UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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



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

For the Quarterly Period Ended March 31, ~~2017~~

2018

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



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~~			~~20-1764048~~
~~Delaware~~	~~23-2872718~~
Delaware Delaware		20-1764048 23-2872718
(State or Other Jurisdiction of	~~(I.R.S. Employer~~
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 xý No o

Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). Yes xý 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
(Do not check if a smaller reporting company)		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
(Do not check if a smaller reporting company)		Emerging Growth Company o

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

As of April 30, ~~2017,~~2018, Select Medical Holdings Corporation had outstanding ~~132,759,535~~134,061,769 shares of common stock.

This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Inc., the indirect operating subsidiary of Concentra Group Holdings Parent, LLC (“Concentra Group ~~Holdings”~~Holdings Parent”), and its subsidiaries. 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 II: 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,

March 31,

December 31,

March 31,

2016

2017

2016

2017

ASSETS

Current Assets:

Cash and cash equivalents

$
99,029

$
65,211

$
99,029

$
65,211

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively

573,752

691,520

573,752

691,520

Prepaid income taxes

12,423

2,402

12,423

2,402

Other current assets

77,699

85,081

77,699

85,081

Total Current Assets

762,903

844,214

762,903

844,214

Property and equipment, net

892,217

897,146

892,217

897,146

Goodwill

2,751,000

2,759,764

2,751,000

2,759,764

Identifiable intangible assets, net

340,562

337,076

340,562

337,076

Other assets

173,944

164,737

173,944

164,737

Total Assets

$
4,920,626

$
5,002,937

$
4,920,626

$
5,002,937

LIABILITIES AND EQUITY

Current Liabilities:

Bank overdrafts

$
39,362

$
22,299

$
39,362

$
22,299

Current portion of long-term debt and notes payable

13,656

22,013

13,656

22,013

Accounts payable

126,558

125,118

126,558

125,118

Accrued payroll

146,397

110,196

146,397

110,196

Accrued vacation

83,261

88,736

83,261

88,736

Accrued interest

22,325

21,558

22,325

21,558

Accrued other

140,076

143,180

140,076

143,180

Income taxes payable

—

5,399

—

5,399

Total Current Liabilities

571,635

538,499

571,635

538,499

Long-term debt, net of current portion

2,685,333

2,771,410

2,685,333

2,771,410

Non-current deferred tax liability

199,078

195,729

199,078

195,729

Other non-current liabilities

136,520

142,208

136,520

142,208

Total Liabilities

3,592,566

3,647,846

3,592,566

3,647,846

Commitments and contingencies (Note 9)

Redeemable non-controlling interests

422,159

462,680

422,159

462,680

Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,753,444 shares issued and outstanding at 2016 and 2017, respectively

132

132

—

—

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

—

—

0

0

Capital in excess of par

443,908

450,373

925,111

931,661

Retained earnings (accumulated deficit)

371,685

351,224

(109,386
)
(129,932
)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

815,725

801,729

815,725

801,729

Non-controlling interest

90,176

90,682

90,176

90,682

Total Equity

905,901

892,411

905,901

892,411

Total Liabilities and Equity

$
4,920,626

$
5,002,937

$
4,920,626

$
5,002,937

Select Medical Holdings Corporation Select Medical Corporation
December 31, 2017 March 31,
2018 December 31, 2017 March 31,
2018
ASSETS

Current Assets:

Cash and cash equivalents $ 122,549
$ 119,683
$ 122,549
$ 119,683
Accounts receivable 691,732
806,391
691,732
806,391
Prepaid income taxes 31,387
21,270
31,387
21,270
Other current assets 75,158
93,997
75,158
93,997
Total Current Assets 920,826
1,041,341
920,826
1,041,341
Property and equipment, net 912,591
973,483
912,591
973,483
Goodwill 2,782,812
3,318,611
2,782,812
3,318,611
Identifiable intangible assets, net 326,519
424,647
326,519
424,647
Other assets 184,418
210,561
184,418
210,561
Total Assets $ 5,127,166
$ 5,968,643
$ 5,127,166
$ 5,968,643
LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts $ 29,463
$ 21,547
$ 29,463
$ 21,547
Current portion of long-term debt and notes payable 22,187
22,499
22,187
22,499
Accounts payable 128,194
138,436
128,194
138,436
Accrued payroll 160,562
135,561
160,562
135,561
Accrued vacation 92,875
105,325
92,875
105,325
Accrued interest 19,885
28,588
19,885
28,588
Accrued other 143,166
163,141
143,166
163,141
Income taxes payable 9,071
10,634
9,071
10,634
Total Current Liabilities 605,403
625,731
605,403
625,731
Long-term debt, net of current portion 2,677,715
3,478,021
2,677,715
3,478,021
Non-current deferred tax liability 124,917
125,020
124,917
125,020
Other non-current liabilities 145,709
167,120
145,709
167,120
Total Liabilities 3,553,744
4,395,892
3,553,744
4,395,892
Commitments and contingencies (Note 10)

Redeemable non-controlling interests 640,818
607,474
640,818
607,474
Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 134,104,286 shares issued and outstanding at 2017 and 2018, respectively 134
134
—
—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding —
—
0
0
Capital in excess of par 463,499
468,885
947,370
952,825
Retained earnings (accumulated deficit) 359,735
383,581
(124,002 ) (100,225 )
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity 823,368
852,600
823,368
852,600
Non-controlling interests 109,236
112,677
109,236
112,677
Total Equity 932,604
965,277
932,604
965,277
Total Liabilities and Equity $ 5,127,166
$ 5,968,643
$ 5,127,166
$ 5,968,643

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

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

For the Three Months Ended March 31,

For the Three Months Ended March 31,

2016

2017

2016

2017

Net operating revenues

$
1,088,330

$
1,111,361

$
1,088,330

$
1,111,361

Costs and expenses:

Cost of services

922,262

928,357

922,262

928,357

General and administrative

28,268

28,075

28,268

28,075

Bad debt expense

16,397

20,625

16,397

20,625

Depreciation and amortization

34,517

42,539

34,517

42,539

Total costs and expenses

1,001,444

1,019,596

1,001,444

1,019,596

Income from operations

86,886

91,765

86,886

91,765

Other income and expense:

Loss on early retirement of debt

(773
)
(19,719
)
(773
)
(19,719
)
Equity in earnings of unconsolidated subsidiaries

4,652

5,521

4,652

5,521

Non-operating gain (loss)

25,087

(49
)
25,087

(49
)
Interest expense

(38,848
)
(40,853
)
(38,848
)
(40,853
)

Income before income taxes

77,004

36,665

77,004

36,665

Income tax expense

17,060

13,202

17,060

13,202

Net income

59,944

23,463

59,944

23,463

Less: Net income attributable to non-controlling interests

5,111

7,593

5,111

7,593

Net income attributable to Select Medical Holdings

Corporation and Select Medical Corporation

$
54,833

$
15,870

$
54,833

$
15,870

Basic

$
0.42

$
0.12

Diluted

$
0.42

$
0.12

Weighted average shares outstanding:

