient rehabilitation clinics that remain temporarily closed. Our net revenue per visit was $106 for the three months ended June 30, 2020, compared to $102 for the three months ended June 30, 2019. The higher net revenue per visit rate reflects a higher percentage of workers’ compensation patients treated during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.

Concentra Segment. Net operating revenues were $312.3 million for the three months ended June 30, 2020, compared to $413.5 million for the three months ended June 30, 2019. The decrease in net operating revenues was attributable to a decline in visits, which were 2,151,080 for the three months ended June 30, 2020, compared to 3,103,089 visits for the three months ended June 30, 2019. For the three months ended June 30, 2020, the decline in volume resulted from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations as a result of the actions of governmental authorities and those in the private sector to limit the spread of COVID-19. Consequently, our centers experienced a reduction in workers’ compensation and employer services visits. During April and May 2020, our centers experienced a 39.2% decrease in visits as compared to the same period in 2019. Patient volume in our centers began to improve during June 2020, as compared to April and May 2020. During June 2020, we experienced a 12.4% decrease in visits as compared to the same period in 2019. As of June 30, 2020, we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Our net revenue per visit was $124 for the three months ended June 30, 2020, compared to $121 for the three months ended June 30, 2019. The higher net revenue per visit rate reflects a higher percentage of workers’ compensation patients treated during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,115.9 million, or 90.5% of net operating revenues, for the three months ended June 30, 2020, compared to $1,181.5 million, or 86.8% of net operating revenues, for the three months ended June 30, 2019. Our cost of services, a major component of which is labor expense, was $1,082.5 million, or 87.8% of net operating revenues, for the three months ended June 30, 2020, compared to $1,150.2 million, or 84.5% of net operating revenues, for the three months ended June 30, 2019. The increase in our operating expenses relative to our net operating revenues was principally due to reduced patient volume in our outpatient rehabilitation and Concentra segments, as discussed above. General and administrative expenses were $33.5 million, or 2.7% of net operating revenues, for the three months ended June 30, 2020, compared to $31.3 million, or 2.3% of net operating revenues, for the three months ended June 30, 2019.

Other Operating Income

For the three months ended June 30, 2020, we had other operating income of $55.0 million. We recognized payments received under the Provider Relief Fund as other operating income as we have incurred losses of revenue and health care related expenses attributable to COVID-19. Refer to Note 12 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the three months ended June 30, 2020, $54.2 million of other operating income is included within the operating results of our other activities; $0.8 million of other operating income is included in the operating results of our Concentra segment.

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 39.9% to $89.7 million for the three months ended June 30, 2020, compared to $64.1 million for the three months ended June 30, 2019. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.3% for the three months ended June 30, 2020, compared to 13.9% for the three months ended June 30, 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment were driven by increases in both patient volume and our net revenue per patient day, as discussed above under “Net Operating Revenues.” The increases in Adjusted EBITDA and Adjusted EBITDA margin were offset, in part, by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our critical illness recovery hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.

Rehabilitation Hospital Segment. Adjusted EBITDA was $27.6 million for the three months ended June 30, 2020, compared to $30.0 million for the three months ended June 30, 2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 16.4% for the three months ended June 30, 2020, compared to 18.7% for the three months ended June 30, 2019. The declines in Adjusted EBITDA and Adjusted EBITDA margin were primarily driven by our rehabilitation hospitals in New Jersey and South Florida which implemented temporary restrictions on admissions as a result of the COVID-19 pandemic, as discussed above under “Net Operating Revenues.” Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment.

Outpatient Rehabilitation Segment. We incurred Adjusted EBITDA losses of $6.3 million for the three months ended June 30, 2020, compared to Adjusted EBITDA of $42.6 million for the three months ended June 30, 2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was (3.8)% for the three months ended June 30, 2020, compared to 16.3% for the three months ended June 30, 2019. The decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 39.1% decrease in visits, resulting from the effects of the COVID-19 pandemic, during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. We incurred Adjusted EBITDA losses during April and May 2020. We generated positive Adjusted EBITDA in June 2020 as we began to see improvement in patient volume, which is discussed above under “Net Operating Revenues.” In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs.

Concentra Segment. Adjusted EBITDA was $41.5 million for the three months ended June 30, 2020, compared to $76.1 million for the three months ended June 30, 2019. Our Adjusted EBITDA margin for the Concentra segment was 13.3% for the three months ended June 30, 2020, compared to 18.4% for the three months ended June 30, 2019. The decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 30.7% decrease in visits, resulting from the effects of the COVID-19 pandemic, during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decreases in our Adjusted EBITDA and Adjusted EBITDA margin occurred during April and May 2020, as compared to the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020, as compared to both April and May 2020 and the same period in 2019, as we began to see improvement in patient volume, which is discussed above under “Net Operating Revenues.” In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs.

Depreciation and Amortization

Depreciation and amortization expense was $52.3 million for the three months ended June 30, 2020, compared to $55.0 million for the three months ended June 30, 2019.

Income from Operations

For the three months ended June 30, 2020, we had income from operations of $119.5 million, compared to $124.9 million for the three months ended June 30, 2019. The decrease in income from operations was primarily attributable to the operating performance of our outpatient rehabilitation and Concentra segments. The decrease in income from operations was offset, in part, by the recognition of $55.0 million of other operating income, as discussed above.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the three months ended June 30, 2020, we had equity in earnings of unconsolidated subsidiaries of $8.3 million, compared to $7.4 million for the three months ended June 30, 2019.

Gain on Sale of Businesses

We recognized a gain of $0.3 million during the three months ended June 30, 2020. The gain was attributable to additional proceeds received from the sale of an outpatient rehabilitation business. The sale occurred during the first quarter ended March 31, 2020.

Interest expense was $37.4 million for the three months ended June 30, 2020, compared to $51.5 million for the three months ended June 30, 2019. The decrease in interest expense was principally due to a decline in variable interest rates, as well as the refinancing of our Select credit facilities, Concentra-JPM credit facilities (as defined below), and senior notes during the third and fourth quarters of 2019.

