Annual Statements Open main menu
  1. Annual Statements
  2. » Companies
  3. » SELECT MEDICAL HOLDINGS CORP
  4. » Quarter Report: 2018 September (Form 10-Q)

SELECT MEDICAL HOLDINGS CORP - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2018

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              
Commission file numbers: 001-34465 and 001-31441
 
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrant as specified in its Charter)
 
Delaware
Delaware
 
20-1764048
23-2872718
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055
(Address of Principal Executive Offices and Zip code)
(717) 972-1100
(Registrants’ telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit such files).   Yes ý  No o
Indicate by check mark whether the Registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging Growth Company o
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the Registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
 
 
Emerging Growth Company o
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
As of October 31, 2018, Select Medical Holdings Corporation had outstanding 135,331,864 shares of common stock.
This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Inc., the indirect operating subsidiary of Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings Parent and its subsidiaries.

Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)

 
Select Medical Holdings Corporation
 
Select Medical Corporation
 
December 31, 2017
 
September 30,
2018
 
December 31, 2017
 
September 30,
2018
ASSETS
 

 
 

 
 

 
 

Current Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
122,549

 
$
160,413

 
$
122,549

 
$
160,413

Accounts receivable
691,732

 
746,816

 
691,732

 
746,816

Prepaid income taxes
31,387

 
19,852

 
31,387

 
19,852

Other current assets
75,158

 
96,214

 
75,158

 
96,214

Total Current Assets
920,826

 
1,023,295

 
920,826

 
1,023,295

Property and equipment, net
912,591

 
965,390

 
912,591

 
965,390

Goodwill
2,782,812

 
3,311,459

 
2,782,812

 
3,311,459

Identifiable intangible assets, net
326,519

 
444,847

 
326,519

 
444,847

Other assets
184,418

 
235,190

 
184,418

 
235,190

Total Assets
$
5,127,166

 
$
5,980,181

 
$
5,127,166

 
$
5,980,181

LIABILITIES AND EQUITY
 

 
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

 
 

Overdrafts
$
29,463

 
$
23,291

 
$
29,463

 
$
23,291

Current portion of long-term debt and notes payable
22,187

 
24,175

 
22,187

 
24,175

Accounts payable
128,194

 
137,540

 
128,194

 
137,540

Accrued payroll
160,562

 
176,221

 
160,562

 
176,221

Accrued vacation
92,875

 
106,026

 
92,875

 
106,026

Accrued interest
19,885

 
23,648

 
19,885

 
23,648

Accrued other
143,166

 
188,079

 
143,166

 
188,079

Income taxes payable
9,071

 
6,129

 
9,071

 
6,129

Total Current Liabilities
605,403

 
685,109

 
605,403

 
685,109

Long-term debt, net of current portion
2,677,715

 
3,305,533

 
2,677,715

 
3,305,533

Non-current deferred tax liability
124,917

 
148,227

 
124,917

 
148,227

Other non-current liabilities
145,709

 
174,170

 
145,709

 
174,170

Total Liabilities
3,553,744

 
4,313,039

 
3,553,744

 
4,313,039

Commitments and contingencies (Note 10)


 


 


 


Redeemable non-controlling interests
640,818

 
779,574

 
640,818

 
779,574

Stockholders’ Equity:
 

 
 

 
 

 
 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 135,140,269 shares issued and outstanding at 2017 and 2018, respectively
134

 
135

 
—

 
—

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

 
—

 
0

 
0

Capital in excess of par
463,499

 
477,822

 
947,370

 
964,683

Retained earnings (accumulated deficit)
359,735

 
296,635

 
(124,002
)
 
(190,091
)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity
823,368

 
774,592

 
823,368

 
774,592

Non-controlling interests
109,236

 
112,976

 
109,236

 
112,976

Total Equity
932,604

 
887,568

 
932,604

 
887,568

Total Liabilities and Equity
$
5,127,166

 
$
5,980,181

 
$
5,127,166

 
$
5,980,181

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

3
Table of Contents

Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)

 
Select Medical Holdings Corporation
 
Select Medical Corporation
 
For the Three Months Ended September 30,
 
For the Three Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Net operating revenues
$
1,077,014

 
$
1,267,401

 
$
1,077,014

 
$
1,267,401

Costs and expenses:
 

 
 

 
 

 
 

Cost of services
939,079

 
1,087,062

 
939,079

 
1,087,062

General and administrative
27,065

 
29,975

 
27,065

 
29,975

Depreciation and amortization
38,772

 
50,527

 
38,772

 
50,527

Total costs and expenses
1,004,916

 
1,167,564

 
1,004,916

 
1,167,564

Income from operations
72,098

 
99,837

 
72,098

 
99,837

Other income and expense:
 

 
 

 
 

 
 

Equity in earnings of unconsolidated subsidiaries
4,431

 
5,432

 
4,431

 
5,432

Non-operating gain
—

 
2,139

 
—

 
2,139

Interest expense
(37,688
)
 
(50,669
)
 
(37,688
)
 
(50,669
)
Income before income taxes
38,841

 
56,739

 
38,841

 
56,739

Income tax expense
14,017

 
14,060

 
14,017

 
14,060

Net income
24,824

 
42,679

 
24,824

 
42,679

Less: Net income attributable to non-controlling interests
6,362

 
9,762

 
6,362

 
9,762

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

 
$
32,917

 
$
18,462

 
$
32,917

Income per common share:
 

 
 

 
 

 
 

Basic
$
0.14

 
$
0.24

 
 

 
 

Diluted
$
0.14

 
$
0.24

 
 

 
 

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
129,142

 
130,387

 
 

 
 

Diluted
129,322

 
130,447

 
 

 
 

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

4
Table of Contents

Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)

 
Select Medical Holdings Corporation
 
Select Medical Corporation
 
For the Nine Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Net operating revenues
$
3,270,996

 
$
3,816,575

 
$
3,270,996

 
$
3,816,575

Costs and expenses:
 

 
 

 
 

 
 

Cost of services
2,788,411

 
3,247,606

 
2,788,411

 
3,247,606

General and administrative
83,415

 
90,951

 
83,415

 
90,951

Depreciation and amortization
119,644

 
149,022

 
119,644

 
149,022

Total costs and expenses
2,991,470

 
3,487,579

 
2,991,470

 
3,487,579

Income from operations
279,526

 
328,996

 
279,526

 
328,996

Other income and expense:
 

 
 

 
 

 
 

Loss on early retirement of debt
(19,719
)
 
(10,255
)
 
(19,719
)
 
(10,255
)
Equity in earnings of unconsolidated subsidiaries
15,618

 
14,914

 
15,618

 
14,914

Non-operating gain (loss)
(49
)
 
9,016

 
(49
)
 
9,016

Interest expense
(116,196
)
 
(147,991
)
 
(116,196
)
 
(147,991
)
Income before income taxes
159,180

 
194,680

 
159,180

 
194,680

Income tax expense
59,593

 
47,460

 
59,593

 
47,460

Net income
99,587

 
147,220

 
99,587

 
147,220

Less: Net income attributable to non-controlling interests
23,200

 
34,053

 
23,200

 
34,053

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation
$
76,387

 
$
113,167

 
$
76,387

 
$
113,167

Income per common share:
 

 
 

 
 

 
 

Basic
$
0.57

 
$
0.84

 
 

 
 

Diluted
$
0.57

 
$
0.84

 
 

 
 

Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
128,745

 
129,972

 
 

 
 

Diluted
128,916

 
130,066

 
 

 
 

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



5
Table of Contents

Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
 
 
 
 
 
Select Medical Holdings Corporation Stockholders
 
 
 
 
 
Redeemable
Non-controlling
Interests
 
 
Common
Stock
Issued
 
Common
Stock
Par Value
 
Capital in
Excess
of Par
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Non-controlling
Interests
 
Total
Equity
Balance at December 31, 2017
$
640,818

 
 
134,115

 
$
134

 
$
463,499

 
$
359,735

 
$
823,368

 
$
109,236

 
$
932,604

Net income attributable to Select Medical Holdings Corporation
 

 
 
 

 
 

 
 

 
113,167

 
113,167

 


 
113,167

Net income attributable to non-controlling interests
25,896

 
 
 

 
 

 
 

 
 

 
—

 
8,157

 
8,157

Issuance of restricted stock
 

 
 
1,222

 
1

 
(1
)
 
 

 
—

 


 
—

Forfeitures of unvested restricted stock
 
 
 
(88
)
 
0

 
0

 
 
 
—

 
 
 
—

Vesting of restricted stock
 
 
 
 
 
 
 
15,059

 
 
 
15,059

 
 
 
15,059

Repurchase of common shares
 

 
 
(285
)
 
0

 
(2,989
)
 
(2,651
)
 
(5,640
)
 


 
(5,640
)
Exercise of stock options
 

 
 
176

 
0

 
1,633

 
 

 
1,633

 


 
1,633

Issuance and exchange of non-controlling interests
163,659

 
 
 
 
 
 
1,553

 
74,341

 
75,894

 
1,921

 
77,815

Distributions to and purchases of non-controlling interests
(215,847
)
 
 
 

 
 

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

 
 
 

 
 

 
 

 
(164,065
)
 
(164,065
)
 


 
(164,065
)
Other
983

 
 
 

 
 

 
 

 
(275
)
 
(275
)
 
1,133

 
858

Balance at September 30, 2018
$
779,574

 
 
135,140

 
$
135

 
$
477,822

 
$
296,635

 
$
774,592

 
$
112,976

 
$
887,568

 
 
 
 
 
Select Medical Corporation Stockholders
 
 
 
 
 
Redeemable
Non-controlling
Interests
 
 
Common
Stock
Issued
 
Common
Stock
Par Value
 
Capital in
Excess
of Par
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Non-controlling
Interests
 
Total
Equity
Balance at December 31, 2017
$
640,818

 
 
0

 
$
0

 
$
947,370

 
$
(124,002
)
 
$
823,368

 
$
109,236

 
$
932,604

Net income attributable to Select Medical Corporation
 

 
 
 

 
 

 
 

 
113,167

 
113,167

 
 

 
113,167

Net income attributable to non-controlling interests
25,896

 
 
 

 
 

 
 

 
 

 
—

 
8,157

 
8,157

Additional investment by Holdings
 

 
 
 

 
 

 
1,633

 
 

 
1,633

 
 

 
1,633

Dividends declared and paid to Holdings
 

 
 
 

 
 

 
 

 
(5,640
)
 
(5,640
)
 
 

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

 
 
 

 
 

 
15,059

 
 

 
15,059

 
 

 
15,059

Issuance and exchange of non-controlling interests
163,659

 
 
 
 
 
 
1,553

 
74,341

 
75,894

 
1,921

 
77,815

Distributions to and purchases of non-controlling interests
(215,847
)
 
 
 

 
 

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

 
 
 

 
 

 
 

 
(164,065
)
 
(164,065
)
 
 

 
(164,065
)
Other
983

 
 
 

 
 

 
 

 
(275
)
 
(275
)
 
1,133

 
858

Balance at September 30, 2018
$
779,574

 
 
0

 
$
0

 
$
964,683

 
$
(190,091
)
 
$
774,592

 
$
112,976

 
$
887,568

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


6
Table of Contents

Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

 
Select Medical Holdings Corporation
 
Select Medical Corporation
 
For the Nine Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Operating activities
 

 
 

 
 

 
 

Net income
$
99,587

 
$
147,220

 
$
99,587

 
$
147,220

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

 
 

 
 

 
 

Distributions from unconsolidated subsidiaries
14,542

 
10,734

 
14,542

 
10,734

Depreciation and amortization
119,644

 
149,022

 
119,644

 
149,022

Provision for bad debts
914

 
(373
)
 
914

 
(373
)
Equity in earnings of unconsolidated subsidiaries
(15,618
)
 
(14,914
)
 
(15,618
)
 
(14,914
)
Loss on extinguishment of debt
6,527

 
484

 
6,527

 
484

Gain on sale of assets and businesses
(9,499
)
 
(9,129
)
 
(9,499
)
 
(9,129
)
Stock compensation expense
14,227

 
17,175

 
14,227

 
17,175

Amortization of debt discount, premium and issuance costs
8,546

 
9,845

 
8,546

 
9,845

Deferred income taxes
(6,126
)
 
(2,092
)
 
(6,126
)
 
(2,092
)
Changes in operating assets and liabilities, net of effects of business combinations:
 

 
 

 
 

 
 

Accounts receivable
(143,308
)
 
23,495

 
(143,308
)
 
23,495

Other current assets
(2,677
)
 
(10,274
)
 
(2,677
)
 
(10,274
)
Other assets
1,407

 
4,828

 
1,407

 
4,828

Accounts payable
3,913

 
(3,507
)
 
3,913

 
(3,507
)
Accrued expenses
18,752

 
49,391

 
18,752

 
49,391

Income taxes
19,141

 
9,072

 
19,141

 
9,072

Net cash provided by operating activities
129,972

 
380,977

 
129,972

 
380,977

Investing activities
 

 
 

 
 

 
 

Business combinations, net of cash acquired
(19,371
)
 
(519,258
)
 
(19,371
)
 
(519,258
)
Purchases of property and equipment
(173,800
)
 
(121,039
)
 
(173,800
)
 
(121,039
)
Investment in businesses
(11,374
)
 
(12,936
)
 
(11,374
)
 
(12,936
)
Proceeds from sale of assets and businesses
34,555

 
6,691

 
34,555

 
6,691

Net cash used in investing activities
(169,990
)
 
(646,542
)
 
(169,990
)
 
(646,542
)
Financing activities
 

 
 

 
 

 
 

Borrowings on revolving facilities
805,000

 
420,000

 
805,000

 
420,000

Payments on revolving facilities
(705,000
)
 
(585,000
)
 
(705,000
)
 
(585,000
)
Proceeds from term loans
1,139,487

 
779,904

 
1,139,487

 
779,904

Payments on term loans
(1,176,567
)
 
(8,625
)
 
(1,176,567
)
 
(8,625
)
Revolving facility debt issuance costs
(4,392
)
 
(1,333
)
 
(4,392
)
 
(1,333
)
Borrowings of other debt
27,571

 
30,134

 
27,571

 
30,134

Principal payments on other debt
(15,112
)
 
(17,971
)
 
(15,112
)
 
(17,971
)
Repurchase of common stock
(3,603
)
 
(5,640
)
 
—

 
—

Dividends paid to Holdings
—

 
—

 
(3,603
)
 
(5,640
)
Proceeds from exercise of stock options
1,634

 
1,633

 
—

 
—

Equity investment by Holdings
—

 
—

 
1,634

 
1,633

Decrease in overdrafts
(20,439
)
 
(6,172
)
 
(20,439
)
 
(6,172
)
Proceeds from issuance of non-controlling interests
8,986

 
2,926

 
8,986

 
2,926

Distributions to non-controlling interests
(9,276
)
 
(306,427
)
 
(9,276
)
 
(306,427
)
Net cash provided by financing activities
48,289

 
303,429

 
48,289

 
303,429

Net increase in cash and cash equivalents
8,271

 
37,864

 
8,271

 
37,864

Cash and cash equivalents at beginning of period
99,029

 
122,549

 
99,029

 
122,549

Cash and cash equivalents at end of period
$
107,300

 
$
160,413

 
$
107,300

 
$
160,413

Supplemental Information
 

 
 

 
 

 
 

Cash paid for interest
$
101,341

 
$
134,378

 
$
101,341

 
$
134,378

Cash paid for taxes
46,553

 
40,460

 
46,553

 
40,460

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

 
238,000

 
—

 
238,000

 

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

7
Table of Contents

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.              Basis of Presentation
The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, 2018, and for the three and nine month periods ended September 30, 2017 and 2018, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2018. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2018.
2.              Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Lease Accounting
Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”) which established Topic 842, Leases (the “standard”). This standard includes a lessee accounting model that recognizes two types of leases: finance and operating. This standard requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in the standard will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. There are two transition approaches available under the standard: a modified retrospective approach for leases that exist, or are entered into, after the beginning of the earliest comparative period in the financial statements or a cumulative-effect approach with an adjustment to the opening balance of retained earnings in the period of adoption.
Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of operations.