Basic

127,500

128,464

Diluted

127,581

128,628

Select Medical Holdings Corporation Select Medical Corporation
For the Three Months Ended March 31, For the Three Months Ended March 31,
2017 2018 2017 2018
Net operating revenues $ 1,091,517
$ 1,252,964
$ 1,091,517
$ 1,252,964
Costs and expenses:

Cost of services 929,138
1,065,813
929,138
1,065,813
General and administrative 28,075
31,782
28,075
31,782
Depreciation and amortization 42,539
46,771
42,539
46,771
Total costs and expenses 999,752
1,144,366
999,752
1,144,366
Income from operations 91,765
108,598
91,765
108,598
Other income and expense:

Loss on early retirement of debt (19,719 ) (10,255 ) (19,719 ) (10,255 )
Equity in earnings of unconsolidated subsidiaries 5,521
4,697
5,521
4,697
Non-operating gain (loss) (49 ) 399
(49 ) 399
Interest expense (40,853 ) (47,163 ) (40,853 ) (47,163 )
Income before income taxes 36,665
56,276
36,665
56,276
Income tax expense 13,202
12,294
13,202
12,294
Net income 23,463
43,982
23,463
43,982
Less: Net income attributable to non-controlling interests 7,593
10,243
7,593
10,243
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation $ 15,870
$ 33,739
$ 15,870
$ 33,739
Income per common share:

Basic $ 0.12
$ 0.25

Diluted $ 0.12
$ 0.25

Weighted average shares outstanding:

Basic 128,464
129,691

Diluted 128,628
129,816

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

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

Select Medical Holdings Corporation Stockholders

Redeemable
Non-controlling
interests

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings

Total
Stockholders’
Equity

Non-controlling
Interests

Total
Equity

Balance at December 31, 2016

$
422,159

132,597

$
132

$
443,908

$
371,685

$
815,725

$
90,176

$
905,901

Net income attributable to Select Medical Holdings Corporation

15,870

15,870

15,870

Net income attributable to non-controlling interests

6,090

—

1,503

1,503

Issuance and vesting of restricted stock

101

0

4,280

4,280

4,280

Repurchase of common shares

(12
)
0

(85
)
(71
)
(156
)

(156
)
Exercise of stock options

67

0

617

617

617

Issuance of non-controlling interests

1,653

1,653

441

2,094

Purchase of non-controlling interests

(57
)

7

7

7

Distributions to non-controlling interests

(2,075
)

—

(1,532
)
(1,532
)
Redemption adjustment on non-controlling interests

36,292

(36,292
)
(36,292
)

(36,292
)
Other

271

25

25

94

119

Balance at March 31, 2017

$
462,680

132,753

$
132

$
450,373

$
351,224

$
801,729

$
90,682

$
892,411

Select Medical Corporation Stockholders

Redeemable
Non-controlling
interests

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings

Total
Stockholders’
Equity

Non-controlling
Interests

Total
Equity

Balance at December 31, 2016

$
422,159

0

$
0

$
925,111

$
(109,386
)
$
815,725

$
90,176

$
905,901

Net income attributable to Select Medical Corporation

15,870

15,870

15,870

Net income attributable to non-controlling interests

6,090

—

1,503

1,503

Additional investment by Holdings

617

617

617

Dividends declared and paid to Holdings

(156
)
(156
)

(156
)
Contribution related to restricted stock awards and stock option issuances by Holdings

4,280

4,280

4,280

Issuance of non-controlling interests

1,653

1,653

441

2,094

Purchase of non-controlling interests

(57
)

7

7

7

Distributions to non-controlling interests

(2,075
)

—

(1,532
)
(1,532
)
Redemption adjustment on non-controlling interests

36,292

(36,292
)
(36,292
)

(36,292
)
Other

271

25

25

94

119

Balance at March 31, 2017

$
462,680

0

$
0

$
931,661

$
(129,932
)
$
801,729

$
90,682

$
892,411

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

33,739
33,739

33,739
Net income attributable to non-controlling interests 5,743

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

—

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

(122 )
Exercise of stock options
80
0
738

738

738
Exchange of interests 163,659
74,341
74,341
74,341
Distributions to non-controlling interests (203,972 )

(83,233 ) (83,233 ) (1,094 ) (84,327 )
Redemption adjustment on non-controlling interests 1,051

(1,051 ) (1,051 )

(1,051 )
Other 175

103
103
35
138
Balance at March 31, 2018 $ 607,474
134,104
$ 134
$ 468,885
$ 383,581
$ 852,600
$ 112,677
$ 965,277

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

33,739
33,739

33,739
Net income attributable to non-controlling interests 5,743

—
4,500
4,500
Additional investment by Holdings

738

738

738
Dividends declared and paid to Holdings

(122 ) (122 )
(122 )
Contribution related to restricted stock award issuances by Holdings

4,717

4,717

4,717
Exchange of interests 163,659
74,341
74,341
74,341
Distributions to non-controlling interests (203,972 )

(83,233 ) (83,233 ) (1,094 ) (84,327 )
Redemption adjustment on non-controlling interests 1,051

(1,051 ) (1,051 )
(1,051 )
Other 175

103
103
35
138
Balance at March 31, 2018 $ 607,474
0
$ 0
$ 952,825
$ (100,225 ) $ 852,600
$ 112,677
$ 965,277

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

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

Select Medical Holdings Corporation

Select Medical Corporation

For the Three Months Ended March 31,

For the Three Months Ended March 31,

2016

2017

2016

2017

Operating activities

Net income

$
59,944

$
23,463

$
59,944

$
23,463

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

Distributions from unconsolidated subsidiaries

8,305

4,911

8,305

4,911

Depreciation and amortization

34,517

42,539

34,517

42,539

Provision for bad debts

16,397

20,625

16,397

20,625

Equity in earnings of unconsolidated subsidiaries

(4,652
)
(5,521
)
(4,652
)
(5,521
)
Loss on early retirement of debt

773

6,527

773

6,527

Gain on sale of assets and businesses

(30,393
)
(4,609
)
(30,393
)
(4,609
)
Impairment of equity investment

5,339

—

5,339

—

Stock compensation expense

3,976

4,586

3,976

4,586

Amortization of debt discount, premium and issuance costs

3,691

3,422

3,691

3,422

Deferred income taxes

(3,475
)
(3,425
)
(3,475
)
(3,425
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

(39,164
)
(138,113
)
(39,164
)
(138,113
)
Other current assets

7,560

(7,621
)
7,560

(7,621
)
Other assets

(891
)
(48
)
(891
)
(48
)
Accounts payable

(21,322
)
412

(21,322
)
412

Accrued expenses

51,193

(18,429
)
51,193

(18,429
)
Income taxes

19,370

15,420

19,370

15,420

Net cash provided by (used in) operating activities

111,168

(55,861
)
111,168

(55,861
)