We recorded income tax expense of $23.3 million for the three months ended June 30, 2020, which represented an effective tax rate of 25.7%. We recorded income tax expense of $20.8 million for the three months ended June 30, 2019, which represented an effective tax rate of 25.8%.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was $15.8 million for the three months ended June 30, 2020, compared to $15.2 million for the three months ended June 30, 2019.

Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019

In the following, we discuss our results of operations related to net operating revenues, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests.

Please refer to “Effects of the COVID-19 Pandemic on our Results of Operations” above for further discussion.

Net Operating Revenues

Our net operating revenues were $2,647.4 million for the six months ended June 30, 2020, compared to $2,686.0 million for the six months ended June 30, 2019.

Critical Illness Recovery Hospital Segment. Net operating revenues increased 11.0% to $1,020.1 million for the six months ended June 30, 2020, compared to $918.7 million for the six months ended June 30, 2019. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased ~~5.8%~~5.1% to ~~258,089~~547,347 days for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~243,891~~520,989 days for the ~~three~~six months ended ~~September~~June 30, ~~2018. The acquisition of three hospitals during 2019 contributed to the increase in patient days.~~2019. We ~~also~~ experienced a ~~2.9%~~2.0% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable to the four critical illness recovery hospitals ~~which was offset~~we acquired in part by a decrease in patient days from the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. For the three months ended September 30, 2019, our net2019. Net revenue per patient day increased ~~4.0%~~5.9% to ~~$1,773, as~~$1,853 for the six months ended June 30, 2020, compared to ~~$1,705~~$1,749 for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. The ~~increase is primarily driven by an~~ increase in our Medicare net revenue per patient ~~day.~~day resulted primarily from an increase in patient acuity

Rehabilitation Hospital Segment. Net operating revenues increased ~~19.9%~~11.4% to ~~$173.4~~$350.7 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$144.6~~$314.9 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the six months ended June 30, 2020. Our patient days increased ~~12.9%~~5.5% to ~~89,454~~178,649 days for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~79,232~~169,341 days for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in patient days was principally driven by our rehabilitation hospitals which ~~recently~~ commenced ~~operations. We also~~operations during 2019. Several of our other rehabilitation hospitals experienced ~~a 4.0% increase~~increases in patient days during the six months ended June 30, 2020; however, these increases were offset by declines in volume experienced within our ~~existing hospitals.~~rehabilitation hospitals in New Jersey and South Florida that temporarily restricted admissions as a result of the COVID-19 pandemic. Certain of our rehabilitation hospitals also experienced overall lower patient volume due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Patient volume in our rehabilitation hospitals began declining in March 2020 and these declines continued through April 2020. Our rehabilitation hospitals began to see improvement in patient volume during May 2020 and, during June 2020, our rehabilitation hospitals patient days increased 7.8% as compared to June 2019. Our net revenue per patient day increased ~~9.0%~~8.8% to ~~$1,724~~$1,778 for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$1,582~~$1,634 for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues ~~increased 8.2% to $265.3~~were $422.4 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$245.2~~$508.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in net operating revenues was attributable to a decline in visits, which were 3,464,932 for the six months ended June 30, 2020, compared to 4,257,988 visits for the six months ended June 30, 2019. We experienced an 11.2% increase in visits ~~which increased 8.1% to 2,204,328 for the three months ended September 30, 2019,~~during January and February 2020 as compared to ~~2,039,462 visits for~~ the ~~three months ended September 30, 2018. The increase~~same period in ~~visits was due to new~~2019. Our outpatient rehabilitation clinics ~~and~~experienced a ~~7.2% increase~~32.4% decrease in visits ~~within~~during the four months ended June 30, 2020, as compared to same period in 2019. The decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19, as discussed above. For the six months ended June 30, 2020, the decline in volume principally occurred during April and May 2020. During this time, our ~~existing clinics. This growth was offset in part by the sale of~~ outpatient rehabilitation clinics experienced a 47.7% decrease in visits as compared to ~~non-consolidating subsidiaries since September~~the same period in 2019. Patient volume in our outpatient rehabilitation clinics began to improve during June 2020, as compared to April and May 2020. During June 2020, we experienced a 19.7% decrease in visits as compared to the same period in 2019. As of June 30, ~~2018, which contributed 24,146 visits during the three months ended September 30, 2018. During the three months ended September 30, 2019,~~2020, we ~~also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries.~~have 66 outpatient rehabilitation clinics that remain temporarily closed. Our net revenue per visit was $105 for the six months ended June 30, 2020, compared to $103 for ~~both~~ the ~~three~~six months ended ~~September~~June 30, ~~2019 and 2018.~~2019. The higher net revenue per visit rate reflects a higher percentage of workers’ compensation patients treated during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019.

Concentra Segment. Net operating revenues ~~increased 4.3% to $421.9~~were $710.9 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$404.5~~$809.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in net operating revenues was attributable to ana decline in visits, which were 5,028,475 for the six months ended June 30, 2020, compared to 6,014,696 visits for the six months ended June 30, 2019. We experienced a 4.9% increase in visits ~~offset~~during January and February 2020, as compared to the same period in ~~part by~~2019. Our centers experienced a 26.3% decrease in ~~net revenue per visit. Visits increased 5.6% to 3,150,903~~ visits ~~for~~during the ~~three~~four months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~2,984,832 visits for~~same period in 2019. The decline in volume during these four months resulted from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations as a result of the ~~three~~actions of governmental authorities and those in the private sector to limit the spread of COVID-19, as discussed above. For the six months ended ~~September~~June 30, ~~2018.~~2020, the decline in volume principally occurred during April and May 2020. During this time, our centers experienced a 39.2% decrease in visits as compared to the same period in 2019. Patient volume in our centers began to improve during June 2020, as compared to April and May 2020. During June 2020, we experienced a 12.4% decrease in visits as compared to the same period in 2019. As of June 30, 2020, we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Net revenue per visit was ~~$120 for the three months ended September 30, 2019, compared to~~ $124 for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2020, compared to $122 for the six months ended June 30, 2019. The ~~decrease in~~higher net revenue per visit ~~was principally due~~rate reflects a higher percentage of workers’ compensation patients treated during the six months ended June 30, 2020, as compared to ~~an increase in employer services visits, which yield lower per visits rates.~~the six months ended June 30, 2019.