8
Table of Contents

The Company will implement the new standard beginning January 1, 2019, using the cumulative-effect approach, without adjusting the comparative periods. The Company has completed its inventory of leases and has begun to implement a new technology platform to account for leases under the new standard.  The Company has substantially completed validating its lease data to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impacts that adoption of this ASU will have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
Beginning in May 2014, the FASB issued several ASUs which established Topic 606, Revenue from Contracts with Customers (the “revenue recognition standard”). This revenue recognition standard supersedes existing revenue recognition requirements and seeks to eliminate most industry-specific guidance under current GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company adopted the new revenue recognition standard on January 1, 2018, using the full retrospective transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:
 
Three Months Ended September 30, 2017
 
As Reported
 
As Adjusted(1)
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Statements of Operations
 
 
 
 
 
Net operating revenues
$
1,097,166

 
$
1,077,014

 
$
(20,152
)
Bad debt expense
20,321

 
169

 
(20,152
)
 
Nine Months Ended September 30, 2017
 
As Reported
 
As Adjusted(1)
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Statements of Operations
 
 
 
 
 
Net operating revenues
$
3,329,202

 
$
3,270,996

 
$
(58,206
)
Bad debt expense
59,120

 
914

 
(58,206
)
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
Provision for bad debts
$
59,120

 
$
914

 
$
(58,206
)
Changes in accounts receivable
(201,514
)
 
(143,308
)
 
58,206

 _____________________________________________________________
(1) Bad debt expense is now included in cost of services on the condensed consolidated statements of operations.
 
December 31, 2017
 
As Reported
 
As Adjusted
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Balance Sheets
 
 
 
 
 
Accounts receivable
$
767,276

 
$
691,732

 
$
(75,544
)
Allowance for doubtful accounts
75,544

 
—

 
(75,544
)
Accounts receivable
$
691,732

 
$
691,732

 
$
—


The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7.


9
Table of Contents

Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the guidance effective January 1, 2018. Adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.
3.  Acquisitions
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra Inc. (“Concentra”) acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) dated as of October 22, 2017, by and among Concentra, U.S. HealthWorks, Concentra Group Holdings, LLC (“Concentra Group Holdings”), Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and Dignity Health Holding Corporation (“DHHC”). For the nine months ended September 30, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.
In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.
Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values in accordance with the provisions of Accounting Standards Codification Topic 805, Business Combinations. The Company is in the process of completing its assessment of the acquisition-date fair values of the assets acquired and the liabilities assumed and determining the estimated useful lives of long-lived assets and finite-lived intangible assets; therefore, the values set forth below are subject to adjustment during the measurement period. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities by December 31, 2018.
The following table reconciles the preliminary allocation of estimated fair value to identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):
Identifiable tangible assets
$
184,163

Identifiable intangible assets
140,406

Goodwill
533,124

Total assets
857,693

Total liabilities
104,693

Consideration given
$
753,000



10
Table of Contents

The preliminary fair value assigned to identifiable intangible assets was determined through the use of the income and cost approaches. Both valuation methods rely on management judgment including expected future cash flows, customer attrition rates, contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates, and other factors. Useful lives for identifiable intangible assets were determined based upon the remaining useful economic lives of the identifiable intangible assets that are expected to contribute directly or indirectly to future cash flows. The valuations of tangible assets were derived using a combination of the market and cost approaches. Significant judgments used in valuing tangible assets include estimated reproduction or replacement cost, useful lives of assets, and estimated selling prices.
 
Fair Value
 
Weighted Average
Amortization Period
 
(in thousands)
 
(in years)
Customer relationships
$
135,000

 
15.0 years
Trademarks
5,000

 
1.0 year
Favorable leasehold interests
406

 
2.9 years
Identifiable intangible assets
$
140,406

 
 


The customer relationships and trademarks are being amortized on a straight-line basis over their expected useful lives. Favorable leasehold interests are being amortized over their remaining lease terms at the time of acquisition.
A preliminary estimate for goodwill of $533.1 million has been recognized for the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.
For the three months ended September 30, 2018, U.S. HealthWorks had net operating revenues of $133.3 million which is reflected in the Company’s consolidated statements of operations. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks had net operating revenues of $362.7 million which is reflected in the Company’s consolidated statements of operations for the nine months ended September 30, 2018. Due to the integrated nature of our operations, it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands, except per share amounts)
Net revenue
$
1,215,869

 
$
1,267,401

 
$
3,687,574

 
$
3,864,155

Net income
21,929

 
45,721

 
85,317

 
153,144

Net income attributable to the Company
17,011

 
34,441

 
69,237

 
116,135

Income per common share:
 
 
 
 
 

 
 
Basic
$
0.13

 
$
0.26

 
$
0.52

 
$
0.86

Diluted
$
0.13

 
$
0.26

 
$
0.52

 
$
0.86


 The pro forma financial information is based on the preliminary allocation of the purchase price of the U.S. HealthWorks acquisition and is therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period. The net income tax impact was calculated at a statutory rate, as if U.S. HealthWorks had been a subsidiary of the Company as of January 1, 2017.
For the nine months ended September 30, 2017, pro forma results were adjusted to include the U.S. HealthWorks acquisition costs recognized by the Company during 2017 and 2018, which were approximately $5.7 million. For the nine months ended September 30, 2018, pro forma results were adjusted to exclude approximately $2.9 million of U.S. HealthWorks acquisition costs which were recognized by the Company during the period.

11
Table of Contents

4.          Intangible Assets
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, 2018:
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Total
 
(in thousands)
Balance as of December 31, 2017
$
1,045,220

 
$
415,528

 
$
647,522

 
$
674,542

 
$
2,782,812

Acquired
—

 
1,118

 
2,465

 
536,945

 
540,528

Measurement period adjustment
—

 
—

 
—

 
(2,472
)
 
(2,472
)
Sold
—

 
—

 
(9,409
)
 
—

 
(9,409
)
Balance as of September 30, 2018
$
1,045,220

 
$
416,646

 
$
640,578

 
$
1,209,015

 
$
3,311,459

_______________________________________________________________________________
(1)
The critical illness recovery hospital reporting unit was previously referred to as the long term acute care reporting unit. The rehabilitation hospital reporting unit was previously referred to as the inpatient rehabilitation reporting unit.
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
 
 
December 31, 2017
 
September 30, 2018
 
 
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
 
19,155

 
—

 
19,155

 
19,118

 
—

 
19,118

Accreditations
 
1,895

 
—

 
1,895

 
1,857

 
—

 
1,857

Finite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademarks
 
—

 
—

 
—

 
5,000

 
(3,333
)
 
1,667

Customer relationships
 
143,953

 
(38,281
)
 
105,672

 
279,967

 
(55,760
)
 
224,207

Favorable leasehold interests
 
13,295

 
(4,319
)
 
8,976

 
13,553

 
(5,653
)
 
7,900

Non-compete agreements
 
28,023

 
(3,900
)
 
24,123

 
28,953

 
(5,553
)
 
23,400

Total identifiable intangible assets
 
$
373,019

 
$
(46,500
)
 
$
326,519

 
$
515,146

 
$
(70,299
)
 
$
444,847


 The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At September 30, 2018, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 8.4 years, respectively.
The Company’s finite-lived customer relationships, non-compete agreements, and trademarks amortize over their estimated useful lives. Amortization expense was $4.4 million and $7.9 million for the three months ended September 30, 2017 and 2018, respectively. Amortization expense was $13.1 million and $22.1 million for the nine months ended September 30, 2017 and 2018, respectively. The Company’s leasehold interests have finite lives and are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date.
Estimated amortization expense for the Company’s finite-lived customer relationships, non-compete agreements, and trademarks for the remaining period of 2018 and each of the four succeeding years is as follows:
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
 
(in thousands)
Amortization expense
 
$
7,811

 
$
26,490

 
$
25,864

 
$
25,648

 
$
25,443




12
Table of Contents

5. 
Long-Term Debt and Notes Payable
For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities are non-recourse to Holdings and Select.
As of September 30, 2018, the Company’s long-term debt and notes payable are as follows (in thousands):
 
Principal
Outstanding
 
Unamortized
Premium
(Discount)
 
Unamortized
Issuance
Costs
 
Carrying
Value
 
 
Fair
Value
Select:
 

 
 

 
 

 
 

 
 
 

6.375% senior notes
$
710,000

 
$
607

 
$
(5,122
)
 
$
705,485

 
 
$
718,875

Credit facilities:
 

 
 

 
 

 
 

 
 
 

Revolving facility
65,000

 
—

 
—

 
65,000

 
 
59,800

Term loans
1,132,750

 
(11,000
)
 
(11,058
)
 
1,110,692

 
 
1,139,830

Other
49,004

 
—

 
(508
)
 
48,496

 
 
48,496

Total Select debt
1,956,754

 
(10,393
)
 
(16,688
)
 
1,929,673

 
 
1,967,001

Concentra:
 

 
 

 
 

 
 

 
 
 

Credit facilities:
 

 
 

 
 

 
 

 
 
 

Term loans
1,414,175

 
(3,078
)
 
(20,417
)
 
1,390,680

 
 
1,427,181

Other
9,355

 
—

 
—

 
9,355

 
 
9,355

Total Concentra debt
1,423,530

 
(3,078
)
 
(20,417
)
 
1,400,035

 
 
1,436,536

Total debt
$
3,380,284

 
$
(13,471
)
 
$
(37,105
)
 
$
3,329,708

 
 
$
3,403,537


 
Principal maturities of the Company’s long-term debt and notes payable are approximately as follows (in thousands):
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Select:
 

 
 

 
 

 
 

 
 

 
 

 
 

6.375% senior notes
$
—

 
$
—

 
$
—

 
$
710,000

 
$
—

 
$
—

 
$
710,000

Credit facilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

Revolving facility
—

 
—

 
—

 
—

 
65,000

 
—

 
65,000

Term loans
2,875

 
11,500

 
11,500

 
11,500

 
11,500

 
1,083,875

 
1,132,750

Other
3,992

 
5,391

 
24,285

 
221

 
—

 
15,115

 
49,004

Total Select debt
6,867

 
16,891

 
35,785

 
721,721

 
76,500

 
1,098,990

 
1,956,754

Concentra:
 

 
 

 
 

 
 

 
 

 
 

 
 

Credit facilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

Term loans
—

 
—

 
5,719

 
12,365

 
1,156,091

 
240,000

 
1,414,175

Other
1,341

 
3,625

 
346

 
346

 
324

 
3,373

 
9,355

Total Concentra debt
1,341

 
3,625

 
6,065

 
12,711

 
1,156,415

 
243,373

 
1,423,530

Total debt
$
8,208

 
$
20,516

 
$
41,850

 
$
734,432

 
$
1,232,915

 
$
1,342,363

 
$
3,380,284




13
Table of Contents

As of December 31, 2017, the Company’s long-term debt and notes payable are as follows (in thousands):
 
Principal
Outstanding
 
Unamortized
Premium
(Discount)
 
Unamortized
Issuance
Costs
 
Carrying
Value
 
 
Fair
Value
Select:
 

 
 

 
 

 
 

 
 
 

6.375% senior notes
$
710,000

 
$
778

 
$
(6,553
)
 
$
704,225

 
 
$
727,750

Credit facilities:
 

 
 

 
 

 
 

 
 
 

Revolving facility
230,000

 
—

 
—

 
230,000

 
 
211,600

Term loans
1,141,375

 
(12,445
)
 
(12,500
)
 
1,116,430

 
 
1,154,215

Other
36,877

 
—

 
(533
)
 
36,344

 
 
36,344

Total Select debt
2,118,252

 
(11,667
)
 
(19,586
)
 
2,086,999

 
 
2,129,909

Concentra:
 

 
 

 
 

 
 

 
 
 

Credit facilities:
 

 
 

 
 

 
 

 
 
 

Term loans
619,175

 
(2,257
)
 
(10,668
)
 
606,250

 
 
625,173

Other
6,653

 
—

 
—

 
6,653

 
 
6,653

Total Concentra debt
625,828

 
(2,257
)
 
(10,668
)
 
612,903

 
 
631,826

Total debt
$
2,744,080

 
$
(13,924
)
 
$
(30,254
)
 
$
2,699,902

 
 
$
2,761,735


 Select Credit Facilities
On March 22, 2018, Select entered into Amendment No. 1 to the senior secured credit agreement (the “Select credit agreement”) dated March 6, 2017. The Select credit agreement originally provided for $1.6 billion in senior secured credit facilities comprised of $1.15 billion in term loans (the “Select term loans”) and a $450.0 million revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.
Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.
Concentra Credit Facilities
Concentra First Lien Credit Agreement
On February 1, 2018, Concentra entered into an amendment to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015, by and among Concentra, as the borrower, Concentra Holdings, Inc., a subsidiary of Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other lenders party thereto. Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement (as described in Note 3), as well as to pay fees and expenses associated with the financing.
Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

14
Table of Contents

Concentra Second Lien Credit Agreement
On February 1, 2018, Concentra entered into a second lien credit agreement (the “Concentra second lien credit agreement” and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”) with Concentra Holdings, Inc., Wells Fargo Bank, National Association, as the administrative agent and the collateral agent, and the other lenders party thereto.
The Concentra second lien credit agreement provided for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.
Concentra will be required to prepay borrowings under the Concentra second lien term loan with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.
The Concentra second lien credit agreement also contains a number of affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.
Loss on Early Retirement of Debt
The amendments to the Select credit facilities and Concentra credit facilities resulted in losses on early retirement of debt totaling $10.3 million for the nine months ended September 30, 2018. The losses on early retirement of debt consisted of $0.5 million of debt extinguishment losses and $9.8 million of debt modification losses during the nine months ended September 30, 2018.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s 6.375% senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.
The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.