Investing activities

Acquisition of businesses, net of cash acquired

(412,883
)
(9,566
)
(412,883
)
(9,566
)
Purchases of property and equipment

(46,768
)
(50,653
)
(46,768
)
(50,653
)
Investment in businesses

(623
)
(500
)
(623
)
(500
)
Proceeds from sale of assets and businesses

62,600

19,512

62,600

19,512

Net cash used in investing activities

(397,674
)
(41,207
)
(397,674
)
(41,207
)

Financing activities

Borrowings on revolving facilities

190,000

530,000

190,000

530,000

Payments on revolving facilities

(175,000
)
(415,000
)
(175,000
)
(415,000
)
Proceeds from term loans

600,127

1,139,822

600,127

1,139,822

Payments on term loans

(226,962
)
(1,170,817
)
(226,962
)
(1,170,817
)
Revolving facility debt issuance costs

—

(3,887
)
—

(3,887
)
Borrowings of other debt

6,727

6,571

6,727

6,571

Principal payments on other debt

(4,464
)
(5,275
)
(4,464
)
(5,275
)
Repayments of bank overdrafts

(28,615
)
(17,062
)
(28,615
)
(17,062
)
Repurchase of common stock

—

(156
)
—

—

Dividends paid to Holdings

—

—

—

(156
)
Proceeds from exercise of stock options

21

617

—

—

Equity investment by Holdings

—

—

21

617

Proceeds from issuance of non-controlling interests

—

2,094

—

2,094

Purchase of non-controlling interests

(1,294
)
(50
)
(1,294
)
(50
)
Distributions to non-controlling interests

(3,061
)
(3,607
)
(3,061
)
(3,607
)
Net cash provided by financing activities

357,479

63,250

357,479

63,250

Net increase (decrease) in cash and cash equivalents

70,973

(33,818
)
70,973

(33,818
)

Cash and cash equivalents at beginning of period

14,435

99,029

14,435

99,029

Cash and cash equivalents at end of period

$
85,408

$
65,211

$
85,408

$
65,211

Supplemental Information

Cash paid for interest

$
21,544

$
38,565

$
21,544

$
38,565

Cash paid for taxes

$
1,209

$
1,207

$
1,209

$
1,207

Select Medical Holdings Corporation Select Medical Corporation
For the Three Months Ended March 31, For the Three Months Ended March 31,
2017 2018 2017 2018
Operating activities

Net income $ 23,463
$ 43,982
$ 23,463
$ 43,982
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries 4,911
1,364
4,911
1,364
Depreciation and amortization 42,539
46,771
42,539
46,771
Provision for bad debts 781
85
781
85
Equity in earnings of unconsolidated subsidiaries (5,521 ) (4,697 ) (5,521 ) (4,697 )
Loss on extinguishment of debt 6,527
412
6,527
412
Gain on sale of assets and businesses (4,609 ) (513 ) (4,609 ) (513 )
Stock compensation expense 4,586
4,927
4,586
4,927
Amortization of debt discount, premium and issuance costs 3,422
3,136
3,422
3,136
Deferred income taxes (3,425 ) 78
(3,425 ) 78
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable (118,269 ) (45,811 ) (118,269 ) (45,811 )
Other current assets (7,621 ) (8,945 ) (7,621 ) (8,945 )
Other assets (48 ) 16,633
(48 ) 16,633
Accounts payable 412
(6,552 ) 412
(6,552 )
Accrued expenses (18,429 ) (11,981 ) (18,429 ) (11,981 )
Income taxes 15,420
11,838
15,420
11,838
Net cash provided by (used in) operating activities (55,861 ) 50,727
(55,861 ) 50,727
Investing activities

Business combinations, net of cash acquired (9,566 ) (515,359 ) (9,566 ) (515,359 )
Purchases of property and equipment (50,653 ) (39,617 ) (50,653 ) (39,617 )
Investment in businesses (500 ) (1,754 ) (500 ) (1,754 )
Proceeds from sale of assets and businesses 19,512
691
19,512
691
Net cash used in investing activities (41,207 ) (556,039 ) (41,207 ) (556,039 )
Financing activities

Borrowings on revolving facilities 530,000
165,000
530,000
165,000
Payments on revolving facilities (415,000 ) (150,000 ) (415,000 ) (150,000 )
Proceeds from term loans 1,139,822
779,904
1,139,822
779,904
Payments on term loans (1,170,817 ) (2,875 ) (1,170,817 ) (2,875 )
Revolving facility debt issuance costs (3,887 ) (1,333 ) (3,887 ) (1,333 )
Borrowings of other debt 6,571
11,600
6,571
11,600
Principal payments on other debt (5,275 ) (5,909 ) (5,275 ) (5,909 )
Repurchase of common stock (156 ) (122 ) —
—
Dividends paid to Holdings —
—
(156 ) (122 )
Proceeds from exercise of stock options 617
738
—
—
Equity investment by Holdings —
—
617
738
Decrease in overdrafts (17,062 ) (7,916 ) (17,062 ) (7,916 )
Proceeds from issuance of non-controlling interests 2,094
—
2,094
—
Distributions to non-controlling interests (3,657 ) (286,641 ) (3,657 ) (286,641 )
Net cash provided by financing activities 63,250
502,446
63,250
502,446
Net decrease in cash and cash equivalents (33,818 ) (2,866 ) (33,818 ) (2,866 )
Cash and cash equivalents at beginning of period 99,029
122,549
99,029
122,549
Cash and cash equivalents at end of period $ 65,211
$ 119,683
$ 65,211
$ 119,683
Supplemental Information

Cash paid for interest $ 38,565
$ 35,233
$ 38,565
$ 35,233
Cash paid for taxes $ 1,207
$ 376
$ 1,207
$ 376
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.

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”) ~~and~~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 March 31, ~~2017,~~2018, and for the three month periods ended March 31, ~~2016~~2017 and ~~2017,~~2018, have been prepared ~~in accordance with~~pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted ~~accounting principles~~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 months ended March 31, ~~2017~~2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed consolidated financial statements of Holdings include the accounts of its wholly owned subsidiary, Select. Holdings conducts substantially all of its business through Select and its subsidiaries.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying2018. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2016~~2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~23, 2017.~~

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 ~~contingent assets and liabilities,~~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

Leases

In February ~~2017,~~2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ~~2017~~-~~05,~~2016‑02, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset. The standard provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

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

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~Income~~ ~~Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~ Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~. This ASU includes a lessee accounting model that recognizes two types of ~~leases;~~leases: finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For ~~short-term~~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~~straight‑line basis over the respective lease term.