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were ~~$1,217.5~~$2,350.1 million, or ~~87.4%~~88.7% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$1,117.0~~$2,342.3 million, or ~~88.2%~~87.2% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Our cost of services, a major component of which is labor expense, was ~~$1,183.1~~$2,282.8 million, or ~~84.9%~~86.2% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$1,087.1~~$2,282.2 million, or ~~85.8%~~85.0% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~decrease~~increase in our operating expenses relative to our net operating revenues was principally due to the ~~improved operating performance of~~reduced patient volume in our outpatient rehabilitation ~~hospital~~ and Concentra segments, ~~during the three months ended September 30, 2019.~~as discussed above. General and administrative expenses were ~~$34.4~~$67.3 million, or 2.5% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$30.0~~$60.0 million, or ~~2.4%~~2.2% of net operating revenues, for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019.

Other Operating Income

For the six months ended June 30, 2020, we had other operating income of $55.0 million. We recognized payments received under the Provider Relief Fund as other operating income as we have incurred losses of revenue and health care related expenses attributable to COVID-19. Refer to Note 12 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the six months ended June 30, 2020, $54.2 million of other operating income is included within the operating results of our other activities; $0.8 million of other operating income is included in the operating results of our Concentra segment.

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~7.4%~~30.0% to ~~$57.2~~$178.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$53.3~~$137.1 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~12.4%~~17.5% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~12.7%~~14.9% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~increases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment ~~was primarily~~were driven by increases in both patient ~~volumes~~volume and net revenue per patient day, as discussed above under “Net Operating Revenues.” The ~~decrease~~increases in ~~our~~Adjusted EBITDA and Adjusted EBITDA margin ~~resulted from our newly acquired hospitals~~were offset, in part, by the incurrence of additional operating ~~at lower margins than our other~~expenses as a result of the COVID-19 pandemic. Our critical illness recovery ~~hospitals.~~hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.

Rehabilitation Hospital Segment. Adjusted EBITDA increased ~~45.1%~~18.7% to ~~$36.8~~$66.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$25.3~~$55.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was ~~21.2%~~18.9% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~17.5%~~17.7% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to ~~improved patient volume~~our hospitals which commenced operations in 2019. We also experienced increases in Adjusted EBITDA and ~~net revenue per patient day within several~~Adjusted EBITDA margin at many of our existing hospitals as ~~discussed above under “~~a result of increased patient volume and increases in net revenue per patient day. These increases were offset, in part, by declines in Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation hospitals in New Jersey and South Florida that implemented temporary restrictions on admissions as a result of the COVID-19 pandemic. Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment.~~Net Operating Revenues~~.”

Prior to our rehabilitation hospitals becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 72.5% to $27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Our Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. We experienced declines in Adjusted EBITDA and Adjusted EBITDA margin during April and May 2020, as compared to the same period in 2019, as a result of lower patient volume. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020 as compared to both April and May 2020 and the same period in 2019. For the six months ended June 30, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $8.8 million.

Outpatient Rehabilitation Segment. Adjusted EBITDA ~~increased 16.0% to $40.0~~was $20.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$34.5~~$71.6 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~15.1%~~4.9% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to 14.1% for the ~~three~~six months ended ~~September~~June 30, ~~2018. Our~~2019. The decrease in Adjusted EBITDA and Adjusted EBITDA margin ~~increased principally from increased patient volumes~~were caused by a decline in visits, beginning in mid-March 2020, as a result of the effects of the COVID-19 pandemic, as described above. During the months of March through June 2020, our ~~existing~~ outpatient rehabilitation clinics ~~allowing these~~experienced a 32.4% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to ~~operate at lower relative costs,~~one another and took other measures to reduce labor costs. Prior to our outpatient rehabilitation clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 33.6% to $23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January and February 2020, compared to 10.7% for the same period in 2019. We incurred Adjusted EBITDA losses during April and May 2020 as ~~well~~a result of the decline in patient visits we experienced. Our outpatient rehabilitation segment generated positive Adjusted EBITDA in June 2020 as ~~other cost reductions~~ we ~~have achieved.~~saw improvement in patient volume.

Concentra Segment. Adjusted EBITDA ~~increased 13.0% to $77.7~~was $103.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$68.8~~$142.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Our Adjusted EBITDA margin for the Concentra segment was ~~18.4%~~14.5% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~17.0%~~17.6% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decreases in Adjusted EBITDA and Adjusted EBITDA margin ~~resulted principally from achieving lower relative~~were caused by a decline in visits, beginning in mid-March 2020, as a result of the effects of the COVID-19 pandemic, as described above. During the months of March through June 2020, our centers experienced a 26.3% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating ~~costs across~~expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs. Prior to our ~~combined Concentra~~centers becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 11.7% to $45.5 million for January and ~~U.S. HealthWorks businesses.~~February 2020, compared to $40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January and February 2020, compared to 15.7% for the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin were most significantly impacted in April and May 2020 as a result of the decline in patient visits we experienced. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020, as compared to both April and May 2020 and the same period in 2019, as we saw improvement in patient volume.

Depreciation and Amortization

Depreciation and amortization expense was ~~$52.9~~$104.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$50.5~~$107.1 million for the ~~three~~six months ended ~~September~~June 30, ~~2018. The increase principally occurred within our critical illness recovery hospital and rehabilitation hospital segments.~~2019.

Income from Operations

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, we had income from operations of ~~$122.9~~$248.2 million, compared to ~~$99.8~~$236.6 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in income from operations ~~resulted principally from our rehabilitation hospital and Concentra segments.~~

~~Loss on Early Retirement of Debt~~

~~The amendment~~was primarily attributable to the ~~Select credit agreement,~~improved operating performance of our critical illness recovery hospital segment, as well as the ~~amendment to the Concentra first lien credit agreement, the repayment~~recognition of ~~term loans outstanding under the Concentra second lien credit agreement, and the redemption~~$55.0 million of ~~the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million for the three months ended September 30, 2019.~~other operating income, as discussed above.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries ~~principally~~ relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, we had equity in earnings of unconsolidated subsidiaries of ~~$7.0~~$10.9 million, compared to ~~$5.4~~$11.8 million for the ~~three~~six months ended ~~September~~June 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain of our non-consolidating subsidiaries, which resulted from our sales of outpatient rehabilitation clinics to these subsidiaries.2019.