15
Table of Contents

6.  Segment Information
The Company identifies its operating segments according to how the chief operating decision maker evaluates financial performance and allocates resources. During the year ended December 31, 2017, the Company changed its internal segment reporting structure which is reflective of how the Company now manages its business operations, reviews operating performance, and allocates resources. The Company’s reportable segments include the critical illness recovery hospital segment (previously referred to as the long term acute care segment), rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment), outpatient rehabilitation segment, and Concentra segment. Prior year results for the three and nine months ended September 30, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.
Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands)
Net operating revenues:(1)
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
$
416,934

 
$
420,108

 
$
1,301,251

 
$
1,327,236

Rehabilitation hospital(2)
157,499

 
176,885

 
453,702

 
525,428

Outpatient rehabilitation
246,644

 
265,927

 
751,999

 
790,491

Concentra
255,881

 
404,481

 
763,357

 
1,173,420

Other
56

 
—

 
687

 
—

Total Company
$
1,077,014

 
$
1,267,401

 
$
3,270,996

 
$
3,816,575

Adjusted EBITDA:
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
$
46,873

 
$
53,292

 
$
194,253

 
$
186,989

Rehabilitation hospital(2)
22,581

 
25,343

 
62,038

 
80,314

Outpatient rehabilitation
29,298

 
34,531

 
102,575

 
107,003

Concentra
40,003

 
68,754

 
125,656

 
199,119

Other
(22,928
)
 
(25,292
)
 
(71,125
)
 
(75,337
)
Total Company
$
115,827

 
$
156,628

 
$
413,397

 
$
498,088

Total assets:
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
$
2,008,485

 
$
1,785,336

 
$
2,008,485

 
$
1,785,336

Rehabilitation hospital(2)
740,276

 
888,342

 
740,276

 
888,342

Outpatient rehabilitation
945,765

 
991,105

 
945,765

 
991,105

Concentra
1,332,012

 
2,201,869

 
1,332,012

 
2,201,869

Other
97,269

 
113,529

 
97,269

 
113,529

Total Company
$
5,123,807

 
$
5,980,181

 
$
5,123,807

 
$
5,980,181

Purchases of property and equipment, net:
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
$
8,003

 
$
8,134

 
$
28,717

 
$
31,455

Rehabilitation hospital(2)
29,373

 
8,769

 
77,707

 
29,766

Outpatient rehabilitation
6,496

 
7,209

 
19,370

 
22,565

Concentra
5,369

 
12,539

 
21,656

 
29,281

Other
19,257

 
2,740

 
26,350

 
7,972

Total Company
$
68,498

 
$
39,391

 
$
173,800

 
$
121,039





16
Table of Contents

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
 
Three Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(2)
 
Rehabilitation Hospital(2)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
46,873

 
$
22,581

 
$
29,298

 
$
40,003

 
$
(22,928
)
 
 

Depreciation and amortization
(10,932
)
 
(4,505
)
 
(5,964
)
 
(15,014
)
 
(2,357
)
 
 

Stock compensation expense
—

 
—

 
—

 
(212
)
 
(4,745
)
 
 

Income (loss) from operations
$
35,941

 
$
18,076

 
$
23,334

 
$
24,777

 
$
(30,030
)
 
$
72,098

Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
4,431

Interest expense
 

 
 
 
 

 
 

 
 

 
(37,688
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
38,841

 
Three Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(2)
 
Rehabilitation Hospital(2)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
53,292

 
$
25,343

 
$
34,531

 
$
68,754

 
$
(25,292
)
 
 

Depreciation and amortization
(11,136
)
 
(6,079
)
 
(6,597
)
 
(24,488
)
 
(2,227
)
 
 

Stock compensation expense
—

 
—

 
—

 
(767
)
 
(5,497
)
 
 

Income (loss) from operations
$
42,156

 
$
19,264

 
$
27,934

 
$
43,499

 
$
(33,016
)
 
$
99,837

Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
5,432

Non-operating gain
 
 
 
 
 
 
 
 
 
 
2,139

Interest expense
 

 
 
 
 

 
 

 
 

 
(50,669
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
56,739

 
 
Nine Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(2)
 
Rehabilitation Hospital(2)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
194,253

 
$
62,038

 
$
102,575

 
$
125,656

 
$
(71,125
)
 
 

Depreciation and amortization
(34,891
)
 
(14,500
)
 
(18,182
)
 
(46,566
)
 
(5,505
)
 
 

Stock compensation expense
—

 
—

 
—

 
(782
)
 
(13,445
)
 
 

Income (loss) from operations
$
159,362

 
$
47,538

 
$
84,393

 
$
78,308

 
$
(90,075
)
 
$
279,526

Loss on early retirement of debt
 

 
 
 
 

 
 

 
 

 
(19,719
)
Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
15,618

Non-operating loss
 

 
 
 
 

 
 

 
 

 
(49
)
Interest expense
 

 
 
 
 

 
 

 
 

 
(116,196
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
159,180


17
Table of Contents

 
Nine Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(2)
 
Rehabilitation Hospital(2)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
186,989

 
$
80,314

 
$
107,003

 
$
199,119

 
$
(75,337
)
 
 

Depreciation and amortization
(34,146
)
 
(17,816
)
 
(19,938
)
 
(70,332
)
 
(6,790
)
 
 

Stock compensation expense
—

 
—

 
—

 
(2,116
)
 
(15,059
)
 
 

U.S. HealthWorks acquisition costs
—

 
—

 
—

 
(2,895
)
 
—

 
 
Income (loss) from operations
$
152,843

 
$
62,498

 
$
87,065

 
$
123,776

 
$
(97,186
)
 
$
328,996

Loss on early retirement of debt
 

 
 
 
 

 
 

 
 

 
(10,255
)
Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
14,914

Non-operating gain
 

 
 
 
 

 
 

 
 

 
9,016

Interest expense
 

 
 
 
 

 
 

 
 

 
(147,991
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
194,680

_______________________________________________________________________________
(1)
Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with Customers.
(2)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.



18
Table of Contents

7. Revenue from Contracts with Customers
Net operating revenues consist primarily of patient service revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues by operating segment for the three and nine months ended September 30, 2017 and 2018:
 
Three Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
Medicare
$
217,116

 
$
64,227

 
$
36,821

 
$
472

Non-Medicare
195,872

 
53,054

 
179,171

 
253,437

Total patient services revenues
412,988

 
117,281

 
215,992

 
253,909

Other revenues
3,946

 
40,218

 
30,652

 
1,972

Total net operating revenues
$
416,934

 
$
157,499

 
$
246,644

 
$
255,881

 
Three Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
Medicare
$
210,101

 
$
71,564

 
$
40,563

 
$
455

Non-Medicare
206,629

 
64,322

 
185,787

 
401,537

Total patient services revenues
416,730

 
135,886

 
226,350

 
401,992

Other revenues
3,378

 
40,999

 
39,577

 
2,489

Total net operating revenues
$
420,108

 
$
176,885

 
$
265,927

 
$
404,481

 
Nine Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
Medicare
$
682,286

 
$
183,820

 
$
111,638

 
$
1,588

Non-Medicare
610,372

 
151,731

 
551,983

 
755,345

Total patient services revenues
1,292,658

 
335,551

 
663,621

 
756,933

Other revenues
8,593

 
118,151

 
88,378

 
6,424

Total net operating revenues
$
1,301,251

 
$
453,702

 
$
751,999

 
$
763,357

 
Nine Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
Medicare
$
676,950

 
$
217,459

 
$
120,228

 
$
1,600

Non-Medicare
639,718

 
188,611

 
569,298

 
1,164,711

Total patient services revenues
1,316,668

 
406,070

 
689,526

 
1,166,311

Other revenues
10,568

 
119,358

 
100,965

 
7,109

Total net operating revenues
$
1,327,236

 
$
525,428

 
$
790,491

 
$
1,173,420

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



19
Table of Contents

Patient Services Revenue
Patient services revenue is recognized when obligations under the terms of the contract are satisfied; generally, this occurs as the Company provides healthcare services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. These amounts are due from patients; third-party payors, including health insurers and government programs; and other payors.
Medicare: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end stage renal disease. Amounts we receive for treatment of patients covered by the Medicare program are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided.
Non-Medicare: The Company is reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these payors using a variety of payment methodologies and the amounts the Company receives are generally less than the standard billing rates.
In the critical illness recovery hospital and rehabilitation hospital segments, the Company recognizes revenue based on known contractual provisions associated with the specific payor or, where the Company has a relatively homogeneous patient population, the Company will monitor individual payors’ historical reimbursement rates to derive a per diem rate which is used to determine the amount of revenue to be recognized for services rendered.
In the outpatient rehabilitation and Concentra segments, the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. The Company performs provision testing, using internally developed systems, whereby the Company monitors a payors’ historical reimbursement rates and compares them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to determine the amount of revenue to be recognized for services rendered.
The Company is subject to potential retrospective adjustments to net operating revenues in future periods for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.
Other Revenues
The Company recognizes revenue for services provided to healthcare institutions, principally management and employee leasing services, under contractual arrangements with related parties affiliated through the Company’s equity investments and other third-party healthcare institutions. Revenue is recognized when obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.

20
Table of Contents

8.
Income Taxes
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law which made significant changes to the Internal Revenue Code. These changes included a corporate tax rate decrease from 35.0% to 21.0% effective after December 31, 2017. Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
 
Three Months Ended September 30,
 
2017
 
2018
Federal income tax at statutory rate
35.0
 %
 
21.0
 %
State and local income taxes, less federal income tax benefit
4.0

 
5.0

Permanent differences
0.8

 
2.7

Valuation allowance
0.1

 
(0.1
)
Uncertain tax positions
0.2

 
0.2

Non-controlling interest
(1.6
)
 
(1.0
)
Stock-based compensation
(2.3
)
 
(2.7
)
Other
(0.1
)
 
(0.3
)
Total effective income tax rate
36.1
 %
 
24.8
 %
 
Nine Months Ended September 30,
 
2017
 
2018
Federal income tax at statutory rate
35.0
 %
 
21.0
 %
State and local income taxes, less federal income tax benefit
3.8

 
4.7

Permanent differences
1.1

 
2.1

Valuation allowance
0.2

 
(0.1
)
Uncertain tax positions
0.2

 
0.2

Non-controlling interest
(1.8
)
 
(1.8
)
Stock-based compensation
(0.9
)
 
(2.6
)
Other
(0.2
)
 
0.9

Total effective income tax rate
37.4
 %
 
24.4
 %

9.  Income per Common Share
Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.
The following table sets forth the calculation of income per share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted earnings per share, respectively.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands, except per share amounts)
Numerator:
 

 
 

 
 

 
 

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

 
$
32,917

 
$
76,387

 
$
113,167

Less: Earnings allocated to unvested restricted stockholders
608

 
1,098

 
2,464

 
3,732

Net income available to common stockholders
$
17,854

 
$
31,819

 
$
73,923

 
$
109,435

Denominator:
 

 
 

 
 

 
 

Weighted average shares—basic
129,142

 
130,387

 
128,745

 
129,972

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options
180

 
60

 
171

 
94

Weighted average shares—diluted
129,322

 
130,447

 
128,916

 
130,066

Basic income per common share:
$
0.14

 
$
0.24

 
$
0.57

 
$
0.84

Diluted income per common share:
$
0.14

 
$
0.24

 
$
0.57

 
$
0.84



21
Table of Contents

10.  Commitments and Contingencies
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company maintains insurance coverages under a combination of policies with a total annual aggregate limit of $35.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
 Evansville Litigation.    On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and two former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.



22
Table of Contents

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.
The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Wilmington Litigation.    On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act.  In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

23
Table of Contents

Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
11.  Subsequent Events
Amendment to the Select Credit Facilities
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement (“Amendment No. 2”). Among other things, Amendment No. 2 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the currently applicable floor.
Amendment to the Concentra Credit Facilities
On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement (“Amendment No. 4”). Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra’s first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.

12.  Condensed Consolidating Financial Information
Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are defined as subsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries” and Concentra Group Holdings Parent and its subsidiaries, the “Non-Guarantor Concentra”).
Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra.
The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.
Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.

24
Table of Contents

Select Medical Corporation
Condensed Consolidating Balance Sheet
September 30, 2018
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Assets
 

 
 

 
 

 
 

 
 

 
 

Current Assets:
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
77

 
$
5,627

 
$
3,045

 
$
151,664

 
$
—

 
$
160,413

Accounts receivable
—

 
412,454

 
123,622

 
210,740

 
—

 
746,816

Intercompany receivables
—

 
1,722,475

 
75,391

 
—

 
(1,797,866
)
(a)
—

Prepaid income taxes
16,325

 
—

 
—

 
3,527

 
—

 
19,852

Other current assets
15,441

 
32,281

 
14,839

 
33,653

 
—

 
96,214

Total Current Assets
31,843

 
2,172,837

 
216,897

 
399,584

 
(1,797,866
)
 
1,023,295

Property and equipment, net
36,947

 
615,299

 
90,821

 
222,323

 
—

 
965,390

Investment in affiliates
4,448,449

 
123,809

 
—

 
—

 
(4,572,258
)
(b)(c)
—

Goodwill
—

 
2,102,444

 
—

 
1,209,015

 
—

 
3,311,459

Identifiable intangible assets, net
3

 
102,423

 
4,972

 
337,449

 
—

 
444,847

Other assets
38,861

 
137,897

 
33,902

 
33,498

 
(8,968
)
(e)
235,190

Total Assets
$
4,556,103

 
$
5,254,709

 
$
346,592

 
$
2,201,869

 
$
(6,379,092
)
 
$
5,980,181

Liabilities and Equity
 

 
 

 
 

 
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Overdrafts
$
23,291

 
$
—

 
$
—

 
$
—

 
$
—

 
$
23,291

Current portion of long-term debt and notes payable
15,508

 
268

 
3,631

 
4,768

 
—

 
24,175

Accounts payable
12,183

 
76,776

 
19,948

 
28,633

 
—

 
137,540

Intercompany payables
1,722,475

 
75,391

 
—

 
—

 
(1,797,866
)
(a)
—

Accrued payroll
12,061

 
95,717

 
4,935

 
63,508

 
—

 
176,221

Accrued vacation
4,394

 
58,590

 
13,584

 
29,458

 
—

 
106,026

Accrued interest
17,775

 
16

 
27

 
5,830

 
—

 
23,648

Accrued other
60,190

 
62,049

 
16,637

 
49,203

 
—

 
188,079

Income taxes payable
2,764

 
—

 
—

 
3,365

 
—

 
6,129

Total Current Liabilities
1,870,641

 
368,807

 
58,762

 
184,765

 
(1,797,866
)
 
685,109

Long-term debt, net of current portion
1,871,407

 
72

 
38,787

 
1,395,267

 
—

 
3,305,533

Non-current deferred tax liability
—

 
91,487

 
882

 
64,826

 
(8,968
)
(e)
148,227

Other non-current liabilities
39,463

 
62,354

 
8,730

 
63,623

 
—

 
174,170

Total Liabilities
3,781,511

 
522,720

 
107,161

 
1,708,481

 
(1,806,834
)
 
4,313,039

Redeemable non-controlling interests
—

 
—

 
—

 
19,402

 
760,172

(d)
779,574

Stockholders’ Equity:
 

 
 

 
 

 
 

 
 

 
 

Common stock
0

 
—

 
—

 
—

 
—

 
0

Capital in excess of par
964,683

 
—

 
—

 
—

 
—

 
964,683

Retained earnings (accumulated deficit)
(190,091
)
 
1,506,874

 
(33,181
)
 
11,504

 
(1,485,197
)
(c)(d)
(190,091
)
Subsidiary investment
—

 
3,225,115

 
272,612

 
456,854

 
(3,954,581
)
(b)(d)
—

Total Select Medical Corporation Stockholders’ Equity
774,592

 
4,731,989

 
239,431

 
468,358

 
(5,439,778
)
 
774,592

Non-controlling interests
—

 
—

 
—

 
5,628

 
107,348

(d)
112,976

Total Equity
774,592

 
4,731,989

 
239,431

 
473,986

 
(5,332,430
)
 
887,568

Total Liabilities and Equity
$
4,556,103

 
$
5,254,709

 
$
346,592

 
$
2,201,869

 
$
(6,379,092
)
 
$
5,980,181

_______________________________________________________________________________
(a) 
Elimination of intercompany balances.
(b) 
Elimination of investments in consolidated subsidiaries.
(c) 
Elimination of investments in consolidated subsidiaries’ earnings.
(d) 
Reclassification of equity attributable to non-controlling interests.
(e) 
Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.