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

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

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

The Company will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and ~~December 2016,~~internal controls in order to account for its leases under the ~~FASB issued ASU 2014-09,~~ new standard.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers~~, ASU 2016-08,~~

Beginning in May 2014, the FASB issued several Accounting Standards Updates which established Topic 606, Revenue from Contracts with Customers ~~Principal versus Agent Considerations~~~~, ASU 2016-10,~~ ~~Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing~~~~, ASU 2016-12,~~ ~~Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients~~~~, and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer~~ ~~(collectively “the standards”), respectively, which supersede most of~~ (the ~~current~~“standard”). This standard supersedes existing revenue recognition ~~requirements.~~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. ~~New~~

The Company adopted the new 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 March 31, 2017
	As Reported			As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,111,361		$	1,091,517		$	(19,844	)
Bad debt expense	20,625			781			(19,844		)

Condensed Consolidated Statements of Cash Flows
Provision for bad debts	20,625			781			(19,844		)
Changes in accounts receivable	(138,113		)	(118,269		)	19,844

_____________________________________________________________

(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 ~~are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however,~~ in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a retrospective or cumulative effect transition method.

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

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

~~Recently Adopted Accounting Pronouncements~~

Note 7.

Income Taxes

In ~~November 2015,~~October 2016, the FASB issued ASU ~~No. 2015-17,~~ ~~Balance Sheet Classification~~2016-16, IncomeTaxes (Topic 740), and Intra-Entity Transfers of ~~Deferred Taxes~~~~, which changed~~Assets Other Than Inventory. Previous GAAP prohibited the ~~presentation~~recognition of ~~deferred income taxes. The standard changed the presentation of~~current and deferred income taxes ~~through~~for an intra-entity asset transfer until the ~~requirement that all deferred~~asset has been sold to an outside party. The ASU requires an entity to recognize the income tax ~~liabilities and assets be classified as noncurrent in a classified statement~~consequences of ~~financial position.~~an intra‑entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the ~~standard on~~guidance effective January 1, ~~2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted.~~2018. Adoption of the ~~new standard impacted~~guidance did not have a material impact on the Company’s ~~previously reported results as follows:~~consolidated financial statements.

December 31, 2016

As Reported

As Adjusted

(in thousands)

Current deferred tax asset

$
45,165

$
—

Total current assets

808,068

762,903

Other assets

152,548

173,944

Total assets

4,944,395

4,920,626

Non-current deferred tax liability

222,847

199,078

Total liabilities

3,616,335

3,592,566

Total liabilities and equity

4,944,395

4,920,626

~~Reclassifications~~

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the prior year balance sheet presentation has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, ~~Balance Sheet Classification of Deferred Taxes.~~

3. Acquisitions

~~Physiotherapy~~

U.S. HealthWorks Acquisition

On ~~March 4, 2016, Select~~February 1, 2018, Concentra Inc. (“Concentra”) acquired ~~100%~~all of the issued and outstanding ~~equity securities~~shares of ~~Physiotherapy Associates Holdings,~~stock of U.S. HealthWorks, Inc. (“~~Physiotherapy”~~U.S. HealthWorks”), an occupational medicine and urgent care service provider, pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) ~~for $406.3 million, net~~dated as of ~~$12.3~~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 three months ended March 31, 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, ~~acquired.~~

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 ~~Physiotherapy~~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 ~~value~~values in accordance with the provisions of Accounting Standards Codification ~~(“ASC”)~~Topic 805, Business Combinations. ~~During~~The Company is in the ~~three months ended March 31, 2017,~~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 ~~finalized the~~expects to complete its purchase price ~~allocation.~~allocation activities by December 31, 2018.

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

Cash and cash equivalents

$
12,340

Identifiable tangible assets, excluding cash and cash equivalents

87,832

Identifiable intangible assets

32,484

Goodwill

343,187

Total assets

475,843

Total liabilities

54,685

Acquired non-controlling interests

2,514

Net assets acquired

418,644

Less: Cash and cash equivalents acquired

(12,340
)
Net cash paid

$
406,304

~~Goodwill~~



Identifiable tangible assets	$	184,357
Identifiable intangible assets	105,000
Goodwill	535,595
Total assets	824,952
Total liabilities	71,952
Consideration given	$	753,000

A preliminary estimate for goodwill of ~~$343.2~~$535.6 million has been recognized infor 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 ~~Physiotherapy’s~~U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the ~~outpatient rehabilitation~~Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, ~~Physiotherapy~~U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of ~~$8.8~~$83.1 million, which the Company will deduct through ~~2030.~~

2032.

For the period February 1, 2018 through March 31, 2018, U.S. HealthWorks had net operating revenues of $89.9 million which is reflected in the Company’s consolidated statements of operations. Due to the ~~integration~~integrated nature of ~~Physiotherapy into~~ our ~~outpatient rehabilitation~~ operations, it is not practicable to separately identify ~~net revenue and~~ earnings of ~~Physiotherapy~~U.S. HealthWorks on a stand-alone basis.

Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisition of ~~Physiotherapy~~U.S. HealthWorks occurred on January 1, ~~2015.~~2017. These results are not necessarily indicative of results of future operations nor of the results that would have ~~actually~~ occurred had the acquisition been consummated on the aforementioned date.



	Three Months Ended March 31,
	2017		2018
	(in thousands, except per share amounts)
Net revenue	$	1,228,484	$	1,300,544
Net income	17,685		45,677
Net income attributable to the Company	7,827		34,538
Income per common share:
Basic	$	0.06	$	0.26
Diluted	$	0.06	$	0.26

The ~~Company’s results of operations for the three months ended March 31, 2017 include Physiotherapy for the entire period and there are no~~ pro forma ~~adjustments; therefore, no pro forma~~financial information is ~~presented for~~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.

For the Three Months
Ended March 31, 2016

(in thousands, except per
share amounts)

Net revenue

$
1,141,860

Net income

53,014

Income per common share:

Basic

$
0.40

Diluted

$
0.40

The net income tax impact was calculated at a statutory rate, as if ~~Physiotherapy~~U.S. HealthWorks had been a subsidiary of the Company as of January 1, ~~2015. Pro~~2017.

For the three months ended March 31, 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 $5.8 million. For the three months ended March 31, 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.

4.Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the three months ended March 31, ~~2016 were adjusted to exclude approximately $3.2 million~~2018:



	Long Term Acute Care		Inpatient Rehabilitation		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	—		—		345			535,595		535,940
Sold	—		—		(141		)	—		(141		)
Balance as of March 31, 2018	$	1,045,220	$	415,528	$	647,726		$	1,210,137	$	3,318,611

See Note 3 for details of ~~Physiotherapy acquisition costs.~~

~~Other Acquisitions~~

~~The Company completed acquisitions within our Concentra and outpatient rehabilitation segments~~the goodwill acquired during the ~~three months ended~~period.