Gain on Sale of Businesses

We recognized ~~a gain~~gains of ~~$2.1~~$7.5 million and $6.5 million during the ~~three~~six months ended ~~September~~June 30, ~~2018. The gain was principally~~2020 and 2019, respectively. These gains were attributable to the ~~sale~~sales of outpatient rehabilitation ~~clinics to a non-consolidating subsidiary.~~

Interest expense was ~~$54.3~~$83.5 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$50.7~~$102.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in interest expense was principally due to a decline in variable interest rates, as well as the ~~recognition~~refinancing of ~~interest expense on both the 6.250% senior notes~~our Select credit facilities, Concentra-JPM credit facilities, and ~~the 6.375%~~ senior notes during ~~August 2019, as~~ the ~~redemption~~third and fourth quarters of ~~the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1,~~ 2019.

We recorded income tax expense of ~~$12.8~~$45.2 million for the ~~three~~six months ended ~~September~~June 30, 2020, which represented an effective tax rate of 24.7%. We recorded income tax expense of $39.3 million for the six months ended June 30, 2019, which represented an effective tax rate of ~~22.6%~~25.7%. ~~We recorded income tax expense of $14.1 million for~~For the ~~three~~six months ended ~~September~~June 30, ~~2018, which represented an effective tax rate of 24.8%. The decrease in~~2020, the lower effective tax rate resulted primarily from the discrete tax benefits realized from the exercise of certain equity options in connection with the purchase of additional membership interests in Concentra Group Holdings Parent, as described under “Other Significant Events.” The impact of these tax benefits were offset, in part, by the sale of an outpatient rehabilitation business. The selling price for this business exceeded our tax basis, resulting in a ~~lower estimate of state and local income taxes.~~taxable gain. This sale was treated as a discrete tax event for the six months ended June 30, 2020.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$13.3~~$33.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$9.8~~$27.7 million for the ~~three~~six months ended ~~September 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment.~~

~~Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018~~

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

~~Net Operating Revenues~~

~~Our net operating revenues increased 6.9% to $4,079.3 million for the nine months ended September 30, 2019, compared to $3,816.6 million for the nine months ended September 30, 2018.~~

~~Critical Illness Recovery Hospital Segment.~~ Net operating revenues increased 4.1% to $1,381.6 million for the nine months ended September 30, 2019, compared to $1,327.2 million for the nine months ended September 30, 2018. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 1.7% to 779,078 days for the nine months ended September 30, 2019, compared to 765,863 days for the nine months ended September 30, 2018. The acquisition of three hospitals during 2019 contributed to the increase in patient days. We also experienced an increase in patient days in our existing hospitals, which was offset by a decrease in patient days from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. Net revenue per patient day increased 2.4% to $1,757 for the nine months ended September 30, 2019, compared to $1,716 for the nine months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

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

~~Outpatient Rehabilitation Segment.~~ Net operating revenues increased 4.1% to $774.1 million for the nine months ended September 30, 2019, compared to $743.4 million for the nine months ended September 30, 2018. The increase in net operating revenues was attributable to an increase in visits, which increased 3.4% to 6,462,316 for the nine months ended September 30, 2019, compared to 6,251,582 visits for the nine months ended September 30, 2018. The increase in visits was due to new outpatient rehabilitation clinics and a 5.0% increase in visits within our existing clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since September 30, 2018, which contributed 192,149 visits during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the nine months ended September 30, 2019 and 2018.

~~Concentra Segment.~~ Net operating revenues increased 5.0% to $1,231.7 million for the nine months ended September 30, 2019, compared to $1,173.4 million for the nine months ended September 30, 2018. Visits in our centers increased 6.5% to 9,165,599 for the nine months ended September 30, 2019, compared to 8,605,012 visits for the nine months ended September 30, 2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018, and other newly acquired centers. Net revenue per visit was $122 for the nine months ended September 30, 2019, compared to $124 for the nine months ended September 30, 2018. The decrease in net revenue per visit was principally due to an increase in employer services visits, which yield lower per visits rates.

~~Operating Expenses~~

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $3,559.8 million, or 87.2% of net operating revenues, for the nine months ended September 30, 2019, compared to $3,338.6 million, or 87.5% of net operating revenues, for the nine months ended September 30, 2018. Our cost of services, a major component of which is labor expense, was $3,465.4 million, or 84.9% of net operating revenues, for the nine months ended September 30, 2019, compared to $3,247.6 million, or 85.1% of net operating revenues, for the nine months ended September 30, 2018. The decrease in our operating expenses relative to our net operating revenues was principally due to the operating performance of our Concentra and rehabilitation hospital segments. General and administrative expenses were $94.4 million, or 2.3% of net operating revenues, for the nine months ended September 30, 2019. General and administrative expenses were $91.0 million, or 2.4% of net operating revenues, for the nine months ended September 30, 2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the nine months ended September 30, 2018.

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

~~Rehabilitation Hospital Segment.~~ Adjusted EBITDA increased 15.2% to $92.5 million for the nine months ended September 30, 2019, compared to $80.3 million for the nine months ended September 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 19.0% for the nine months ended September 30, 2019, compared to 18.6% for the nine months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin are primarily attributable to increases in patient volume and net revenue per visit at several of our existing hospitals. Adjusted EBITDA start-up losses were $8.8 million for the nine months ended September 30, 2019, compared to $3.8 million for the nine months ended September 30, 2018.

~~Outpatient Rehabilitation Segment.~~ Adjusted EBITDA increased 4.3% to $111.6 million for the nine months ended September 30, 2019, compared to $107.0 million for the nine months ended September 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.4% for both the nine months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019, the increase in Adjusted EBITDA resulted principally from our start-up and newly developed outpatient rehabilitation clinics.