25
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2018
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Net operating revenues
$
—

 
$
675,059

 
$
187,861

 
$
404,481

 
$
—

 
$
1,267,401

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of services
815

 
585,110

 
164,643

 
336,494

 
—

 
1,087,062

General and administrative
29,791

 
184

 
—

 
—

 
—

 
29,975

Depreciation and amortization
2,215

 
19,726

 
4,098

 
24,488

 
—

 
50,527

Total costs and expenses
32,821

 
605,020

 
168,741

 
360,982

 
—

 
1,167,564

Income (loss) from operations
(32,821
)
 
70,039

 
19,120

 
43,499

 
—

 
99,837

Other income and expense:
 

 
 

 
 

 
 

 
 

 
 

Intercompany interest and royalty fees
6,357

 
(2,578
)
 
(3,445
)
 
(334
)
 
—

 
—

Intercompany management fees
50,601

 
(39,262
)
 
(11,339
)
 
—

 
—

 
—

Equity in earnings of unconsolidated subsidiaries
—

 
5,424

 
8

 
—

 
—

 
5,432

Non-operating gain
—

 
2,139

 
—

 
—

 
—

 
2,139

Interest income (expense)
(28,933
)
 
99

 
(207
)
 
(21,628
)
 
—

 
(50,669
)
Income (loss) before income taxes
(4,796
)
 
35,861

 
4,137

 
21,537

 
—

 
56,739

Income tax expense (benefit)
(1,428
)
 
9,923

 
112

 
5,453

 
—

 
14,060

Equity in earnings of consolidated subsidiaries
36,285

 
2,861

 
—

 
—

 
(39,146
)
(a)
—

Net income
32,917

 
28,799

 
4,025

 
16,084

 
(39,146
)
 
42,679

Less: Net income attributable to non-controlling interests
—

 
—

 
1,164

 
8,598

 
—

 
9,762

Net income attributable to Select Medical Corporation
$
32,917

 
$
28,799

 
$
2,861

 
$
7,486

 
$
(39,146
)
 
$
32,917

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

26
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2018
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Net operating revenues
$
—

 
$
2,072,237

 
$
570,918

 
$
1,173,420

 
$
—

 
$
3,816,575

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of services
2,340

 
1,782,843

 
486,006

 
976,417

 
—

 
3,247,606

General and administrative
87,806

 
250

 
—

 
2,895

 
—

 
90,951

Depreciation and amortization
6,777

 
59,708

 
12,205

 
70,332

 
—

 
149,022

Total costs and expenses
96,923

 
1,842,801

 
498,211

 
1,049,644

 
—

 
3,487,579

Income (loss) from operations
(96,923
)
 
229,436

 
72,707

 
123,776

 
—

 
328,996

Other income and expense:
 

 
 

 
 

 
 

 
 

 
 

Intercompany interest and royalty fees
22,029

 
(10,502
)
 
(10,685
)
 
(842
)
 
—

 
—

Intercompany management fees
166,749

 
(132,733
)
 
(34,016
)
 
—

 
—

 
—

Loss on early retirement of debt
(2,229
)
 
—

 
—

 
(8,026
)
 
—

 
(10,255
)
Equity in earnings of unconsolidated subsidiaries
—

 
14,884

 
30

 
—

 
—

 
14,914

Non-operating gain
1,654

 
7,362

 
—

 
—

 
—

 
9,016

Interest income (expense)
(89,416
)
 
220

 
(544
)
 
(58,251
)
 
—

 
(147,991
)
Income before income taxes
1,864

 
108,667

 
27,492

 
56,657

 
—

 
194,680

Income tax expense (benefit)
(83
)
 
36,112

 
350

 
11,081

 
—

 
47,460

Equity in earnings of consolidated subsidiaries
111,220

 
17,984

 
—

 
—

 
(129,204
)
(a)
—

Net income
113,167

 
90,539

 
27,142

 
45,576

 
(129,204
)
 
147,220

Less: Net income attributable to non-controlling interests
—

 
97

 
9,158

 
24,798

 
—

 
34,053

Net income attributable to Select Medical Corporation
$
113,167

 
$
90,442

 
$
17,984

 
$
20,778

 
$
(129,204
)
 
$
113,167

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


27
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2018
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Operating activities
 

 
 

 
 

 
 

 
 

 
 

Net income
$
113,167

 
$
90,539

 
$
27,142

 
$
45,576

 
$
(129,204
)
(a)
$
147,220

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

 
 

 
 

 
 

 
 

 
 

Distributions from unconsolidated subsidiaries
—

 
10,700

 
34

 
—

 
—

 
10,734

Depreciation and amortization
6,777

 
59,708

 
12,205

 
70,332

 
—

 
149,022

Provision for bad debts
—

 
(451
)
 
—

 
78

 
—

 
(373
)
Equity in earnings of unconsolidated subsidiaries
—

 
(14,884
)
 
(30
)
 
—

 
—

 
(14,914
)
Equity in earnings of consolidated subsidiaries
(111,220
)
 
(17,984
)
 
—

 
—

 
129,204

(a)
—

Loss on extinguishment of debt
115

 
—

 
—

 
369

 
—

 
484

Loss (gain) on sale of assets and businesses
(1,641
)
 
(7,493
)
 
5

 
—

 
—

 
(9,129
)
Stock compensation expense
15,059

 
—

 
—

 
2,116

 
—

 
17,175

Amortization of debt discount, premium and issuance costs
4,435

 
—

 
—

 
5,410

 
—

 
9,845

Deferred income taxes
1,804

 
2,527

 
103

 
(6,526
)
 
—

 
(2,092
)
Changes in operating assets and liabilities, net of effects of business combinations:
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable
—

 
37,490

 
(894
)
 
(13,101
)
 
—

 
23,495

Other current assets
(2,420
)
 
(2,100
)
 
(1,807
)
 
(3,947
)
 
—

 
(10,274
)
Other assets
(4,381
)
 
(8,576
)
 
1,604

 
16,181

 
—

 
4,828

Accounts payable
(42
)
 
(5,155
)
 
3,059

 
(1,369
)
 
—

 
(3,507
)
Accrued expenses
20,379

 
13,620

 
6,412

 
8,980

 
—

 
49,391

Income taxes
9,622

 
4,401

 
1

 
(4,952
)
 
—

 
9,072

Net cash provided by operating activities
51,654

 
162,342

 
47,834

 
119,147

 
—

 
380,977

Investing activities
 

 
 

 
 

 
 

 
 

 
 

Business combinations, net of cash acquired
—

 
(2,666
)
 
(22
)
 
(516,570
)
 
—

 
(519,258
)
Purchases of property and equipment
(6,412
)
 
(60,669
)
 
(24,677
)
 
(29,281
)
 
—

 
(121,039
)
Investment in businesses
—

 
(12,931
)
 
—

 
(5
)
 
—

 
(12,936
)
Proceeds from sale of assets and businesses
1,654

 
5,029

 
8

 
—

 
—

 
6,691

Net cash used in investing activities
(4,758
)
 
(71,237
)
 
(24,691
)
 
(545,856
)
 
—

 
(646,542
)
Financing activities
 

 
 

 
 

 
 

 
 

 
 

Borrowings on revolving facilities
420,000

 
—

 
—

 
—

 
—

 
420,000

Payments on revolving facilities
(585,000
)
 
—

 
—

 
—

 
—

 
(585,000
)
Proceeds from term loans (financing costs)
(11
)
 
—

 
—

 
779,915

 
—

 
779,904

Payments on term loans
(8,625
)
 
—

 
—

 
—

 
—

 
(8,625
)
Revolving facility debt issuance costs
(837
)
 
—

 
—

 
(496
)
 
—

 
(1,333
)
Borrowings of other debt
5,542

 
—

 
19,935

 
4,657

 
—

 
30,134

Principal payments on other debt
(8,455
)
 
(540
)
 
(4,504
)
 
(4,472
)
 
—

 
(17,971
)
Dividends paid to Holdings
(5,640
)
 
—

 
—

 
—

 
—

 
(5,640
)
Equity investment by Holdings
1,633

 
—

 
—

 
—

 
—

 
1,633

Intercompany
140,673

 
(88,344
)
 
(34,184
)
 
(18,145
)
 
—

 
—

Decrease in overdrafts
(6,172
)
 
—

 
—

 
—

 
—

 
(6,172
)
Proceeds from issuance of non-controlling interests
—

 
—

 
957

 
1,969

 
—

 
2,926

Distributions to non-controlling interests
—

 
(1,450
)
 
(6,863
)
 
(298,114
)
 
—

 
(306,427
)
Net cash provided by (used in) financing activities
(46,892
)
 
(90,334
)
 
(24,659
)
 
465,314

 
—

 
303,429

Net increase (decrease) in cash and cash equivalents
4

 
771

 
(1,516
)
 
38,605

 
—

 
37,864

Cash and cash equivalents at beginning of period
73

 
4,856

 
4,561

 
113,059

 
—

 
122,549

Cash and cash equivalents at end of period
$
77

 
$
5,627

 
$
3,045

 
$
151,664

 
$
—

 
$
160,413

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


28
Table of Contents

Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2017
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Assets
 

 
 

 
 

 
 

 
 

 
 

Current Assets:
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
73

 
$
4,856

 
$
4,561

 
$
113,059

 
$
—

 
$
122,549

Accounts receivable
—

 
449,493

 
122,728

 
119,511

 
—

 
691,732

Intercompany receivables
—

 
1,598,212

 
60,707

 
—

 
(1,658,919
)
(a)
—

Prepaid income taxes
22,704

 
5,703

 
31

 
2,949

 
—

 
31,387

Other current assets
13,021

 
30,209

 
13,031

 
18,897

 
—

 
75,158

Total Current Assets
35,798

 
2,088,473

 
201,058

 
254,416

 
(1,658,919
)
 
920,826

Property and equipment, net
39,836

 
623,085

 
79,013

 
170,657

 
—

 
912,591

Investment in affiliates
4,524,385

 
124,104

 
—

 
—

 
(4,648,489
)
(b)(c)
—

Goodwill
—

 
2,108,270

 
—

 
674,542

 
—

 
2,782,812

Identifiable intangible assets, net
—

 
104,067

 
5,046

 
217,406

 
—

 
326,519

Other assets
36,494

 
98,575

 
35,440

 
23,898

 
(9,989
)
(e)
184,418

Total Assets
$
4,636,513

 
$
5,146,574

 
$
320,557

 
$
1,340,919

 
$
(6,317,397
)
 
$
5,127,166

Liabilities and Equity
 

 
 

 
 

 
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Overdrafts
$
29,463

 
$
—

 
$
—

 
$
—

 
$
—

 
$
29,463

Current portion of long-term debt and notes payable
16,635

 
740

 
2,212

 
2,600

 
—

 
22,187

Accounts payable
12,504

 
85,489

 
17,475

 
12,726

 
—

 
128,194

Intercompany payables
1,598,212

 
60,707

 
—

 
—

 
(1,658,919
)
(a)
—

Accrued payroll
16,736

 
98,887

 
4,819

 
40,120

 
—

 
160,562

Accrued vacation
4,083

 
58,355

 
12,295

 
18,142

 
—

 
92,875

Accrued interest
17,479

 
7

 
6

 
2,393

 
—

 
19,885

Accrued other
39,219

 
57,378

 
12,599

 
33,970

 
—

 
143,166

Income taxes payable
—

 
1,302

 
30

 
7,739

 
—

 
9,071

Total Current Liabilities
1,734,331

 
362,865

 
49,436

 
117,690

 
(1,658,919
)
 
605,403

Long-term debt, net of current portion
2,042,555

 
127

 
24,730

 
610,303

 
—

 
2,677,715

Non-current deferred tax liability
—

 
88,376

 
780

 
45,750

 
(9,989
)
(e)
124,917

Other non-current liabilities
36,259

 
56,721

 
8,138

 
44,591

 
—

 
145,709

Total Liabilities
3,813,145

 
508,089

 
83,084

 
818,334

 
(1,668,908
)
 
3,553,744

Redeemable non-controlling interests
—

 
—

 
—

 
16,270

 
624,548

(d)
640,818

Stockholders’ Equity:
 

 
 

 
 

 
 

 
 

 
 

Common stock
0

 
—

 
—

 
—

 
—

 
0

Capital in excess of par
947,370

 
—

 
—

 
—

 
—

 
947,370

Retained earnings (accumulated deficit)
(124,002
)
 
1,416,857

 
(35,942
)
 
64,626

 
(1,445,541
)
(c)(d)
(124,002
)
Subsidiary investment
—

 
3,221,628

 
273,415

 
437,779

 
(3,932,822
)
(b)(d)
—

Total Select Medical Corporation Stockholders’ Equity
823,368

 
4,638,485

 
237,473

 
502,405

 
(5,378,363
)
 
823,368

Non-controlling interests
—

 
—

 
—

 
3,910

 
105,326

(d)
109,236

Total Equity
823,368

 
4,638,485

 
237,473

 
506,315

 
(5,273,037
)
 
932,604

Total Liabilities and Equity
$
4,636,513

 
$
5,146,574

 
$
320,557

 
$
1,340,919

 
$
(6,317,397
)
 
$
5,127,166

_______________________________________________________________________________
(a) 
Elimination of intercompany balances.
(b) 
Elimination of investments in consolidated subsidiaries.
(c) 
Elimination of investments in consolidated subsidiaries’ earnings.
(d) 
Reclassification of equity attributable to non-controlling interests.
(e) 
Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.