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							March 31, 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		19,159		—			19,159
Accreditations	1,895		—			1,895		1,895		—			1,895
Finite-lived intangible assets:
Trademarks	—		—			—		5,000		(417		)	4,583
Customer relationships	143,953		(38,281		)	105,672		243,969		(43,886		)	200,083
Favorable leasehold interests	13,295		(4,319		)	8,976		13,279		(4,742		)	8,537
Non-compete agreements	28,023		(3,900		)	24,123		28,130		(4,438		)	23,692
Total identifiable intangible assets	$	373,019	$	(46,500	)	$	326,519	$	478,130	$	(53,483	)	$	424,647

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, ~~2017. Consideration given for these acquisitions consisted~~2018, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of ~~$9.6 million of cash, net of cash received. The assets received in these acquisitions consisted principally of accounts receivable, property~~1.5 years and ~~equipment, identifiable intangible assets, and goodwill, of which $8.6 million and $0.3 million of goodwill was recognized in our Concentra and outpatient rehabilitation reporting units,~~8.9 years, respectively.

4.~~Intangible Assets and Liabilities~~

~~The Company’s goodwill and identifiable intangible assets and liabilities consist of the following:~~

December 31,

March 31,

2016

2017

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

(in thousands)

Goodwill

$
2,751,000

$
—

$
2,751,000

$
2,759,764

$
—

$
2,759,764

Identifiable intangibles—Indefinite lived assets:

Trademarks

166,698

—

166,698

166,698

—

166,698

Certificates of need

17,026

—

17,026

17,152

—

17,152

Accreditations

2,235

—

2,235

2,143

—

2,143

Identifiable intangibles—Finite lived assets:

Customer relationships

142,198

(23,185
)
119,013

142,890

(26,908
)
115,982

Favorable leasehold interests

13,089

(2,317
)
10,772

13,177

(2,796
)
10,381

Non-compete agreements

26,655

(1,837
)
24,818

27,057

(2,337
)
24,720

Total identifiable intangible assets

$
367,901

$
(27,339
)
$
340,562

$
369,117

$
(32,041
)
$
337,076

Identifiable intangibles—Finite lived liabilities:

Unfavorable leasehold interests

$
5,139

$
(1,410
)
$
3,729

$
5,343

$
(1,690
)
$
3,653

The Company’s customer relationships, ~~and~~ non-compete agreements, and U.S. HealthWorks trademarks amortize over their estimated useful lives. Amortization expense was ~~$3.8~~$4.4 million and ~~$4.4~~$6.4 million for the three months ended March 31, ~~2016~~2017 and ~~2017,~~2018, respectively. ~~Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million annually.~~

The Company’s ~~favorable~~ leasehold ~~interest assets~~interests have finite lives and ~~unfavorable leasehold interest liabilities~~ are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. ~~The Company’s unfavorable leasehold interests are presented as part of accrued other and other non-current liabilities on the condensed consolidated balance sheets.~~

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.6 years, respectively.

~~The changes in goodwill for the three months ended March 31, 2017 are as follows:~~

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Total

(in thousands)

Balance as of December 31, 2016

$
1,447,406

$
643,557

$
660,037

$
2,751,000

Acquired

—

311

8,627

8,938

Measurement period adjustment

(342
)
168

—

(174
)
Balance as of March 31, 2017

$
1,447,064

$
644,036

$
668,664

$
2,759,764

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

5.~~Long-Term Debt and Notes Payable~~


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.

~~The~~

As of March 31, 2018, the Company’s long-term debt and notes payable ~~consist of the following:~~

December 31,
2016

March 31,
2017

(in thousands)

Select 6.375% senior notes(1)

$
702,545

$
702,966

Select credit facilities:

Select revolving facility

220,000

335,000

Select term loan(2)

1,122,203

1,122,052

Other—Select

22,688

24,842

Total Select debt

2,067,436

2,184,860

Less: Select current maturities

8,996

21,641

Select long-term debt maturities

$
2,058,440

$
2,163,219

Concentra credit facilities:

Concentra term loans(3)

$
626,375

$
604,068

Other—Concentra

5,178

4,495

Total Concentra debt

631,553

608,563

Less: Concentra current maturities

4,660

372

Concentra long-term debt maturities

$
626,893

$
608,191

Total current maturities

$
13,656

$
22,013

Total long-term debt maturities

2,685,333

2,771,410

Total debt

$
2,698,989

$
2,793,423

are as follows (in thousands):

~~(1)~~ Includes unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

~~(2)~~ Includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

~~(3)~~ Includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

~~Maturities of Long-Term Debt and Notes Payable~~

~~Maturities~~



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	721		$	(6,074	)	$	704,647	$	720,650
Credit facilities:
Revolving facility	245,000		—			—			245,000		225,400
Term loans	1,138,500		(11,883		)	(11,946		)	1,114,671		1,151,308
Other	43,268		—			(519		)	42,749		42,749
Total Select debt	2,136,768		(11,162		)	(18,539		)	2,107,067		2,140,107
Concentra:
Credit facilities:
Term loans	1,414,175		(3,498		)	(23,021		)	1,387,656		1,427,384
Other	5,797		—			—			5,797		5,797
Total Concentra debt	1,419,972		(3,498		)	(23,021		)	1,393,453		1,433,181
Total debt	$	3,556,740	$	(14,660	)	$	(41,560	)	$	3,500,520	$	3,573,288

Principal maturities of the Company’s long-term debt and notes payable ~~for the period April 1, 2017 through~~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	—		—		—		—		245,000		—		245,000
Term loans	8,625		11,500		11,500		11,500		11,500		1,083,875		1,138,500
Other	9,218		3,207		25,285		221		—		5,337		43,268
Total Select debt	17,843		14,707		36,785		721,721		256,500		1,089,212		2,136,768
Concentra:
Credit facilities:
Term loans	—		—		5,719		12,365		1,156,091		240,000		1,414,175
Other	1,170		304		322		320		308		3,373		5,797
Total Concentra debt	1,170		304		6,041		12,685		1,156,399		243,373		1,419,972
Total debt	$	19,013	$	15,011	$	42,826	$	734,406	$	1,412,899	$	1,332,585	$	3,556,740

As of December 31, 2017, the Company’s long-term debt and ~~for the years after 2017~~notes payable are ~~approximately~~ as ~~follows:~~

Select

Concentra

Total

(in thousands)

April 1, 2017 — December 31, 2017

$
18,072

$
343

$
18,415

2018

14,976

128

15,104

2019

23,327

144

23,471

2020

11,568

3,177

14,745

2021

721,514

6,680

728,194

2022 and beyond

1,430,385

613,198

2,043,583

Total principal

2,219,842

623,670

2,843,512

Unamortized discounts and premiums

(13,051
)
(2,641
)
(15,692
)
Unamortized debt issuance costs

(21,931
)
(12,466
)
(34,397
)
Total

$
2,184,860

$
608,563

$
2,793,423

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 ~~6, 2017,~~22, 2018, Select entered into ~~a new~~Amendment No. 1 to the senior secured credit agreement (the “Select credit agreement”) ~~that provides~~dated March 6, 2017. The Select credit agreement originally provided for $1.6 billion in senior secured credit facilities ~~comprising a~~comprised of $1.15 billion ~~seven-year~~in term ~~loan~~loans (the “Select term ~~loan”~~loans”) and a $450.0 million ~~five-year~~ revolving credit facility (the “Select revolving facility” and together with the Select term ~~loan,~~loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Amendment No. 1 (i) decreases 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) decreases 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) extends the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) makes 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 ~~Select~~Concentra first lien credit ~~facilities to:~~agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the 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) ~~refinance~~an additional $555.0 million in ~~full the series E~~ tranche B term loans ~~due June 1, 2018,~~that, along with the ~~series F~~existing tranche B term loans ~~due March 31, 2021, and~~under the ~~revolving facility maturing March~~Concentra first lien credit agreement, have a maturity date of June 1, ~~2018 under its then existing credit facilities;~~2022 (collectively, the “Concentra first lien term loan”) and (ii) ~~pay fees and expenses in connection with~~an additional $25.0 million to the ~~refinancing.~~