~~Concentra Segment.~~ Adjusted EBITDA increased 10.5% to $220.0 million for the nine months ended September 30, 2019, compared to $199.1 million for the nine months ended September 30, 2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.9% for the nine months ended September 30, 2019, compared to 17.0% for the nine months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

~~Depreciation and Amortization~~

Depreciation and amortization expense was $160.1 million for the nine months ended September 30, 2019, compared to $149.0 million for the nine months ended September 30, 2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in our Concentra segment was principally due to the acquisition of U.S. HealthWorks, which we acquired on February 1, 2018. The increase in our critical illness recovery hospital segment was principally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Floridajoint venture critical illness recovery hospitals ~~were fully amortized during the nine months ended September 30, 2019.~~

~~Income from Operations~~

For the nine months ended September 30, 2019, we had income from operations of $359.5 million, compared to $329.0 million for the nine months ended September 30, 2018. The increase in income from operations resulted principally from our Concentra and ~~rehabilitation hospital segments.~~

~~Loss on Early Retirement of Debt~~

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

During the nine months ended September 30, 2018, we amended both the Select credit agreement and the Concentra first lien credit agreement which resulted in losses on early retirement of debt of $10.3 million.

~~Equity in Earnings of Unconsolidated Subsidiaries~~

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the nine months ended September 30, 2019, we had equity in earnings of unconsolidated subsidiaries of $18.7 million, compared to $14.9 million for the nine months ended September 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.

~~Gain on Sale of Businesses~~

We recognized gains of $6.5 million and $9.0 million during the nine months ended September 30, 2019 and 2018, respectively. The gains were principally attributable to sales of outpatient rehabilitation clinics to non-consolidating subsidiaries.

~~Interest Expense~~

Interest expense was $156.6 million for the nine months ended September 30, 2019, compared to $148.0 million for the nine months ended September 30, 2018. The increase in interest expense was principally due an increase in variable interest rates associated with the Concentra credit facilities and an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks on February 1, 2018. We also recognized interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the redemption of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.

We recorded income tax expense of $52.1 million for the nine months ended September 30, 2019, which represented an effective tax rate of 24.9%. We recorded income tax expense of $47.5 million for the nine months ended September 30, 2018, which represented an effective tax rate of 24.4%. For the nine months ended September 30, 2018, the lower effective tax rate resulted principally from the discrete tax benefits realized from certain equity interests redeemed at our Concentra subsidiary.

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

Net income attributable to non-controlling interests was $41.0 million for the nine months ended September 30, 2019, compared to $34.1 million for the nine months ended September 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment and several of our joint venture rehabilitation hospitals.

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Liquidity and Capital Resources

Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

In the following, we discuss cash flows from operating activities, investing activities, and financing activities.


	Nine Months Ended September 30,							Six Months Ended June 30,
	2018			2019				2019		2020
	(in thousands)							(in thousands)
Cash flows provided by operating activities	$	380,977		$	266,640		Cash flows provided by operating activities	$	132,914	$	686,098
Cash flows used in investing activities	(646,542		)	(270,710		)	Cash flows used in investing activities	(227,479)		(80,562)
Cash flows provided by (used in) financing activities	303,429			(35,145		)	Cash flows provided by (used in) financing activities	43,423		(431,681)
Net increase (decrease) in cash and cash equivalents	37,864			(39,215		)	Net increase (decrease) in cash and cash equivalents	(51,142)		173,855
Cash and cash equivalents at beginning of period	122,549			175,178			Cash and cash equivalents at beginning of period	175,178		335,882
Cash and cash equivalents at end of period	$	160,413		$	135,963		Cash and cash equivalents at end of period	$	124,036	$	509,737

Operating activities provided ~~$266.6~~$686.1 million of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$381.0~~$132.9 million of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~lower~~increase in cash flow provided by operating ~~cash flows~~activities is primarily attributable to approximately $317.0 million of advanced payments received under the Accelerated and Advance Payment Program for Medicare providers, as well as approximately $100.5 million of payments received under the ~~nine months ended September 30, 2019, compared~~Provider Relief Fund. Refer to Note 12 – CARES Act of the ~~nine months ended September 30, 2018, was principally driven by the change in~~notes to our ~~accounts receivable. We experienced an increase in~~condensed consolidated financial statements included herein for further information.

Our days sales outstanding was 55 days at June 30, 2020, compared to 51 days at December 31, 2019. Our days sales outstanding was 53 days at ~~September~~June 30, 2019, compared to 51 days at December 31, 2018. ~~We experienced a decline~~Our days sales outstanding experiences variability throughout the collection cycle, and the trend we have observed is an increase in days sales outstanding ~~to 54 days~~ at ~~September~~June 30, ~~2018,~~2020 and 2019, as compared to 58our days sales outstanding at December 31, ~~2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at September 30,~~ 2019 and ~~December 31, 2018.~~2018, respectively. Our cash collections from accounts receivable have been ample and are expected to provide us with sufficient working capital to operate our businesses.

Investing activities used ~~$270.7~~$80.6 million of cash flows for the ~~nine~~six months ended ~~September~~June 30, 2020. The principal uses of cash were $71.3 million for purchases of property and equipment and $21.7 million for investments in and acquisitions of businesses. This was offset in part by proceeds received from the sale of assets and businesses of $12.4 million. Investing activities used $227.5 million of cash flows for the six months ended June 30, 2019. The principal uses of cash were ~~$124.0~~$89.3 million for purchases of property and equipment and ~~$146.9~~$138.3 million for investments in and acquisitions of businesses. ~~Investing~~

Financing activities used ~~$646.5~~$431.7 million of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020. The principal ~~uses~~use of cash ~~were $515.0 million related to the acquisition of U.S. HealthWorks and $121.0~~was $366.2 million for ~~purchases~~the purchase of ~~property and equipment.~~additional membership interests of Concentra Group Holdings Parent during the six months ended June 30, 2020, as discussed above under “OtherSignificant Events.” We also used $39.8 million of cash for the mandatory prepayment of term loans under the Select credit facilities.