29
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2017
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Net operating revenues
$
56

 
$
654,964

 
$
166,113

 
$
255,881

 
$
—

 
$
1,077,014

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of services
667

 
574,250

 
148,072

 
216,090

 
—

 
939,079

General and administrative
27,028

 
37

 
—

 
—

 
—

 
27,065

Depreciation and amortization
2,355

 
18,015

 
3,388

 
15,014

 
—

 
38,772

Total costs and expenses
30,050

 
592,302

 
151,460

 
231,104

 
—

 
1,004,916

Income (loss) from operations
(29,994
)
 
62,662

 
14,653

 
24,777

 
—

 
72,098

Other income and expense:
 

 
 

 
 

 
 

 
 

 
 

Intercompany interest and royalty fees
7,865

 
(4,328
)
 
(3,537
)
 
—

 
—

 
—

Intercompany management fees
51,241

 
(41,031
)
 
(10,210
)
 
—

 
—

 
—

Equity in earnings of unconsolidated subsidiaries
—

 
4,416

 
15

 
—

 
—

 
4,431

Interest income (expense)
(30,240
)
 
271

 
(20
)
 
(7,699
)
 
—

 
(37,688
)
Income before income taxes
(1,128
)
 
21,990

 
901

 
17,078

 
—

 
38,841

Income tax expense (benefit)
(1,032
)
 
8,562

 
145

 
6,342

 
—

 
14,017

Equity in earnings of consolidated subsidiaries
18,558

 
397

 
—

 
—

 
(18,955
)
(a)
—

Net income
18,462

 
13,825

 
756

 
10,736

 
(18,955
)
 
24,824

Less: Net income attributable to non-controlling interests
—

 
24

 
359

 
5,979

 
—

 
6,362

Net income attributable to Select Medical Corporation
$
18,462

 
$
13,801

 
$
397

 
$
4,757

 
$
(18,955
)
 
$
18,462

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


30
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2017
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Net operating revenues
$
687

 
$
2,019,581

 
$
487,371

 
$
763,357

 
$
—

 
$
3,270,996

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of services
1,843

 
1,725,060

 
423,025

 
638,483

 
—

 
2,788,411

General and administrative
83,291

 
124

 
—

 
—

 
—

 
83,415

Depreciation and amortization
5,503

 
57,568

 
10,007

 
46,566

 
—

 
119,644

Total costs and expenses
90,637

 
1,782,752

 
433,032

 
685,049

 
—

 
2,991,470

Income (loss) from operations
(89,950
)
 
236,829

 
54,339

 
78,308

 
—

 
279,526

Other income and expense:
 

 
 

 
 

 
 

 
 

 
 

Intercompany interest and royalty fees
24,760

 
(14,029
)
 
(10,731
)
 
—

 
—

 
—

Intercompany management fees
176,443

 
(147,042
)
 
(29,401
)
 
—

 
—

 
—

Loss on early retirement of debt
(19,719
)
 
—

 
—

 
—

 
—

 
(19,719
)
Equity in earnings of unconsolidated subsidiaries
—

 
15,555

 
63

 
—

 
—

 
15,618

Non-operating loss
—

 
(49
)
 
—

 
—

 
—

 
(49
)
Interest income (expense)
(93,725
)
 
270

 
(105
)
 
(22,636
)
 
—

 
(116,196
)
Income (loss) before income taxes
(2,191
)
 
91,534

 
14,165

 
55,672

 
—

 
159,180

Income tax expense (benefit)
(3,230
)
 
42,135

 
428

 
20,260

 
—

 
59,593

Equity in earnings of consolidated subsidiaries
75,348

 
10,131

 
—

 
—

 
(85,479
)
(a)
—

Net income
76,387

 
59,530

 
13,737

 
35,412

 
(85,479
)
 
99,587

Less: Net income attributable to non-controlling interests
—

 
21

 
3,606

 
19,573

 
—

 
23,200

Net income attributable to Select Medical Corporation
$
76,387

 
$
59,509

 
$
10,131

 
$
15,839

 
$
(85,479
)
 
$
76,387

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




31
Table of Contents

Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2017
(unaudited)
 
Select 
(Parent
Company 
Only)
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Non-Guarantor
Concentra
 
Consolidating
and Eliminating
Adjustments
 
Consolidated
Select Medical
Corporation
 
(in thousands)
Operating activities
 

 
 

 
 

 
 

 
 

 
 

Net income
$
76,387

 
$
59,530

 
$
13,737

 
$
35,412

 
$
(85,479
)
(a)
$
99,587

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

 
 

 
 

 
 

 
 

 
 

Distributions from unconsolidated subsidiaries
—

 
14,493

 
49

 
—

 
—

 
14,542

Depreciation and amortization
5,503

 
57,568

 
10,007

 
46,566

 
—

 
119,644

Provision for bad debts
—

 
864

 
—

 
50

 
—

 
914

Equity in earnings of unconsolidated subsidiaries
—

 
(15,555
)
 
(63
)
 
—

 
—

 
(15,618
)
Equity in earnings of consolidated subsidiaries
(75,348
)
 
(10,131
)
 
—

 
—

 
85,479

(a)
—

Loss on extinguishment of debt
6,527

 
—

 
—

 
—

 
—

 
6,527

Loss (gain) on sale of assets and businesses
(8
)
 
(4,824
)
 
(4,687
)
 
20

 
—

 
(9,499
)
Stock compensation expense
13,445

 
—

 
—

 
782

 
—

 
14,227

Amortization of debt discount, premium and issuance costs
6,113

 
—

 
—

 
2,433

 
—

 
8,546

Deferred income taxes
5,014

 
—

 
—

 
(11,140
)
 
—

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

 
 

 
 

 
 

 
 

 
 

Accounts receivable
—

 
(105,536
)
 
(22,820
)
 
(14,952
)
 
—

 
(143,308
)
Other current assets
1,016

 
3,857

 
(6,772
)
 
(778
)
 
—

 
(2,677
)
Other assets
1,633

 
(3,709
)
 
3,044

 
439

 
—

 
1,407

Accounts payable
2,375

 
(823
)
 
1,580

 
781

 
—

 
3,913

Accrued expenses
164

 
(1,175
)
 
10,281

 
9,482

 
—

 
18,752

Income taxes
3,776

 
—

 
—

 
15,365

 
—

 
19,141

Net cash provided by (used in) operating activities
46,597

 
(5,441
)
 
4,356

 
84,460

 
—

 
129,972

Investing activities
 

 
 

 
 

 
 

 
 

 
 

Business combinations, net of cash acquired
—

 
(3,356
)
 
(295
)
 
(15,720
)
 
—

 
(19,371
)
Purchases of property and equipment
(26,350
)
 
(102,342
)
 
(23,452
)
 
(21,656
)
 
—

 
(173,800
)
Investment in businesses
—

 
(11,374
)
 
—

 
—

 
—

 
(11,374
)
Proceeds from sale of assets and businesses
8

 
15,007

 
19,537

 
3

 
—

 
34,555

Net cash used in investing activities
(26,342
)
 
(102,065
)
 
(4,210
)
 
(37,373
)
 
—

 
(169,990
)
Financing activities
 

 
 

 
 

 
 

 
 

 
 

Borrowings on revolving facilities
805,000

 
—

 
—

 
—

 
—

 
805,000

Payments on revolving facilities
(705,000
)
 
—

 
—

 
—

 
—

 
(705,000
)
Proceeds from term loans
1,139,487

 
—

 
—

 
—

 
—

 
1,139,487

Payments on term loans
(1,153,502
)
 
—

 
—

 
(23,065
)
 
—

 
(1,176,567
)
Revolving facility debt issuance costs
(4,392
)
 
—

 
—

 
—

 
—

 
(4,392
)
Borrowings of other debt
21,572

 
—

 
3,232

 
2,767

 
—

 
27,571

Principal payments on other debt
(10,122
)
 
(306
)
 
(2,150
)
 
(2,534
)
 
—

 
(15,112
)
Dividends paid to Holdings
(3,603
)
 
—

 
—

 
—

 
—

 
(3,603
)
Equity investment by Holdings
1,634

 
—

 
—

 
—

 
—

 
1,634

Intercompany
(101,888
)
 
107,834

 
(5,946
)
 
—

 
—

 
—

Decrease in overdrafts
(20,439
)
 
—

 
—

 
—

 
—

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

 
—

 
8,986

 
—

 
—

 
8,986

Distributions to non-controlling interests
—

 
(130
)
 
(4,776
)
 
(4,370
)
 
—

 
(9,276
)
Net cash provided by (used in) financing activities
(31,253
)
 
107,398

 
(654
)
 
(27,202
)
 
—

 
48,289

Net increase (decrease) in cash and cash equivalents
(10,998
)
 
(108
)
 
(508
)
 
19,885

 
—

 
8,271

Cash and cash equivalents at beginning of period
11,071

 
6,467

 
5,056

 
76,435

 
—

 
99,029

Cash and cash equivalents at end of period
$
73

 
$
6,359

 
$
4,548

 
$
96,320

 
$
—

 
$
107,300

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

32
Table of Contents

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
•
changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;
•
the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
•
the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
•
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
•
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;
•
our plans and expectations related to the acquisition of U.S. HealthWorks by Concentra and our ability to realize anticipated synergies;
•
private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;
•
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
•
shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;
•
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
•
the loss of key members of our management team could significantly disrupt our operations;
•
the effect of claims asserted against us could subject us to substantial uninsured liabilities;
•
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
•
other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as such risk factors may be updated from time to time in our periodic filings with the SEC.

33
Table of Contents

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 are one of the largest operators of critical illness recovery hospitals (previously referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient rehabilitation facilities), outpatient rehabilitation clinics and occupational health centers in the United States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. As of September 30, 2018, we operated 97 critical illness recovery hospitals in 27 states, 26 rehabilitation hospitals in 11 states, and 1,649 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated 525 occupational health centers in 41 states as of September 30, 2018 after giving effect to the closing of the acquisition of U.S. HealthWorks on February 1, 2018. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics, or “CBOCs.” As of September 30, 2018, we had operations in 47 states and the District of Columbia.
We had net operating revenues of $3,816.6 million for the nine months ended September 30, 2018. Of this total, we earned approximately 34% of our net operating revenues from our critical illness recovery hospital segment, approximately 14% from our rehabilitation hospital segment, approximately 21% from our outpatient rehabilitation segment, and approximately 31% from our Concentra segment. Patients are typically admitted to the Company’s critical illness recovery and rehabilitation hospitals from general acute care hospitals. These patients have specialized needs, with serious and often complex medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers and contract services provided at employer worksites that deliver occupational medicine, physical therapy, and consumer health services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.

34
Table of 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”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
2017
 
2018
 
 
(in thousands)
Net income
 
$
24,824

 
$
42,679

 
$
99,587

 
$
147,220

Income tax expense
 
14,017

 
14,060

 
59,593

 
47,460

Interest expense
 
37,688

 
50,669

 
116,196

 
147,991

Non-operating loss (gain)
 
—

 
(2,139
)
 
49

 
(9,016
)
Equity in earnings of unconsolidated subsidiaries
 
(4,431
)
 
(5,432
)
 
(15,618
)
 
(14,914
)
Loss on early retirement of debt
 
—

 
—

 
19,719

 
10,255

Income from operations
 
72,098

 
99,837

 
279,526

 
328,996

Stock compensation expense:
 
 

 
 

 
 

 
 

Included in general and administrative
 
4,079

 
4,683

 
11,603

 
12,720

Included in cost of services
 
878

 
1,581

 
2,624

 
4,455

Depreciation and amortization
 
38,772

 
50,527

 
119,644

 
149,022

U.S. HealthWorks acquisition costs
 
—

 
—

 
—

 
2,895

Adjusted EBITDA
 
$
115,827

 
$
156,628

 
$
413,397

 
$
498,088

Summary Financial Results
Three Months Ended September 30, 2018
For the three months ended September 30, 2018, our net operating revenues increased 17.7% to $1,267.4 million, compared to $1,077.0 million for the three months ended September 30, 2017. Income from operations increased 38.5% to $99.8 million for the three months ended September 30, 2018, compared to $72.1 million for the three months ended September 30, 2017.
Net income increased 71.9% to $42.7 million for the three months ended September 30, 2018, compared to $24.8 million for the three months ended September 30, 2017. Net income for the three months ended September 30, 2018 included a pre-tax non-operating gain of $2.1 million.
Adjusted EBITDA increased 35.2% to $156.6 million for the three months ended September 30, 2018, compared to $115.8 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin was 12.4% for the three months ended September 30, 2018, compared to 10.8% for the three months ended September 30, 2017.




35
Table of Contents

The following tables reconcile our segment performance measures to our consolidated operating results:
 
Three Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Net operating revenues
$
420,108

 
$
176,885

 
$
265,927

 
$
404,481

 
$
—

 
$
1,267,401

Operating expenses
366,816

 
151,542

 
231,396

 
336,494

 
30,789

 
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

U.S. HealthWorks acquisition costs
—

 
—

 
—

 
—

 
—

 
—

Adjusted EBITDA
$
53,292

 
$
25,343

 
$
34,531

 
$
68,754

 
$
(25,292
)
 
$
156,628

Adjusted EBITDA margin
12.7
%
 
14.3
%
 
13.0
%
 
17.0
%
 
N/M

 
12.4
%
 
Three Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Net operating revenues
$
416,934

 
$
157,499

 
$
246,644

 
$
255,881

 
$
56

 
$
1,077,014

Operating expenses
370,061

 
134,918

 
217,346

 
216,090

 
27,729

 
966,144

Depreciation and amortization
10,932

 
4,505

 
5,964

 
15,014

 
2,357

 
38,772

Income (loss) from operations
$
35,941

 
$
18,076

 
$
23,334

 
$
24,777

 
$
(30,030
)
 
$
72,098

Depreciation and amortization
10,932

 
4,505

 
5,964

 
15,014

 
2,357

 
38,772

Stock compensation expense
—

 
—

 
—

 
212

 
4,745

 
4,957

Adjusted EBITDA
$
46,873

 
$
22,581

 
$
29,298

 
$
40,003

 
$
(22,928
)
 
$
115,827

Adjusted EBITDA margin
11.2
%
 
14.3
%
 
11.9
%
 
15.6
%
 
N/M

 
10.8
%

The following table summarizes changes in segment performance measures for the three months ended September 30, 2018, compared to the three months ended September 30, 2017:
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
Change in net operating revenues
0.8
%
 
12.3
%
 
7.8
%
 
58.1
%
 
N/M

 
17.7
%
Change in income from operations
17.3
%
 
6.6
%
 
19.7
%
 
75.6
%
 
(9.9
)%
 
38.5
%
Change in Adjusted EBITDA
13.7
%
 
12.2
%
 
17.9
%
 
71.9
%
 
(10.3
)%
 
35.2
%
_______________________________________________________________________________
(1)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
N/M —     Not meaningful.