~~Borrowings~~$50.0 million, five-year revolving credit facility under the ~~Select~~terms of the existing Concentra first lien credit ~~facilities~~agreement. The tranche B term loans bear interest at a rate equal ~~to: (i) in~~to the ~~case of the Select term loan,~~ Adjusted LIBO Rate (as defined in the ~~Select~~Concentra first lien credit agreement) plus ~~3.50%~~2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

Concentra Second Lien Credit Agreement

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

The Concentra second lien credit agreement provides 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 ~~Select~~Concentra second lien credit agreement) plus ~~2.50%~~5.50% (subject to an Alternate Base Rate floor of 2.00%)~~; and (ii) in~~.

In the ~~case~~event that, on or prior to February 1, 2019, Concentra prepays any of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

~~The Select~~Concentra second lien term loan ~~amortizes in equal quarterly installments in amounts equal~~ to ~~0.25%~~refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate ~~original~~ principal amount of the ~~Select~~Concentra second lien term loan ~~commencing on June 30, 2017. The balance~~prepaid. If Concentra prepays any of the ~~Select~~Concentra second lien term loan ~~will be payable~~to refinance such term loans on ~~March 8, 2024; however, if~~or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the ~~Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021,~~aggregate principal amount of the ~~maturity date for the Select~~Concentra second lien term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

~~Select~~prepaid.

Concentra will be required to prepay borrowings under the ~~Select credit facilities~~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 ~~to the extent required,~~ the payment of certain indebtedness secured by liens, ~~having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement,~~ (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and ~~(ii)~~(iii) 50% of excess cash flow (as defined in the ~~Select~~Concentra second lien credit agreement) if ~~Select’s~~Concentra’s leverage ratio is greater than ~~4.50~~4.25 to 1.00 and 25% of excess cash flow if ~~Select’s~~Concentra’s leverage ratio is less than or equal to ~~4.50~~4.25 to 1.00 and greater than ~~4.00~~3.75 to 1.00, in each case, reduced by the aggregate amount of term loans ~~revolving loans~~ and certain ~~other~~ debt optionally prepaid during the applicable fiscal ~~year. Select~~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 ~~Select’s~~Concentra’s leverage ratio is less than or equal to ~~4.00~~3.75 to 1.00.

The ~~Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select~~Concentra second lien credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

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

~~Borrowings~~

The borrowings under the ~~Select credit facilities~~Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and ~~substantially all of Select’s current~~certain domestic subsidiaries of Concentra and will be guaranteed by ~~substantially all of Select’s~~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 ~~Select’s~~Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of ~~Select’s~~Concentra’s capital stock, the capital stock of ~~Select’s~~certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of ~~Select’s~~Concentra’s foreign subsidiaries, ~~held directly by Select or a domestic subsidiary.~~

if any.

Loss on Early Retirement of Debt

~~During~~

The amendments to the ~~three months ended March 31, 2017, the Company refinanced its senior secured~~Select credit facilities ~~which consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021,~~ and ~~the revolving facility maturing March 1, 2018, which~~Concentra credit facilities resulted in losses on early retirement of debt ~~of $19.7 million.~~

~~Excess Cash Flow Payment~~

~~On March 1, 2017, Concentra made a principal prepayment of $23.1~~totaling $10.3 million ~~associated with~~for the ~~Concentra first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow.~~

~~6. Fair Value~~

Financial instruments include cash and cash equivalents, notes payable, and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

~~The face values, carrying values, and fair values of the Company’s 6.375% senior notes and credit facilities are as follows:~~

December 31, 2016

March 31, 2017

Face
Value

Carrying
Value

Fair
Value

Face
Value

Carrying
Value

Fair
Value

(in thousands)

Select 6.375% senior notes(1)

$
710,000

$
702,545

$
710,000

$
710,000

$
702,966

$
715,325

Select credit facilities(2)

1,367,751

1,342,203

1,370,460

1,485,000

1,457,052

1,474,013

Concentra credit facilities(3)

642,239

626,375

644,648

619,175

604,068

622,271

~~(1)~~ ~~The carrying value includes an unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and~~three months ended March 31, ~~2017, respectively,~~2018. The losses on early retirement of debt consisted of $0.4 million of debt extinguishment losses and ~~unamortized~~$9.9 million of debt ~~issuance costs of $8.5 million and $8.0 million at December 31, 2016 and~~modification losses during the three months ended March 31, ~~2017, respectively.~~

~~(2)~~ The carrying value includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

~~(3)~~ The carrying value includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

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 debt was based on quoted market prices.

2018.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value ~~hierarchy.~~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.

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 ~~consist of:~~include long term acute care, inpatient rehabilitation, outpatient rehabilitation, and Concentra. Prior year results for the three months ended March 31, 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 accounting policies of the segments are the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2016.~~ The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Physiotherapy~~ acquisition costs 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 March 31, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Net revenue

$
598,954

$
238,082

$
250,877

$
417

$
1,088,330

Adjusted EBITDA

86,756

28,879

34,153

(21,173
)
128,615

Total assets(2)

2,434,405

974,264

1,310,317

103,878

4,822,864

Capital expenditures

33,675

4,974

3,210

4,909

46,768

Three Months Ended March 31, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Net revenue

$
598,787

$
255,817

$
256,149

$
608

$
1,111,361

Adjusted EBITDA

88,665

31,351

42,592

(23,718
)
138,890

Total assets

2,622,220

980,261

1,297,672

102,784

5,002,937

Capital expenditures

32,357

6,673

8,686

2,937

50,653



	Three Months Ended March 31,
	2017			2018
	(in thousands)
Net operating revenues:⁽¹⁾
Long term acute care	$	445,123		$	464,676
Inpatient rehabilitation	144,825			174,774
Outpatient rehabilitation	250,371			257,381
Concentra	250,589			356,116
Other	609			17
Total Company	$	1,091,517		$	1,252,964
Adjusted EBITDA:
Long term acute care	$	72,337		$	72,972
Inpatient rehabilitation	16,328			26,776
Outpatient rehabilitation	31,351			30,525
Concentra	42,592			57,797
Other	(23,718		)	(24,838		)
Total Company	$	138,890		$	163,232
Total assets:
Long term acute care	$	1,978,226		$	1,862,791
Inpatient rehabilitation	643,994			877,750
Outpatient rehabilitation	980,261			973,122
Concentra	1,297,672			2,143,405
Other	102,784			111,575
Total Company	$	5,002,937		$	5,968,643
Purchases of property and equipment, net:
Long term acute care	$	10,943		$	10,472
Inpatient rehabilitation	21,414			12,917
Outpatient rehabilitation	6,673			7,338
Concentra	8,686			6,621
Other	2,937			2,269
Total Company	$	50,653		$	39,617