Financing activities ~~used $35.1~~provided $43.4 million of cash flows for the ~~nine~~six months ended ~~September~~June 30, 2019. The principal ~~sources~~source of cash ~~were from the issuance~~was net borrowings of ~~$550.0~~$175.0 million ~~6.250% senior notes, $500.0 million of incremental term loan borrowings under~~on the Select credit facilities, and $100.0 million of incremental term loan borrowings under the Concentra first lien credit agreement. These borrowings resulted in net proceeds of $1,132.9 million. A portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities, were used to redeem in full Select’s $710.0 million 6.375% senior notes at a redemption price of 100.000% of the principal amount. The proceeds from the incremental term loans under the Concentra first lien credit agreement were used,revolving facility. This was offset in part ~~to repay the $240.0 million of term loans outstanding under the Concentra second lien credit agreement. We also used~~by $98.8 million and $33.9 million ~~of cash~~ for mandatory prepayments of term loans under the Select credit facilities and ~~Concentra~~Concentra-JPM credit facilities, respectively. ~~During the nine months ended September 30, 2019, we had net repayments~~

Table of ~~$20.0 million under the Select revolving facility.~~Contents

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

Capital Resources

Working capital. We had net working capital of ~~$180.5~~$107.4 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$287.3~~$298.7 million at December 31, ~~2018.~~2019. The decrease in net working capital was principally due to the ~~recognition~~purchase of ~~current operating lease liabilities upon~~additional membership interests of Concentra Group Holdings Parent for $366.2 million during the ~~adoption of ASC Topic 842,~~ three months ended March 31, 2020, as discussed above under “~~Leases~~Other Significant Events~~, on January 1, 2019, offset in part by an increase in our accounts receivable.~~.”

Select credit facilities.

In February ~~2019,~~2020, Select made a principal prepayment of ~~$98.8~~approximately $39.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.

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

At ~~September~~June 30, ~~2019,~~2020, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,531.1~~$2,103.4 million in ~~Select~~ term loans (excluding unamortized discounts and debt issuance costs of ~~$22.2~~$19.7 million) (the “Select term loan”). ~~Select did not have any borrowings under the Select revolving facility.~~ At ~~September~~June 30, ~~2019,~~2020, Select had ~~$411.7~~$410.7 million of availability under ~~the Select~~its revolving facility (the “Select revolving facility”) after giving effect to ~~$38.3~~$39.3 million of outstanding letters of credit.

~~Select 6.250% senior notes.~~

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

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

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

On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5, among other things, (i) extended the maturity date of the Concentra revolving facility fromAt June 1,30, 2020, ~~to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra revolving facility from $75.0 million to $100.0 million.~~

At September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $12.7 million). Concentra Inc. did not have any term loan or revolving facility borrowings under its first lien credit agreement dated June 1, 2015 (together with any borrowings thereunder, the ~~Concentra revolving facility.~~“Concentra-JPM credit facilities”). At ~~September~~June 30, ~~2019,~~2020, Concentra Inc. had ~~$87.3~~$85.7 million of availability under its revolving facility (the “Concentra-JPM revolving facility”) after giving effect to ~~$12.7~~$14.3 million of outstanding letters of credit. Select and Holdings are not obligors with respect to Concentra Inc.’s debt under the Concentra-JPM credit facilities. At June 30, 2020, Concentra Inc. had outstanding borrowings under its intercompany loan agreement with Select of $1,199.8 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, 2020, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. ~~During~~Holdings did not repurchase shares during the ~~nine~~three months ended ~~September~~June 30, ~~2019, Holdings repurchased 2,165,221 shares at a cost of approximately $33.2 million, an average cost per share of $15.32, which includes transaction costs.~~2020. Since the inception of the program through ~~September~~June 30, ~~2019,~~2020, Holdings has repurchased ~~38,089,349~~38,580,908 shares at a cost of approximately ~~$347.9~~$356.6 million, or ~~$9.13~~$9.24 per share, which includes transaction costs.

Liquidity. WeThe COVID-19 pandemic adversely affected our operations during the three and six months ended June 30, 2020. The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, we believe our internally generated cash flows, ~~and~~ borrowing capacity under the Select and ~~Concentra~~Concentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below, will ~~be sufficient~~allow us to finance our operations over the next twelve months. As of June 30, 2020, we had cash and cash equivalents of $509.7 million, availability of $410.7 million under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.

On March 27, 2020, the CARES Act, which is explained further within “Regulatory Changes,” was enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to the coronavirus. We received approximately $100.5 million of payments under the Provider Relief Fund.

In accordance with the CARES Act, CMS expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. We received approximately $317.0 million of advanced payments under this program. The majority of these payments were received in April 2020. For our critical illness recovery hospitals and rehabilitation hospitals, repayment of amounts received under the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued. Failure to repay the advanced payments when due result in interest charges on the outstanding balance owed.

The CARES Act further included a technical correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and provided for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. As a result of these provisions, we expect to reduce our estimated tax payments during 2020 by approximately $20.0 million.

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Additionally, we have taken other temporary measures to reduce operating costs and expenses. These measures have included reducing labor costs through employee furloughs, salary and wage reductions for certain employees, and reducing the hours worked by part time employees, as well as limiting discretionary spending on capital expenditures. Further, we are deferring payment on our share of payroll taxes owed, as allowed by the CARES Act. Many of these initiatives will be curtailed as we see improvement in patient volumes.

At June 30, 2020, we were in compliance with each of our financial covenants. As of June 30, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 4.01 to 1.00. As of June 30, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. Please refer to our risk factors discussed in Item 1A. “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 for further discussion.

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. 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.

Recent Accounting Pronouncements

Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.

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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.~~Concentra-JPM revolving facility.

At ~~September~~June 30, ~~2019,~~2020, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,531.1~~the $2,103.4 million in Select term ~~loans~~loan (excluding unamortized discounts and debt issuance costs of ~~$22.2~~$19.7 million)~~, which bear interest at variable rates.~~. At June 30, 2020, Select did not have any borrowings under the Select revolving facility.