36
Table of Contents

Nine Months Ended September 30, 2018
For the nine months ended September 30, 2018, our net operating revenues increased 16.7% to $3,816.6 million, compared to $3,271.0 million for the nine months ended September 30, 2017. Income from operations increased 17.7% to $329.0 million for the nine months ended September 30, 2018, compared to $279.5 million for the nine months ended September 30, 2017.
Net income increased 47.8% to $147.2 million for the nine months ended September 30, 2018, compared to $99.6 million for the nine months ended September 30, 2017. Net income for the nine months ended September 30, 2018 included a pre-tax loss on early retirement of debt of $10.3 million, pre-tax non-operating gains of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million. Net income for the nine months ended September 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million.
Adjusted EBITDA increased 20.5% to $498.1 million for the nine months ended September 30, 2018, compared to $413.4 million for the nine months ended September 30, 2017. Our Adjusted EBITDA margin was 13.1% for the nine months ended September 30, 2018, compared to 12.6% for the nine months ended September 30, 2017.
The following tables reconcile our segment performance measures to our consolidated operating results:
 
Nine Months Ended September 30, 2018
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Net operating revenues
$
1,327,236

 
$
525,428

 
$
790,491

 
$
1,173,420

 
$
—

 
$
3,816,575

Operating expenses
1,140,247

 
445,114

 
683,488

 
979,312

 
90,396

 
3,338,557

Depreciation and amortization
34,146

 
17,816

 
19,938

 
70,332

 
6,790

 
149,022

Income (loss) from operations
$
152,843

 
$
62,498

 
$
87,065

 
$
123,776

 
$
(97,186
)
 
$
328,996

Depreciation and amortization
34,146

 
17,816

 
19,938

 
70,332

 
6,790

 
149,022

Stock compensation expense
—

 
—

 
—

 
2,116

 
15,059

 
17,175

U.S. HealthWorks acquisition costs
—

 
—

 
—

 
2,895

 
—

 
2,895

Adjusted EBITDA
$
186,989

 
$
80,314

 
$
107,003

 
$
199,119

 
$
(75,337
)
 
$
498,088

Adjusted EBITDA margin
14.1
%
 
15.3
%
 
13.5
%
 
17.0
%
 
N/M

 
13.1
%
 
Nine Months Ended September 30, 2017
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Net operating revenues
$
1,301,251

 
$
453,702

 
$
751,999

 
$
763,357

 
$
687

 
$
3,270,996

Operating expenses
1,106,998

 
391,664

 
649,424

 
638,483

 
85,257

 
2,871,826

Depreciation and amortization
34,891

 
14,500

 
18,182

 
46,566

 
5,505

 
119,644

Income (loss) from operations
$
159,362

 
$
47,538

 
$
84,393

 
$
78,308

 
$
(90,075
)
 
$
279,526

Depreciation and amortization
34,891

 
14,500

 
18,182

 
46,566

 
5,505

 
119,644

Stock compensation expense
—

 
—

 
—

 
782

 
13,445

 
14,227

Adjusted EBITDA
$
194,253

 
$
62,038

 
$
102,575

 
$
125,656

 
$
(71,125
)
 
$
413,397

Adjusted EBITDA margin
14.9
%
 
13.7
%
 
13.6
%
 
16.5
%
 
N/M

 
12.6
%

37
Table of Contents

The following table summarizes changes in segment performance measures for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017:
 
Critical Illness Recovery Hospital(1)
 
Rehabilitation Hospital(1)
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
Change in net operating revenues
2.0
 %
 
15.8
%
 
5.1
%
 
53.7
%
 
N/M

 
16.7
%
Change in income from operations
(4.1
)%
 
31.5
%
 
3.2
%
 
58.1
%
 
(7.9
)%
 
17.7
%
Change in Adjusted EBITDA
(3.7
)%
 
29.5
%
 
4.3
%
 
58.5
%
 
(5.9
)%
 
20.5
%
_______________________________________________________________________________
(1)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
N/M —     Not meaningful.

38
Table of Contents

Significant Events
Acquisition of U.S. HealthWorks
On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care provider, pursuant to the terms of the Purchase Agreement.
In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.
Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC, to finance the redemption and reorganization transactions executed under the Purchase Agreement, and to pay fees and expenses associated with the financing.
Amendment to the Concentra Credit Facilities
On February 1, 2018, in connection with the transactions executed under the Purchase Agreement, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.
In addition, Concentra entered into the Concentra second lien credit agreement that provided for $240.0 million in term loans with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement. Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra’s first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.





39
Table of Contents

Amendment to the Select Credit Facilities
On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment No. 2 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the currently applicable floor.


40
Table of Contents

Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 22, 2018, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.
Medicare Reimbursement
The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately 27% of our net operating revenues for the nine months ended September 30, 2018, and 30% of our net operating revenues for the year ended December 31, 2017.
Medicare Reimbursement of Critical Illness Recovery Hospital Services
There have been significant regulatory changes affecting our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”), that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCH-PPS are generally published in May, finalized in August and effective on October 1 of each year.
The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 2017. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed‑loss amount for high cost outlier cases paid under LTCH‑PPS was set at $21,943, an increase from the fixed‑loss amount in the 2016 fiscal year of $16,423. The fixed‑loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $23,573, an increase from the fixed‑loss amount in the 2016 fiscal year of $22,538.
Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. The update to the standard federal rate for fiscal year 2018 was impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.
Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate was set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule (discussed further below). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, which is a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.


41
Table of Contents

25 Percent Rule
The “25 Percent Rule” was a downward payment adjustment that applied if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period. Specifically, the payment rate for only Medicare patients above the percentage admissions threshold were subject to a downward payment adjustment. For Medicare patients above the applicable percentage admissions threshold, the LTCH was reimbursed at a rate equivalent to that under general acute care hospital inpatient prospective payment system, or “IPPS,” which was generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital did not count toward the admissions threshold and were paid under LTCH-PPS.
CMS was precluded from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges occurring on or after October 1, 2016 and before October 1, 2017. In addition, the law applied higher percentage admissions thresholds for most LTCHs operating as a hospital within a hospital (“HIH”) and satellites for cost reporting years beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017. For most HIHs and satellites the percentage admissions threshold was raised from 25% to 50% during the relief periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs were exempt from the 25 Percent Rule regulations.
For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.
For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a temporary, one-time adjustment of 0.990878 to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-time adjustment of 0.990737 to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment of 0.991249 to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.
Short Stay Outlier Policy
CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five‑sixths of the geometric average length of stay for that particular Medicare severity long-term care diagnosis-related group (“MS-LTC-DRG”), referred to as a short stay outlier, or “SSO.” For discharges before October 1, 2017, SSO cases were paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.
The SSO rule also had a category referred to as a “very short stay outlier,” which applied to cases with a length of stay that is less than the average length of stay plus one standard deviation for the same Medicare severity diagnosis-related group (“MS-DRG”) under IPPS, referred to as the so-called “IPPS comparable threshold.” The LTCH payment for very short stay outlier cases was equivalent to the general acute care hospital IPPS per diem rate.
CMS adopted changes to the SSO policy such that all SSO cases discharged on or after October 1, 2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS (i.e., the fourth option under the prior policy). Under this policy, as the length of stay of a SSO case increases, the percentage of the per diem payment amounts based on the full MS-LTCH-DRG standard federal payment rate increases and the percentage of the payment based on the IPPS comparable amount decreases. In addition, the very short stay outlier category was eliminated.

42
Table of Contents

Medicare Reimbursement of Rehabilitation Hospital Services
The following is a summary of significant regulatory changes affecting our rehabilitation hospitals, which are certified by Medicare as inpatient rehabilitation facilities (“IRFs”), as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our rehabilitation hospitals are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).
The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.
Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. The standard payment conversion factor for fiscal year 2018 was impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits 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.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit‑Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements a provider’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019 through 2024 professionals who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. MIPS and APM applies to physicians and other practitioners included within the definition of “eligible clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the Medicare Physician Fee Schedule proposed rule for calendar year 2019, CMS proposes to include physical therapists and occupational therapists as “eligible clinicians” which, if the proposed rule is adopted, would require physical therapists and occupational therapists to participate in these programs beginning in 2021. CMS requested public comment on requiring speech-language pathologists to participate in these programs beginning in 2021. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, remain subject to future notice and comment rule‑making.

43
Table of Contents

Therapy Caps
Outpatient therapy providers reimbursed under the Medicare physician fee schedule have been subject to annual limits for therapy expenses. For example, for the calendar year beginning January 1, 2017, the annual limit on outpatient therapy services was $1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy services. The Bipartisan Budget Act of 2018 repealed the annual limits on outpatient therapy.
The annual limits for therapy expenses historically did not apply to services furnished and billed by outpatient hospital departments. However, the Medicare Access and CHIP Reauthorization Act of 2015, and prior legislation, extended the annual limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limits to hospital outpatient department settings sunset on December 31, 2017.
Prior to calendar year 2028, all therapy claims exceeding $3,000 are subject to a manual medical review process. The $3,000 threshold is applied to physical therapy and speech therapy services combined and separately applied to occupational therapy. CMS will continue to require that an appropriate modifier be included on claims over the current exception threshold indicating that the therapy services are medically necessary. Beginning in 2028 and in each calendar year thereafter, the threshold amount for claims requiring manual medical review will increase by the percentage increase in the Medicare Economic Index.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedule proposed rule for calendar year 2019, CMS proposes to establish two new therapy modifiers to identify the services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”) beginning January 1, 2020. This change, which was mandated by the Bipartisan Budget Act of 2018, establishes modifiers to be used whenever a PTA or OTA furnishes all or part of any covered outpatient therapy service. CMS intends to use these modifiers to develop a proposed planned payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning in calendar year 2022. CMS proposes the creation of a voluntary reporting system for the new modifiers beginning in 2019.
Critical Accounting Matters
Revenue Adjustments
Net operating revenues include amounts estimated by us to be reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided. Additionally, we are reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. We are reimbursed by these payors using a variety of payment methodologies.
On January 1, 2018, we adopted Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, we recognize a contractual allowance for fixed discounts based on the difference between our standard billing rates and the fees legislated, negotiated or otherwise arranged between us and our patients. Additionally, we are subject to potential retrospective adjustments to net operating revenues in future periods, such as for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are recognized as a constraint to revenue in the period services are rendered. Under the previous standard, these adjustments were classified as a component of bad debt expense.
In the critical illness recovery hospital and rehabilitation hospital segments, we estimate our contractual allowances based on known contractual provisions associated with the specific payor or, where we have a relatively homogeneous patient population, we will monitor individual payors’ historical reimbursement rates to estimate a per diem rate. The estimated per diem rate is used to derive the contractual allowance recognized in the period services are rendered. In the outpatient rehabilitation and Concentra segments, we estimate our contractual allowances based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. We estimate our contractual allowances using internally developed systems in which we monitor a payors’ historical reimbursement rates and compare them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is used to estimate the contractual allowance recognized in the period services are rendered. In each of our segments, estimates for potential retrospective adjustments are recognized as an additional contractual allowance during the period services are rendered.

44
Table of Contents

Operating Statistics
The following table sets forth operating statistics for our operating segments for each of the periods presented. The operating statistics reflect data for the period of time we managed these operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
2017
 
2018
Critical illness recovery hospital data:(1)
 
 

 
 

 
 

 
 

Number of hospitals owned—start of period
 
101

 
98

 
102

 
99

Number of hospitals acquired
 
—

 
—

 
1

 
—

Number of hospital start-ups
 
1

 
—

 
1

 
1

Number of hospitals closed/sold
 
(2
)
 
(1
)
 
(4
)
 
(3
)
Number of hospitals owned—end of period
 
100

 
97

 
100

 
97

Number of hospitals managed—end of period
 
1

 
—

 
1

 
—

Total number of hospitals (all)—end of period
 
101

 
97

 
101

 
97

Available licensed beds(2)
 
4,146

 
4,095

 
4,146

 
4,095

Admissions(2)
 
8,670

 
8,651

 
26,880

 
27,605

Patient days(2)
 
248,002

 
243,891

 
754,401

 
765,863

Average length of stay (days)(2)
 
29

 
28

 
28

 
28

Net revenue per patient day(2)(3)(5)
 
$
1,661

 
$
1,705

 
$
1,708

 
$
1,716

Occupancy rate(2)
 
65
%
 
65
%
 
66
%
 
68
%
Percent patient days—Medicare(2)
 
53
%
 
53
%
 
54
%
 
53
%
Rehabilitation hospital data:(1)
 
 
 
 
 
 
 
 
Number of facilities owned—start of period
 
13

 
17

 
13

 
16

Number of facilities acquired
 
—

 
—

 
—

 
—

Number of facilities start-ups
 
1

 
—

 
1

 
1

Number of facilities closed/sold
 
—

 
—

 
—

 
—

Number of facilities owned—end of period
 
14

 
17

 
14

 
17

Number of facilities managed—end of period
 
8

 
9

 
8

 
9

Total number of facilities (all)—end of period
 
22

 
26

 
22

 
26

Available licensed beds(2)
 
1,013

 
1,189

 
1,013

 
1,189

Admissions(2)
 
4,816

 
5,370

 
13,762

 
16,219

Patient days(2)
 
68,168

 
79,232

 
196,018

 
233,537

Average length of stay (days)(2)
 
14

 
15

 
14

 
15

Net revenue per patient day(2)(3)(5)
 
$
1,573

 
$
1,582

 
$
1,554

 
$
1,604

Occupancy rate(2)
 
73
%
 
72
%
 
72
%
 
73
%
Percent patient days—Medicare(2)
 
53
%
 
53
%
 
53
%
 
54
%
Outpatient rehabilitation data:
 
 

 
 

 
 
 
 
Number of clinics owned—start of period
 
1,441

 
1,435

 
1,445

 
1,447

Number of clinics acquired
 
4

 
—

 
5

 
14

Number of clinic start-ups
 
3

 
8

 
17

 
26

Number of clinics closed/sold
 
(13
)
 
(23
)
 
(32
)
 
(67
)
Number of clinics owned—end of period
 
1,435

 
1,420

 
1,435

 
1,420

Number of clinics managed—end of period
 
169

 
229

 
169

 
229

Total number of clinics (all)—end of period
 
1,604

 
1,649

 
1,604

 
1,649

Number of visits(2)
 
1,986,213

 
2,039,462

 
6,168,763

 
6,251,582

Net revenue per visit(2)(4)(5)
 
$
102

 
$
103

 
$
101

 
$
103







45
Table of Contents

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

 
 

Number of centers owned—start of period
 
315

 
527

 
300

 
312

Number of centers acquired
 
—

 
1

 
11

 
220

Number of clinic start-ups
 
—

 
—

 
4

 
—

Number of centers closed/sold
 
(3
)
 
(3
)
 
(3
)
 
(7
)
Number of centers owned—end of period
 
312

 
525

 
312

 
525

Number of visits(2)
 
1,979,481

 
2,984,832

 
5,848,551

 
8,605,012

Net revenue per visit(2)(4)(5)
 
$
113

 
$
124

 
$
114

 
$
124

_____________________________________________________________
(1)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
(2)
Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded.
(3)
Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days.
(4)
Net revenue per visit is calculated by dividing direct patient service revenue by the total number of visits. For purposes of this computation for our Concentra segment, direct patient service revenue does not include onsite clinics and community-based outpatient clinics.
(5)
Net revenue per patient day and net revenue per visit were retrospectively conformed to reflect the impact of Topic 606, Revenue from Contracts with Customers.
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
2017
 
2018
Net operating revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of services(1)
 
87.2

 
85.8

 
85.2

 
85.1

General and administrative
 
2.5

 
2.4

 
2.6

 
2.4

Depreciation and amortization
 
3.6

 
3.9

 
3.7

 
3.9

Income from operations
 
6.7

 
7.9

 
8.5

 
8.6

Loss on early retirement of debt
 
—

 
—

 
(0.6
)
 
(0.3
)
Equity in earnings of unconsolidated subsidiaries
 
0.4

 
0.4

 
0.5

 
0.4

Non-operating gain (loss)
 
—

 
0.2

 
(0.0
)
 
0.2

Interest expense
 
(3.5
)
 
(4.0
)
 
(3.5
)
 
(3.8
)
Income before income taxes
 
3.6

 
4.5

 
4.9

 
5.1

Income tax expense
 
1.3

 
1.1

 
1.9

 
1.2

Net income
 
2.3

 
3.4

 
3.0

 
3.9

Net income attributable to non-controlling interests
 
0.6

 
0.8

 
0.7

 
0.9

Net income attributable to Holdings and Select
 
1.7
 %
 
2.6
 %
 
2.3
 %
 
3.0
 %
_______________________________________________________________________________
(1)
Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.