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



	Three Months Ended March 31, 2017
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	72,337		$	16,328		$	31,351		$	42,592		$	(23,718	)
Depreciation and amortization	(13,042		)	(5,458		)	(6,340		)	(16,123		)	(1,576		)
Stock compensation expense	—			—			—			(306		)	(4,280		)
Income (loss) from operations	$	59,295		$	10,870		$	25,011		$	26,163		$	(29,574	)	$	91,765
Loss on early retirement of debt																(19,719		)
Equity in earnings of unconsolidated subsidiaries																5,521
Non-operating loss																(49		)
Interest expense																(40,853		)
Income before income taxes																$	36,665



	Three Months Ended March 31, 2018
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)
Depreciation and amortization	(11,058		)	(5,722		)	(6,637		)	(21,147		)	(2,207		)
Stock compensation expense	—			—			—			(211		)	(4,716		)
U.S. HealthWorks acquisition costs	—			—			—			(2,936		)	—
Income (loss) from operations	$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																4,697
Non-operating gain																399
Interest expense																(47,163		)
Income before income taxes																$	56,276

Three Months Ended March 31, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
86,756

$
28,879

$
34,153

$
(21,173
)

Depreciation and amortization

(13,893
)
(4,036
)
(15,376
)
(1,212
)

Stock compensation expense

—

—

(192
)
(3,784
)

Physiotherapy acquisition costs

—

—

—

(3,236
)

Income (loss) from operations

$
72,863

$
24,843

$
18,585

$
(29,405
)
$
86,886

Loss on early retirement of debt

(773
)
Equity in earnings of unconsolidated subsidiaries

4,652

Non-operating gain

25,087

Interest expense

(38,848
)
Income before income taxes

$
77,004

Three Months Ended March 31, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
88,665

$
31,351

$
42,592

$
(23,718
)

Depreciation and amortization

(18,500
)
(6,340
)
(16,123
)
(1,576
)

Stock compensation expense

—

—

(306
)
(4,280
)

Income (loss) from operations

$
70,165

$
25,011

$
26,163

$
(29,574
)
$
91,765

Loss on early retirement of debt

(19,719
)
Equity in earnings of unconsolidated subsidiaries

5,521

Non-operating loss

(49
)
Interest expense

(40,853
)
Income before income taxes

$
36,665


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

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 months ended March 31, 2017 and 2018:



	Three Months Ended March 31, 2017
	Long Term Acute Care		Inpatient Rehabilitation		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	236,437	$	57,504	$	36,698	$	545
Non-Medicare	206,625		47,243		183,803		247,801
Total patient services revenues	443,062		104,747		220,501		248,346
Other revenues	2,061		40,078		29,870		2,243
Total net operating revenues	$	445,123	$	144,825	$	250,371	$	250,589



	Three Months Ended March 31, 2018
	Long Term Acute Care		Inpatient Rehabilitation		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	240,992	$	72,841	$	38,190	$	628
Non-Medicare	220,006		61,902		188,900		353,252
Total patient services revenues	460,998		134,743		227,090		353,880
Other revenues	3,678		40,031		30,291		2,236
Total net operating revenues	$	464,676	$	174,774	$	257,381	$	356,116

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.

~~(1)~~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 long term acute care and inpatient rehabilitation 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 ~~segment includes~~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 ~~results~~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 ~~Company’s~~ contract ~~therapy businesses through March~~are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.


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, ~~2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result~~2017. Reconciliations of the ~~sale of our contract therapy businesses.~~

~~(2)~~ ~~Reflects~~statutory federal income tax rate to the ~~retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets~~effective income tax rate are as ~~of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.~~

8.follows:

Three Months Ended March 31,
2017 2018
Federal income tax at statutory rate 35.0 % 21.0 %
State and local income taxes, less federal income tax benefit 3.9
4.7
Permanent differences 0.8
1.5
Valuation allowance (0.7 ) 0.8
Uncertain tax positions 0.2
0.3
Non-controlling interest (2.4 ) (2.7 )
Stock-based compensation (0.7 ) (5.4 )
Other (0.1 ) 1.6
Total effective income tax rate 36.0 % 21.8 %

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 March 31,

2016

2017

(in thousands, except per share amounts)

Numerator:

Net income attributable to Select Medical Holdings Corporation

$
54,833

$
15,870

Less: Earnings allocated to unvested restricted stockholders

1,582

507

Net income available to common stockholders

$
53,251

$
15,363

Denominator:

Weighted average shares—basic

127,500

128,464

Effect of dilutive securities:

Stock options

81

164

Weighted average shares—diluted

127,581

128,628

Basic income per common share:

$
0.42

$
0.12

Diluted income per common share:

$
0.42

$
0.12

Three Months Ended March 31,
2017 2018
(in thousands, except per share amounts)
Numerator:

Net income attributable to Select Medical Holdings Corporation $ 15,870
$ 33,739
Less: Earnings allocated to unvested restricted stockholders 507
1,111
Net income available to common stockholders $ 15,363
$ 32,628
Denominator:

Weighted average shares—basic 128,464
129,691
Effect of dilutive securities:

Stock options 164
125
Weighted average shares—diluted 128,628
129,816
Basic income per common share: $ 0.12
$ 0.25
Diluted income per common share: $ 0.12
$ 0.25

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 ~~subject to~~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 ~~$2.0~~the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million ~~per medical incident for professional liability claims~~to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and ~~$2.0 million per occurrence for general liability claims.~~may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

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

Evansville ~~Litigation~~Litigation.

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

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

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the ~~plaintiff-relators~~plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all ~~non-retaliation~~non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However,

the District Court ruled that the ~~plaintiff-relators~~plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ 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 ~~opposed.~~ 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~~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,~~14‑cv‑00172‑TAV‑CCS, which named as defendants Select, Select Specialty ~~Hospital—Knoxville,~~Hospital-Knoxville, Inc. (“~~SSH-Knoxville”~~SSH‑Knoxville”), Select Specialty ~~Hospital—North~~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.~~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~~first‑to‑file bar required dismissal of ~~plaintiff-relator’s~~plaintiff‑relator’s claims. Under the ~~first-to-file~~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~~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~~plaintiff‑relator’s claims must be dismissed under the public disclosure bar, and because the ~~plaintiff-relator~~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~~plaintiff‑relator’s lawsuit in its entirety. The District Court ruled that the ~~first-to-file~~first‑to‑file bar precludes all but one of the ~~plaintiff-relator’s~~plaintiff‑relator’s claims, and that the remaining claim must also be dismissed because the ~~plaintiff-relator~~plaintiff‑relator failed to plead it with sufficient particularity. In July 2016, the ~~plaintiff-relator~~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~~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~~plaintiff‑relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow ~~plaintiff-relator~~plaintiff‑relator to supplement his Complaint, ~~which~~but the ~~defendants have opposed.~~ 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.