At ~~September~~June 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $12.7 million), which bear interest at variable rates.2020, Concentra Inc. did not have any borrowings under the ~~Concentra~~Concentra-JPM revolving facility.

As of ~~September~~June 30, ~~2019,~~2020, each 0.25% increase in market interest rates will impact the interest expense on ~~Select’s and Concentra Inc.’s~~our variable rate debt by ~~$6.9~~$5.3 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~~June 30, ~~2019,~~2020, 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.

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~~second quarter ended ~~September~~June 30, ~~2019,~~2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

~~Evansville Litigation.~~ 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.

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~~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~~plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at ~~SSH‑Wilmington,~~SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at ~~SSH‑Wilmington.~~SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, 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~~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.

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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~~The risk factors set forth in this report update, and should be read together with, the risk factors discussed in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

Risks Related to Our Business

The unpredictable effects of the COVID-19 pandemic, including the duration and extent of disruption on our operations, creates significant uncertainties about our future operating results and financial condition.

The extent to which the COVID-19 pandemic continues to disrupt our business and results of operations, financial position, and cash flows will depend on a number of evolving factors and future developments that we are not able to predict, including, but not limited to, the duration of the outbreak; further actions by governmental authorities and the private sector to limit the spread of COVID-19; continued encouragement to social distance; and the economic impact on our patients and the communities we serve as ~~previously reported~~a result of containment efforts. The adverse impacts of COVID-19 on our business may also exacerbate other risks discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

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Our hospitals may experience declines in their occupancy in future months in order protect both our patients and staff members and to prevent the spread of COVID-19 within our hospitals. Our rehabilitation hospitals may experience declines in patient volume if governmental authorities and health departments continue to suspend or resume suspension of elective surgeries at hospitals and other facilities. Our critical illness recovery hospitals and rehabilitation hospitals may experience constrained staffing levels and increased operating costs resulting from increased usage of contract clinical labor due to the overwhelming need for healthcare professionals, particularly in areas which are heavily impacted by the pandemic. Our hospitals may also experience increased operating costs resulting from shortages of medical supplies, including personal protective equipment, and supply chain disruptions.

In our outpatient rehabilitation clinics and Concentra centers, we may continue to experience declines in demand for our services if governmental authorities continue to mandate or resume mandates requiring the temporary closure of non-essential and non-life sustaining businesses. Our outpatient rehabilitation clinics may experience reductions in patient volume if governmental authorities and health departments continue to suspend or resume suspension of elective surgeries which would typically result in a patient seeking outpatient services and if the operations of our referral sources experience disruption as a result of the COVID-19 pandemic. Our clinics may continue to experience a decline in workers’ compensation injury visits as a result of business closures and our Concentra centers may continue to experience a reduction in workers’ compensation and employer services visits as a result of businesses furloughing their workforce and temporarily ceasing and reducing operations.

Our future results of operations and financial condition depend upon, among other things, the operating costs we face and the demand for our services. To the extent that we face increased operating costs and declines in demand for our services as a result of the adverse impacts of COVID-19, our ability to comply with financial covenants and obligations under the Select credit facilities, the Concentra-JPM credit facilities and the indenture governing our senior notes in future periods, as well as our ability to pay amounts due to WCAS and the other members of Concentra Group Holdings Parent or DHHC in connection with their Put Right (as defined below), if exercised, may be adversely affected. Risks related to our capital structure are described further in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

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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, 2020, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate.

The following table provides information regarding repurchases of our common stock during the three months ended ~~September~~June 30, ~~2019.~~2020.

Total Number of
Shares Purchased⁽¹⁾

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


	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2020	46,955	$	15.41	—	$	143,394,863
May 1 - May 31, 2020	—	—		—	143,394,863
June 1 - June 30, 2020	—	—		—	143,394,863
Total	46,955	$	15.41	—	$	143,394,863


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

(1) Represents common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS



Number		Description
~~4.1~~10.1		~~Indenture, dated as of August 1, 2019, by and among Select Medical Corporation, the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference~~First Amendment to ~~Exhibit 4.1 of the Current Report on Form 8-K, filed on August 1, 2019).~~
~~4.2~~	~~Forms of 6.250% Senior Notes due 2026 (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed on August 1, 2019).~~
~~10.1~~	Amendment No. 3, dated August 1, 2019, to the Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated as of March 22, 2018, and Amendment No. 2, dated as of October 26, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on August 1, 2019).
~~10.2~~	~~Amendment No. 6, dated September 20, 2019, to the First Lien Credit~~Lease Agreement, dated as of ~~June 1, 2015, among Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto~~April 24, 2020, between 225 Grandview Investors, LLC and ~~JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, as amended by Amendment No. 1,~~Select Medical Corporation.
10.2		Third Addendum to Lease Agreement, dated as of ~~September 26, 2016, Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, Amendment No. 4, dated as of October 26, 2018,~~May 5, 2020, between Old Gettysburg Associates III, LP and ~~Amendment No. 5, dated as of April 8, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on September 24, 2019).~~Select Medical Corporation.
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		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
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101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES

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



			SELECT MEDICAL HOLDINGS CORPORATION


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

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

Dated: ~~October 31, 2019~~July 30, 2020



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



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)


	December 31, 2018		September 30, 2019			December 31, 2019		June 30, 2020
ASSETS					ASSETS
Current Assets:					Current Assets:
Cash and cash equivalents	$	175,178	$	135,963	Cash and cash equivalents	$	335,882	$	509,737
Accounts receivable	706,676		798,805		Accounts receivable	762,677		749,245
Prepaid income taxes	20,539		18,804		Prepaid income taxes	18,585		9,204
Other current assets	90,131		96,721		Other current assets	95,848		95,143
Total Current Assets	992,524		1,050,293		Total Current Assets	1,212,992		1,363,329
Operating lease right-of-use assets	—		986,519		Operating lease right-of-use assets	1,003,986		1,022,721
Property and equipment, net	979,810		997,467		Property and equipment, net	998,406		959,086
Goodwill	3,320,726		3,382,656		Goodwill	3,391,955		3,391,196
Identifiable intangible assets, net	437,693		415,763		Identifiable intangible assets, net	409,068		398,266
Other assets	233,512		322,058		Other assets	323,881		333,860
Total Assets	$	5,964,265	$	7,154,756	Total Assets	$	7,340,288	$	7,468,458
LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current Liabilities:					Current Liabilities:
Overdrafts	$	25,083	$	—