46
Table of Contents

The following table summarizes selected financial data by business segment for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
% Change
 
2017
 
2018
 
% Change
 
 
(in thousands)
Net operating revenues:(1)
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
$
416,934

 
$
420,108

 
0.8
 %
 
$
1,301,251

 
$
1,327,236

 
2.0
 %
Rehabilitation hospital(2)
 
157,499

 
176,885

 
12.3

 
453,702

 
525,428

 
15.8

Outpatient rehabilitation
 
246,644

 
265,927

 
7.8

 
751,999

 
790,491

 
5.1

Concentra
 
255,881

 
404,481

 
58.1

 
763,357

 
1,173,420

 
53.7

Other(3)
 
56

 
—

 
N/M

 
687

 
—

 
N/M

Total Company
 
$
1,077,014

 
$
1,267,401

 
17.7
 %
 
$
3,270,996

 
$
3,816,575

 
16.7
 %
Income (loss) from operations:
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
$
35,941

 
$
42,156

 
17.3
 %
 
$
159,362

 
$
152,843

 
(4.1
)%
Rehabilitation hospital(2)
 
18,076

 
19,264

 
6.6

 
47,538

 
62,498

 
31.5

Outpatient rehabilitation
 
23,334

 
27,934

 
19.7

 
84,393

 
87,065

 
3.2

Concentra
 
24,777

 
43,499

 
75.6

 
78,308

 
123,776

 
58.1

Other(3)
 
(30,030
)
 
(33,016
)
 
(9.9
)
 
(90,075
)
 
(97,186
)
 
(7.9
)
Total Company
 
$
72,098

 
$
99,837

 
38.5
 %
 
$
279,526

 
$
328,996

 
17.7
 %
Adjusted EBITDA:
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
$
46,873

 
$
53,292

 
13.7
 %
 
$
194,253

 
$
186,989

 
(3.7
)%
Rehabilitation hospital(2)
 
22,581

 
25,343

 
12.2

 
62,038

 
80,314

 
29.5

Outpatient rehabilitation
 
29,298

 
34,531

 
17.9

 
102,575

 
107,003

 
4.3

Concentra
 
40,003

 
68,754

 
71.9

 
125,656

 
199,119

 
58.5

Other(3)
 
(22,928
)
 
(25,292
)
 
(10.3
)
 
(71,125
)
 
(75,337
)
 
(5.9
)
Total Company
 
$
115,827

 
$
156,628

 
35.2
 %
 
$
413,397

 
$
498,088

 
20.5
 %
Adjusted EBITDA margins:
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
11.2
%
 
12.7
%
 
 

 
14.9
%
 
14.1
%
 
 

Rehabilitation hospital(2)
 
14.3

 
14.3

 
 
 
13.7

 
15.3

 
 
Outpatient rehabilitation
 
11.9

 
13.0

 
 

 
13.6

 
13.5

 
 

Concentra
 
15.6

 
17.0

 
 

 
16.5

 
17.0

 
 

Other(3)
 
N/M

 
N/M

 
 

 
N/M

 
N/M

 
 

Total Company
 
10.8
%
 
12.4
%
 
 

 
12.6
%
 
13.1
%
 
 

Total assets:
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
$
2,008,485

 
$
1,785,336

 
 

 
$
2,008,485

 
$
1,785,336

 
 

Rehabilitation hospital(2)
 
740,276

 
888,342

 
 
 
740,276

 
888,342

 
 
Outpatient rehabilitation
 
945,765

 
991,105

 
 

 
945,765

 
991,105

 
 

Concentra
 
1,332,012

 
2,201,869

 
 

 
1,332,012

 
2,201,869

 
 

Other(3)
 
97,269

 
113,529

 
 

 
97,269

 
113,529

 
 

Total Company
 
$
5,123,807

 
$
5,980,181

 
 

 
$
5,123,807

 
$
5,980,181

 
 

Purchases of property and equipment, net:
 
 

 
 

 
 

 
 

 
 

 
 

Critical illness recovery hospital(2)
 
$
8,003

 
$
8,134

 
 
 
$
28,717

 
$
31,455

 
 
Rehabilitation hospital(2)
 
29,373

 
8,769

 
 

 
77,707

 
29,766

 
 

Outpatient rehabilitation
 
6,496

 
7,209

 
 

 
19,370

 
22,565

 
 

Concentra
 
5,369

 
12,539

 
 

 
21,656

 
29,281

 
 

Other(3)
 
19,257

 
2,740

 
 

 
26,350

 
7,972

 
 

Total Company
 
$
68,498

 
$
39,391

 
 

 
$
173,800

 
$
121,039

 
 

_______________________________________________________________________________
(1)
Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with Customers.
(2)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
(3)
Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.
N/M —     Not meaningful.

47
Table of Contents

Three Months Ended September 30, 2018, Compared to Three Months Ended September 30, 2017
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 17.7% to $1,267.4 million for the three months ended September 30, 2018, compared to $1,077.0 million for the three months ended September 30, 2017.
Critical Illness Recovery Hospital Segment.    Net operating revenues increased 0.8% to $420.1 million for the three months ended September 30, 2018, compared to $416.9 million for the three months ended September 30, 2017. Our net revenue per patient day increased 2.6% to $1,705 for the three months ended September 30, 2018, compared to $1,661 for the three months ended September 30, 2017. The increase principally resulted from changes we experienced in our non-Medicare net revenue per patient day during the three months ended September 30, 2018. We had 243,891 patient days for the three months ended September 30, 2018, compared to 248,002 days for the three months ended September 30, 2017.
Rehabilitation Hospital Segment.    Net operating revenues increased 12.3% to $176.9 million for the three months ended September 30, 2018, compared to $157.5 million for the three months ended September 30, 2017. The increase in net operating revenues was principally attributable to an increase in patient volumes during the three months ended September 30, 2018. Our patient days increased 16.2% to 79,232 days for the three months ended September 30, 2018, compared to 68,168 days for the three months ended September 30, 2017. The increase in patient days was principally due to the maturation of our rehabilitation hospitals which commenced operations during 2016 and 2017. We also experienced an increase in our net revenue per patient day, which increased 0.6% to $1,582 for the three months ended September 30, 2018, compared to $1,573 for the three months ended September 30, 2017.
Outpatient Rehabilitation Segment.    Net operating revenues increased 7.8% to $265.9 million for the three months ended September 30, 2018, compared to $246.6 million for the three months ended September 30, 2017. The increase in net operating revenues was primarily attributable to an increase in visits, which increased 2.7% to 2,039,462 visits for the three months ended September 30, 2018, compared to 1,986,213 visits for the three months ended September 30, 2017. The increase in visits resulted from both start-up and newly acquired outpatient rehabilitation clinics, as well as growth within our existing clinics. Our net revenue per visit increased 1.0% to $103 for the three months ended September 30, 2018, compared to $102 for the three months ended September 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. During the three months ended September 30, 2018, we also experienced an increase in net operating revenues related to contracted labor services provided to our equity investments. Our net operating revenues for the three months ended September 30, 2017 were impacted by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues.
Concentra Segment.    Net operating revenues increased 58.1% to $404.5 million for the three months ended September 30, 2018, compared to $255.9 million for the three months ended September 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $133.3 million of net operating revenues during the quarter. Visits in our centers increased 50.8% to 2,984,832 visits for the three months ended September 30, 2018, compared to 1,979,481 visits for the three months ended September 30, 2017. Net revenue per visit increased 9.7% to $124 for the three months ended September 30, 2018, compared to $113 for the three months ended September 30, 2017. The increase in net revenue per visit was driven principally by U.S. HealthWorks visits, which yield higher per visit rates, as well as an increase in workers’ compensation and employer services reimbursement rates in our existing Concentra centers. Our net operating revenues for the three months ended September 30, 2017 were impacted by Hurricanes Harvey and Irma, which caused an estimated $1.2 million decrease in net operating revenues.

48
Table of Contents

Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,117.0 million, or 88.2% of net operating revenues, for the three months ended September 30, 2018, compared to $966.1 million, or 89.7% of net operating revenues, for the three months ended September 30, 2017. Our cost of services, a major component of which is labor expense, was $1,087.1 million, or 85.8% of net operating revenues, for the three months ended September 30, 2018, compared to $939.1 million, or 87.2% of net operating revenues, for the three months ended September 30, 2017. The decrease in our operating expenses relative to our net operating revenues was principally due to the improved operating performance of our critical illness recovery hospital and outpatient rehabilitation segments during the three months ended September 30, 2018. We also experienced lower relative operating costs within our Concentra segment as a result of the U.S. HealthWorks acquisition. Facility rent expense was $68.4 million for the three months ended September 30, 2018, compared to $57.9 million for the three months ended September 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and administrative expenses were $30.0 million, or 2.4% of net operating revenues, for the three months ended September 30, 2018, compared to $27.1 million, or 2.5% of net operating revenues, for the three months ended September 30, 2017.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment.    Adjusted EBITDA increased 13.7% to $53.3 million for the three months ended September 30, 2018, compared to $46.9 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.7% for the three months ended September 30, 2018, compared to 11.2% for the three months ended September 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin increased principally as a result of an increase in net revenue per patient day, as discussed above under “Net Operating Revenues,” without a corresponding increase in operating costs.
Rehabilitation Hospital Segment.    Adjusted EBITDA increased 12.2% to $25.3 million for the three months ended September 30, 2018, compared to $22.6 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 14.3% for both the third quarters ended September 30, 2018 and 2017. The increase in Adjusted EBITDA for our rehabilitation hospital segment was primarily driven by an increase in patient volume, as discussed above under “Net Operating Revenues.” Adjusted EBITDA losses in our start-up hospitals were $0.8 million for the three months ended September 30, 2018, compared to $1.3 million for the three months ended September 30, 2017.
Outpatient Rehabilitation Segment.    Adjusted EBITDA increased 17.9% to $34.5 million for the three months ended September 30, 2018, compared to $29.3 million for the three months ended September 30, 2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.0% for the three months ended September 30, 2018, compared to 11.9% for the three months ended September 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin increased as a result of an increase in net revenue per visit, as discussed above under “Net Operating Revenues,” and a reduction in operating expenses. Adjusted EBITDA for the three months ended September 30, 2017 was impacted by Hurricanes Harvey and Irma, as discussed above under “Net Operating Revenues.”
Concentra Segment.    Adjusted EBITDA increased 71.9% to $68.8 million for the three months ended September 30, 2018, compared to $40.0 million for the three months ended September 30, 2017. The increase in Adjusted EBITDA was principally due to the operating results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.0% for the three months ended September 30, 2018, compared to 15.6% for the three months ended September 30, 2017. The increase in Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses. Adjusted EBITDA for the three months ended September 30, 2017 was impacted by Hurricanes Harvey and Irma, as discussed above under “Net Operating Revenues.”
Other.    The Adjusted EBITDA loss was $25.3 million for the three months ended September 30, 2018, compared to an Adjusted EBITDA loss of $22.9 million for the three months ended September 30, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.
Depreciation and Amortization
Depreciation and amortization expense was $50.5 million for the three months ended September 30, 2018, compared to $38.8 million for the three months ended September 30, 2017.The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.



49
Table of Contents

Income from Operations
For the three months ended September 30, 2018, we had income from operations of $99.8 million, compared to $72.1 million for the three months ended September 30, 2017. The increase in income from operations resulted principally from the growth of our Concentra segment, as discussed above.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended September 30, 2018, we had equity in earnings of unconsolidated subsidiaries of $5.4 million, compared to $4.4 million for the three months ended September 30, 2017.
Non-Operating Gain
We recognized a non-operating gain of $2.1 million during the three months ended September 30, 2018. The non-operating gain was attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.
Interest Expense
Interest expense was $50.7 million for the three months ended September 30, 2018, compared to $37.7 million for the three months ended September 30, 2017. The increase in interest expense was principally due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.
Income Taxes
We recorded income tax expense of $14.1 million for the three months ended September 30, 2018, which represented an effective tax rate of 24.8%. We recorded income tax expense of $14.0 million for the three months ended September 30, 2017, which represented an effective tax rate of 36.1%. The lower effective tax rate for the three months ended September 30, 2018 resulted primarily from the effects of the federal tax reform legislation enacted on December 22, 2017.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $9.8 million for the three months ended September 30, 2018, compared to $6.4 million for the three months ended September 30, 2017. The increase resulted principally from the growth of our Concentra segment.





50
Table of Contents

Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 16.7% to $3,816.6 million for the nine months ended September 30, 2018, compared to $3,271.0 million for the nine months ended September 30, 2017.
Critical Illness Recovery Hospital Segment.    Net operating revenues increased 2.0% to $1,327.2 million for the nine months ended September 30, 2018, compared to $1,301.3 million for the nine months ended September 30, 2017. Our patient days increased 1.5% to 765,863 days for the nine months ended September 30, 2018, compared to 754,401 days for the nine months ended September 30, 2017, which was the principal cause of the increase in net operating revenues during the nine months ended September 30, 2018. Our net revenue per patient day increased to $1,716 for the nine months ended September 30, 2018, compared to $1,708 for the nine months ended September 30, 2017. The increase principally resulted from changes we experienced in our non-Medicare net revenue per patient day during the nine months ended September 30, 2018.
Rehabilitation Hospital Segment.    Net operating revenues increased 15.8% to $525.4 million for the nine months ended September 30, 2018, compared to $453.7 million for the nine months ended September 30, 2017. The increase in net operating revenues resulted primarily from an increase in patient volumes during the nine months ended September 30, 2018. Our patient days increased 19.1% to 233,537 days for the nine months ended September 30, 2018, compared to 196,018 days for the nine months ended September 30, 2017. The increase in patient days was principally attributable to our rehabilitation hospitals which commenced operations during 2016 and 2017. Our net revenue per patient day increased 3.2% to $1,604 for the nine months ended September 30, 2018, compared to $1,554 for the nine months ended September 30, 2017.
Outpatient Rehabilitation Segment.    Net operating revenues increased 5.1% to $790.5 million for the nine months ended September 30, 2018, compared to $752.0 million for the nine months ended September 30, 2017. The increase in net operating revenues was principally attributable to an increase in our net revenue per visit, which increased 2.0% to $103 for the nine months ended September 30, 2018, compared to $101 for the nine months ended September 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. Additionally, visits increased 1.3% to 6,251,582 for the nine months ended September 30, 2018, compared to 6,168,763 visits for the nine months ended September 30, 2017. The increase in visits resulted from both start-up and newly acquired outpatient rehabilitation clinics, as well as growth within our existing clinics. During the nine months ended September 30, 2018, we also experienced an increase in net operating revenues related to contracted labor services provided to our equity investments.
Concentra Segment.    Net operating revenues increased 53.7% to $1,173.4 million for the nine months ended September 30, 2018, compared to $763.4 million for the nine months ended September 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $362.7 million of net operating revenues during the period. Visits in our centers increased 47.1% to 8,605,012 for the nine months ended September 30, 2018, compared to 5,848,551 visits for the nine months ended September 30, 2017. Net revenue per visit increased 8.8% to $124 for the nine months ended September 30, 2018, compared to $114 for the nine months ended September 30, 2017. The increase in net revenue per visit was driven principally by U.S. HealthWorks visits, which yield higher per visit rates, as well as an increase in workers’ compensation and employer services reimbursement rates in our existing Concentra centers.

51
Table of Contents

Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $3,338.6 million, or 87.5% of net operating revenues, for the nine months ended September 30, 2018, compared to $2,871.8 million, or 87.8% of net operating revenues, for the nine months ended September 30, 2017. Our cost of services, a major component of which is labor expense, was $3,247.6 million, or 85.1% of net operating revenues, for the nine months ended September 30, 2018, compared to $2,788.4 million, or 85.2% of net operating revenues, for the nine months ended September 30, 2017. The decrease in our operating expenses relative to our net operating revenues was principally due to the improved operating performance of our rehabilitation hospital segment. Facility rent expense was $200.5 million for the nine months ended September 30, 2018, compared to $171.7 million for the nine months ended September 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and administrative expenses were $91.0 million, or 2.4% of net operating revenues, for the nine months ended September 30, 2018, which included $2.9 million of U.S. HealthWorks acquisition costs. General and administrative expenses were $83.4 million, or 2.6% of net operating revenues, for the nine months ended September 30, 2017.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment.    Adjusted EBITDA was $187.0 million for the nine months ended September 30, 2018, compared to $194.3 million for the nine months ended September 30, 2017. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.1% for the nine months ended September 30, 2018, compared to 14.9% for the nine months ended September 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin were impacted by increases in wages, benefits, and other operating costs, relative to our net operating revenues, during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017.
Rehabilitation Hospital Segment.    Adjusted EBITDA increased 29.5% to $80.3 million for the nine months ended September 30, 2018, compared to $62.0 million for the nine months ended September 30, 2017. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 15.3% for the nine months ended September 30, 2018, compared to 13.7% for the nine months ended September 30, 2017. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven by increases in patient volume within our rehabilitation hospitals that commenced operations during 2016 and 2017, which allowed our facilities to operate at lower relative costs compared to the prior period. The increases in Adjusted EBITDA and Adjusted EBITDA margins also resulted from an increase in net revenue per patient day, as discussed above under “Net Operating Revenues.” Adjusted EBITDA losses in our start-up hospitals were $3.8 million for the nine months ended September 30, 2018, compared to $4.5 million for the nine months ended September 30, 2017.
Outpatient Rehabilitation Segment.    Adjusted EBITDA increased 4.3% to $107.0 million for the nine months ended September 30, 2018, compared to $102.6 million for the nine months ended September 30, 2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.5% for the nine months ended September 30, 2018, compared to 13.6% for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, our Adjusted EBITDA increased as a result of an increase in patient visits and net revenue per visit, as discussed above under “Net Operating Revenues.”
Concentra Segment.    Adjusted EBITDA increased 58.5% to $199.1 million for the nine months ended September 30, 2018, compared to $125.7 million for the nine months ended September 30, 2017. The increase in Adjusted EBITDA was principally due to the operating results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.0% for the nine months ended September 30, 2018, compared to 16.5% for the nine months ended September 30, 2017. The increase in Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.
Other.    The Adjusted EBITDA loss was $75.3 million for the nine months ended September 30, 2018, compared to an Adjusted EBITDA loss of $71.1 million for the nine months ended September 30, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.
Depreciation and Amortization
Depreciation and amortization expense was $149.0 million for the nine months ended September 30, 2018, compared to $119.6 million for the nine months ended September 30, 2017. The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.




52
Table of Contents

Income from Operations
For the nine months ended September 30, 2018, we had income from operations of $329.0 million, compared to $279.5 million for the nine months ended September 30, 2017. The increase in income from operations resulted principally from the improved performance of our rehabilitation hospital segment and the growth of our Concentra segment, as discussed above.
Loss on Early Retirement of Debt
During the nine months ended September 30, 2018, we amended both Select’s and Concentra’s credit facilities, as discussed above under “Significant Events,” which resulted in losses on early retirement of debt of $10.3 million.
During the nine months ended September 30, 2017, we refinanced Select’s senior secured credit facilities which resulted in a loss on early retirement of debt of $19.7 million.
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, 2018, we had equity in earnings of unconsolidated subsidiaries of $14.9 million, compared to $15.6 million for the nine months ended September 30, 2017.
Non-Operating Gain
We recognized non-operating gains of $9.0 million during the nine months ended September 30, 2018. The non-operating gains were principally attributable to the sales of outpatient rehabilitation clinics to non-consolidating subsidiaries.
Interest Expense
Interest expense was $148.0 million for the nine months ended September 30, 2018, compared to $116.2 million for the nine months ended September 30, 2017. The increase in interest expense was principally due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.
Income Taxes
We recorded income tax expense of $47.5 million for the nine months ended September 30, 2018, which represented an effective tax rate of 24.4%. We recorded income tax expense of $59.6 million for the nine months ended September 30, 2017, which represented an effective tax rate of 37.4%. The lower effective tax rate for the nine months ended September 30, 2018 resulted primarily from the effects of the federal tax reform legislation enacted on December 22, 2017 and the discrete tax benefits realized from certain equity interests that were redeemed as part of the closing of the U.S. HealthWorks transaction during the first quarter of 2018.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $34.1 million for the nine months ended September 30, 2018, compared to $23.2 million for the nine months ended September 30, 2017. The increase was principally due to the improved operating performance of several of our joint venture rehabilitation hospitals and the growth of our Concentra segment.




53
Table of Contents

Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 2018 and Nine Months Ended September 30, 2017
In the following, we discuss cash flows from operating activities, investing activities, and financing activities, which, in each case, are the same for Holdings and Select.
 
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
 
(in thousands)
Cash flows provided by operating activities
 
$
129,972

 
$
380,977

Cash flows used in investing activities
 
(169,990
)
 
(646,542
)
Cash flows provided by financing activities
 
48,289

 
303,429

Net increase in cash and cash equivalents
 
8,271

 
37,864

Cash and cash equivalents at beginning of period
 
99,029

 
122,549

Cash and cash equivalents at end of period
 
$
107,300

 
$
160,413

Operating activities provided $381.0 million of cash flows for the nine months ended September 30, 2018, compared to $130.0 million of cash flows for the nine months ended September 30, 2017. The increase in operating cash flows for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, was principally driven by the change in our accounts receivable in their respective periods. Our days sales outstanding decreased from 58 days at December 31, 2017 to 54 days at September 30, 2018 while our days sales outstanding increased from 51 days at December 31, 2016 to 61 days at September 30, 2017. The decrease in days sales outstanding during the nine months ended September 30, 2018 resulted from the recoupment of Medicare periodic interim underpayments from prior periods. The increase in days sales outstanding during the nine months ended September 30, 2017 was caused by the significant underpayments we received through the Medicare periodic interim payment program in our critical illness recovery hospitals. Additionally, we received overpayments during 2016 which were repaid during the first quarter of 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles.
Investing activities used $646.5 million of cash flows for the nine months ended September 30, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and $121.0 million for purchases of property and equipment. Investing activities used $170.0 million of cash flows for the nine months ended September 30, 2017. The principal uses of cash were $173.8 million for purchases of property and equipment and $19.4 million for acquisition-related payments, offset in part by $34.6 million of proceeds from the sale of assets.
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 under the Purchase Agreement in connection with the acquisition of U.S. HealthWorks by our Concentra segment, and $165.0 million of net repayments under the Select revolving credit facility.
Financing activities provided $48.3 million of cash flows for the nine months ended September 30, 2017. The principal source of cash was net borrowings under the Select revolving facility of $100.0 million, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $5.8 million of cash used for a term loan payment associated with the Select credit facilities, and $9.2 million of cash used for financing costs.

54
Table of Contents

Capital Resources
Working capital.  We had net working capital of $338.2 million at September 30, 2018, compared to $315.4 million at December 31, 2017. The increase in net working capital was primarily due to the acquisition of U.S. HealthWorks and an increase in our accounts receivable.
Select credit facilities. 
On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment No. 2 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the currently applicable floor.
At September 30, 2018, Select had outstanding borrowings under the Select credit facilities consisting of $1,132.8 million in Select term loans (excluding unamortized discounts and debt issuance costs of $22.1 million) and borrowings of $65.0 million (excluding letters of credit) under the Select revolving facility. At September 30, 2018, Select had $347.5 million of availability under the Select revolving facility after giving effect to $37.5 million of outstanding letters of credit.
Concentra credit facilities.  Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated financial statements.
On February 1, 2018, in connection with the acquisition of U.S. HealthWorks, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.
In addition, on February 1, 2018, Concentra entered into the Concentra second lien credit agreement. The Concentra second lien credit agreement provided for a $240.0 million Concentra second lien term loan with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).


55
Table of Contents

In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.
On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement. Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra’s first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.
Concentra will be required to prepay borrowings under the Concentra second lien term loan with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.
The Concentra second lien credit agreement also contains a number of affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement.
At September 30, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,414.2 million of term loans (excluding unamortized discounts and debt issuance costs of $23.5 million). Concentra did not have any borrowings under the Concentra revolving facility. At September 30, 2018, Concentra had $62.3 million of availability under its revolving facility after giving effect to $12.7 million of outstanding letters of credit.
Stock Repurchase Program.  Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2019, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. Holdings did not repurchase shares during the three months ended September 30, 2018. Since the inception of the program through September 30, 2018, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.

56
Table of Contents

Liquidity.  We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Use of Capital Resources.  We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers and from time to time we may also develop new rehabilitation hospitals and occupational health centers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions, such as the acquisition of U.S. HealthWorks.
Recent Accounting Pronouncements
Lease Accounting
Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”) which established Topic 842, Leases (the “standard”). This standard includes a lessee accounting model that recognizes two types of leases: finance and operating. This standard requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in the standard will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. There are two transition approaches available under the standard: a modified retrospective approach for leases that exist, or are entered into, after the beginning of the earliest comparative period in the financial statements or a cumulative-effect approach with an adjustment to the opening balance of retained earnings in the period of adoption.
Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will still be recognized as rent expense on a straight‑line basis over the respective lease terms in the consolidated statements of operations.
The Company will implement the new standard beginning January 1, 2019, using the cumulative-effect approach, without adjusting the comparative periods. The Company has completed its inventory of leases and has begun to implement a new technology platform to account for leases under the new standard.  The Company has substantially completed validating its lease data to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impacts that adoption of this ASU will have on its consolidated financial statements.

57
Table of Contents

Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
Beginning in May 2014, the FASB issued several ASUs which established Topic 606, Revenue from Contracts with Customers (the “revenue recognition standard”). This revenue recognition standard supersedes existing revenue recognition requirements and seeks to eliminate most industry-specific guidance under current GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company adopted the new revenue recognition standard on January 1, 2018, using the full retrospective transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:
 
Three Months Ended September 30, 2017
 
As Reported
 
As Adjusted(1)
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Statements of Operations
 
 
 
 
 
Net operating revenues
$
1,097,166

 
$
1,077,014

 
$
(20,152
)
Bad debt expense
20,321

 
169

 
(20,152
)
 
Nine Months Ended September 30, 2017
 
As Reported
 
As Adjusted(1)
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Statements of Operations
 
 
 
 
 
Net operating revenues
$
3,329,202

 
$
3,270,996

 
$
(58,206
)
Bad debt expense
59,120

 
914

 
(58,206
)
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
Provision for bad debts
$
59,120

 
$
914

 
$
(58,206
)
Changes in accounts receivable
(201,514
)
 
(143,308
)
 
58,206

 _____________________________________________________________
(1)
Bad debt expense is now included in cost of services on the condensed consolidated statements of operations.
 
December 31, 2017
 
As Reported
 
As Adjusted
 
Adoption Impact
 
(in thousands)
Condensed Consolidated Balance Sheets
 
 
 
 
 
Accounts receivable
$
767,276

 
$
691,732

 
$
(75,544
)
Allowance for doubtful accounts
75,544

 
—

 
(75,544
)
Accounts receivable
$
691,732

 
$
691,732

 
$
—

The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7 of the Company’s condensed consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the guidance effective January 1, 2018. Adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

58
Table of Contents

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.
At September 30, 2018, Select had outstanding borrowings under the Select credit facilities consisting of $1,132.8 million of Select term loans (excluding unamortized discounts and debt issuance costs of $22.1 million) and borrowings of $65.0 million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates.
At September 30, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,414.2 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $23.5 million), which bear interest at variable rates. Concentra did not have any borrowings under the Concentra revolving facility.
As of September 30, 2018, each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra’s variable rate debt by $6.5 million per annum.
ITEM 4.  CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of September 30, 2018, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the third quarter ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. Effective from that date, we began integrating U.S. HealthWorks into our existing control procedures. The U.S. HealthWorks integration may lead us to modify certain controls in future periods, but we do not expect changes to significantly affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

59
Table of Contents

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”), 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 maintains insurance coverages under a combination of policies with a total annual aggregate limit of $35.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
 Evansville Litigation.    On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and two former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.



60
Table of Contents

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.
The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Knoxville Litigation.    On July 13, 2015, the United States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14‑cv‑00172‑TAV‑CCS, which named as defendants Select, Select Specialty Hospital-Knoxville, Inc. (“SSH‑Knoxville”), Select Specialty Hospital-North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH‑Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015.
In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first‑to‑file bar required dismissal of plaintiff‑relator’s claims. Under the first‑to‑file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff‑relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff‑relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff‑relator did not plead his claims with sufficient particularity.
In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff‑relator’s lawsuit in its entirety. The District Court ruled that the first‑to‑file bar precludes all but one of the plaintiff‑relator’s claims, and that the remaining claim must also be dismissed because the plaintiff‑relator failed to plead it with sufficient particularity. In July 2016, the plaintiff‑relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff‑relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff‑relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff‑relator to supplement his Complaint, but the District Court denied such request. In December 2017, the Court of Appeals, relying on the public disclosure bar, denied the appeal of the plaintiff‑relator and affirmed the judgment of the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018, and in July 2018, the deadline expired for the plaintiff-relator to file a petition for certiorari to the Supreme Court of the United States.


61
Table of Contents

Wilmington Litigation.    On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act.  In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
ITEM 1A. RISK FACTORS
There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2017.

62
Table of Contents

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 has been extended until December 31, 2019 and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings did not repurchase shares during the three months ended September 30, 2018 under the authorized common stock repurchase program.
The following table provides information regarding repurchases of our common stock during the three months ended September 30, 2018. As set forth below, the shares repurchased during the three months ended September 30, 2018 relate entirely to shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.
 
 
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be
Purchased Under Plans or Programs
July 1 - July 31, 2018
 
—

 
$
—

 
—

 
$
185,249,408

August 1 - August 31, 2018
 
235,782

 
20.15

 
—

 
185,249,408

September 1 - September 30, 2018
 
—

 
—

 
—

 
185,249,408

Total
 
235,782

 
$
20.15

 
—

 
$
185,249,408

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

63
Table of Contents

ITEM 6. EXHIBITS
Number
 
Description
31.1
 
31.2
 
32.1
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

64
Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.
 
SELECT MEDICAL CORPORATION
 
 
 
 
 
By:
/s/ Martin F. Jackson
 
 
Martin F. Jackson
 
 
Executive Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer)
 
 
 
 
By:
/s/ Scott A. Romberger
 
 
Scott A. Romberger
 
 
Senior Vice President, Chief Accounting Officer and Controller
 
 
(Principal Accounting Officer)
 
Dated:  November 1, 2018
 
SELECT MEDICAL HOLDINGS CORPORATION
 
 
 
 
 
By:
/s/ Martin F. Jackson
 
 
Martin F. Jackson
 
 
Executive Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer)
 
 
 
 
By:
/s/  Scott A. Romberger
 
 
Scott A. Romberger
 
 
Senior Vice President, Chief Accounting Officer and Controller
 
 
(Principal Accounting Officer)
 
Dated:  November 1, 2018


65