Current operating lease liabilities	—		204,936		Current operating lease liabilities	$	207,950	$	216,689
Current portion of long-term debt and notes payable	43,865		15,656		Current portion of long-term debt and notes payable	25,167		13,435
Accounts payable	146,693		136,801		Accounts payable	145,731		142,946
Accrued payroll	172,386		170,294		Accrued payroll	183,754		125,109
Accrued vacation	110,660		119,286		Accrued vacation	124,111		124,624
Accrued interest	12,137		10,112		Accrued interest	33,853		29,610
Accrued other	190,691		209,887		Accrued other	191,076		204,074
Government advances (Note 12)					Government advances (Note 12)	—		316,992
Unearned government assistance (Note 12)					Unearned government assistance (Note 12)	—		45,505

Income taxes payable	3,671		2,815		Income taxes payable	2,638		36,985
Total Current Liabilities	705,186		869,787		Total Current Liabilities	914,280		1,255,969
Non-current operating lease liabilities	—		836,205		Non-current operating lease liabilities	852,897		866,097
Long-term debt, net of current portion	3,249,516		3,336,506		Long-term debt, net of current portion	3,419,943		3,390,417
Non-current deferred tax liability	153,895		147,567		Non-current deferred tax liability	148,258		144,697
Other non-current liabilities	158,940		105,251		Other non-current liabilities	101,334		142,861
Total Liabilities	4,267,537		5,295,316		Total Liabilities	5,436,712		5,800,041
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 11)					Commitments and contingencies (Note 11)
Redeemable non-controlling interests	780,488		953,697		Redeemable non-controlling interests	974,541		495,987
Stockholders’ Equity:					Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,171,529 shares issued and outstanding at 2018 and 2019, respectively	135		134
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,970,064 shares issued and outstanding at 2019 and 2020, respectively					Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,970,064 shares issued and outstanding at 2019 and 2020, respectively	134		134
Capital in excess of par	482,556		485,415		Capital in excess of par	491,038		496,785
Retained earnings	320,351		269,169		Retained earnings	279,800		495,964
Total Stockholders’ Equity	803,042		754,718		Total Stockholders’ Equity	770,972		992,883
Non-controlling interests	113,198		151,025		Non-controlling interests	158,063		179,547
Total Equity	916,240		905,743		Total Equity	929,035		1,172,430
Total Liabilities and Equity	$	5,964,265	$	7,154,756	Total Liabilities and Equity	$	7,340,288	$	7,468,458



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



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	8

	Notes to condensed consolidated financial statements	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2920

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5049

ITEM 4.	CONTROLS AND PROCEDURES	5049

PART II	OTHER INFORMATION	5150

ITEM 1.	LEGAL PROCEEDINGS	5150

ITEM 1A.	RISK FACTORS	5351

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

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53

ITEM 4.	MINE SAFETY DISCLOSURES	53

ITEM 5.	OTHER INFORMATION	53

ITEM 6.	EXHIBITS	54

SIGNATURES


	For the Three Months Ended September 30,							For the Three Months Ended June 30,
	2018			2019				2019		2020
Net operating revenues	$	1,267,401		$	1,393,343		Net operating revenues	$	1,361,364	$	1,232,718
Costs and expenses:							Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,087,062			1,183,111			Cost of services, exclusive of depreciation and amortization	1,150,150		1,082,456
General and administrative	29,975			34,385			General and administrative	31,339		33,461
Depreciation and amortization	50,527			52,941			Depreciation and amortization	54,993		52,271
Total costs and expenses	1,167,564			1,270,437			Total costs and expenses	1,236,482		1,168,188
Other operating income (Note 12)							Other operating income (Note 12)	—		54,988
Income from operations	99,837			122,906			Income from operations	124,882		119,518
Other income and expense:							Other income and expense:
Loss on early retirement of debt	—			(18,643		)

Equity in earnings of unconsolidated subsidiaries	5,432			6,950			Equity in earnings of unconsolidated subsidiaries	7,394		8,324
Gain on sale of businesses (Note 5)	2,139			—
Gain on sale of businesses							Gain on sale of businesses	—		346
Interest expense	(50,669		)	(54,336		)	Interest expense	(51,464)		(37,366)
Income before income taxes	56,739			56,877			Income before income taxes	80,812		90,822
Income tax expense	14,060			12,847			Income tax expense	20,826		23,336
Net income	42,679			44,030			Net income	59,986		67,486
Less: Net income attributable to non-controlling interests	9,762			13,298			Less: Net income attributable to non-controlling interests	15,170		15,836
Net income attributable to Select Medical Holdings Corporation	$	32,917		$	30,732		Net income attributable to Select Medical Holdings Corporation	$	44,816	$	51,650
Earnings per common share (Note 12):
Earnings per common share (Note 10):							Earnings per common share (Note 10):
Basic	$	0.24		$	0.23		Basic	$	0.33	$	0.39
Diluted	$	0.24		$	0.23		Diluted	$	0.33	$	0.39



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



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



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



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



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

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



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



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



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	550		$	(4,642	)	$	705,908	$	706,450
Credit facilities:
Revolving facility	20,000		—			—			20,000		18,400
Term loan	1,129,875		(9,690		)	(9,321		)	1,110,864		1,076,206
Other	56,415		—			(484		)	55,931		55,931
Total Select debt	1,916,290		(9,140		)	(14,447		)	1,892,703		1,856,987
Concentra Inc.:
Credit facilities:
Term loans	1,414,175		(2,765		)	(18,648		)	1,392,762		1,357,802
Other debt, including finance leases	7,916		—			—			7,916		7,916
Total Concentra Inc. debt	1,422,091		(2,765		)	(18,648		)	1,400,678		1,365,718
Total debt	$	3,338,381	$	(11,905	)	$	(33,095	)	$	3,293,381	$	3,222,705


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


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


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


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


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