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~~Litigation.

On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty ~~Hospital—Wilmington,~~Hospital-Wilmington, Inc. (“~~SSH-Wilmington”~~SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. ~~16-347-LPS.~~16‑347‑LPS. The Complaint was initially filed under seal onin May ~~12,~~ 2016 by a former chief nursing officer at ~~SSH-Wilmington~~SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention onin January ~~13,~~ 2017. The corporate defendants were served onin March 6, 2017. In the complaint, the ~~plaintiff-relator~~plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at ~~SSH-Wilmington,~~SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at ~~SSH-Wilmington.~~ SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, 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 defendant’s 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 ~~this action if the plaintiff-relator pursues it,~~these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

~~Construction Commitments~~

~~At March 31,~~

Contract Therapy Subpoena

On May 18, 2017, the Company ~~had outstanding commitments under construction contracts related~~received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to ~~new construction, improvements,~~the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and ~~renovations totaling approximately $69.9 million.~~

~~10.~~other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

Northern District of Alabama Investigation

On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. In March 2018, the U.S. Attorney’s Office for the Northern District of Alabama informed the Company that it has closed its investigation.

11. Condensed Consolidating Financial Information ~~for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes~~

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”) ~~which is~~. The Subsidiary Guarantors are defined as ~~a subsidiary~~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 at December 31, 2016 and March 31, 2017 and for the three months ended March 31, 2016 and March 31, 2017.~~

Concentra.

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

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

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, ~~2017~~2018

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Assets

Current Assets:

Cash and cash equivalents

$
72

$
6,836

$
3,405

$
54,898

$
—

$
65,211

Accounts receivable, net

—

442,132

125,079

124,309

—

691,520

Intercompany receivables

—

2,183,527

169,816

—

(2,353,343
) (a)
—

Prepaid income taxes

2,402

—

—

—

—

2,402

Other current assets

17,714

34,693

11,878

20,796

—

85,081

Total Current Assets

20,188

2,667,188

310,178

200,003

(2,353,343
)
844,214

Property and equipment, net

49,309

609,822

54,118

183,897

—

897,146

Investment in affiliates

4,513,416

100,095

—

—

(4,613,511
) (b) (c)
—

Goodwill

—

2,091,100

—

668,664

—

2,759,764

Identifiable intangible assets, net

—

108,545

—

228,531

—

337,076

Other assets

50,355

86,384

38,882

16,577

(27,461
) (d)
164,737

Total Assets

$
4,633,268

$
5,663,134

$
403,178

$
1,297,672

$
(6,994,315
)
$
5,002,937

Liabilities and Equity

Current Liabilities:

Bank overdrafts

$
22,299

$
—

$
—

$
—

$
—

$
22,299

Current portion of long-term debt and notes payable

20,506

502

633

372

22,013

Accounts payable

13,349

78,195

17,429

16,145

—

125,118

Intercompany payables

2,183,527

169,816

—

—

(2,353,343
) (a)
—

Accrued payroll

4,268

76,290

2,488

27,150

—

110,196

Accrued vacation

3,740

57,763

11,968

15,265

—

88,736

Accrued interest

19,390

—

4

2,164

—

21,558

Accrued other

38,937

62,607

9,780

31,856

—

143,180

Income taxes payable

—

—

—

5,399

—

5,399

Total Current Liabilities

2,306,016

445,173

42,302

98,351

(2,353,343
)
538,499

Long-term debt, net of current portion

1,482,768

525,263

155,188

608,191

—

2,771,410

Non-current deferred tax liability

—

135,640

667

86,883

(27,461
) (d)
195,729

Other non-current liabilities

42,755

56,617

6,849

35,987

—

142,208

Total Liabilities

3,831,539

1,162,693

205,006

829,412

(2,380,804
)
3,647,846

Redeemable non-controlling interests

—

—

9,899

452,781

—

462,680

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

931,661

—

—

—

—

931,661

Retained earnings (accumulated deficit)

(129,932
)
1,318,340

(40,858
)
6,668

(1,284,150
) (c)
(129,932
)
Subsidiary investment

—

3,182,101

142,123

5,137

(3,329,361
) (b)
—

Total Select Medical Corporation Stockholder’s Equity

801,729

4,500,441

101,265

11,805

(4,613,511
)
801,729

Non-controlling interests

—

—

87,008

3,674

—

90,682

Total Equity

801,729

4,500,441

188,273

15,479

(4,613,511
)
892,411

Total Liabilities and Equity

$
4,633,268

$
5,663,134

$
403,178

$
1,297,672

$
(6,994,315
)
$
5,002,937



	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		$	5,502	$	3,749		$	110,359		$	—			$	119,683
Accounts receivable	—			474,559		139,693			192,139			—				806,391
Intercompany receivables	—			1,575,611		58,914			—			(1,634,525		)	(a)	—
Prepaid income taxes	18,382			—		—			2,888			—				21,270
Other current assets	18,732			30,119		12,389			32,757			—				93,997
Total Current Assets	37,187			2,085,791		214,745			338,143			(1,634,525		)		1,041,341
Property and equipment, net	37,668			622,253		82,697			230,865			—				973,483
Investment in affiliates	4,534,700			130,556		—			—			(4,665,256		)	(b)(c)	—
Goodwill	—			2,108,474		—			1,210,137			—				3,318,611
Identifiable intangible assets, net	3			103,335		5,192			316,117			—				424,647
Other assets	33,702			104,140		34,907			48,143			(10,331		)	(e)	210,561
Total Assets	$	4,643,260		$	5,154,549	$	337,541		$	2,143,405		$	(6,310,112	)		$	5,968,643
Liabilities and Equity
Current Liabilities:
Overdrafts	$	21,547		$	—	$	—		$	—		$	—			$	21,547
Current portion of long-term debt and notes payable	19,372			623		1,298			1,206			—				22,499
Accounts payable	13,235			81,563		16,998			26,640			—				138,436
Intercompany payables	1,575,611			58,914		—			—			(1,634,525		)	(a)	—
Accrued payroll	5,248			81,902		2,338			46,073			—				135,561
Accrued vacation	4,368			60,577		13,363			27,017			—				105,325
Accrued interest	16,594			7		13			11,974			—				28,588
Accrued other	39,010			61,671		14,262			48,198			—				163,141
Income taxes payable	2,417			—		—			8,217			—				10,634
Total Current Liabilities	1,697,402			345,257		48,272			169,325			(1,634,525		)		625,731
Long-term debt, net of current portion	2,055,664			108		30,002			1,392,247			—				3,478,021
Non-current deferred tax liability	—			89,619		774			44,958			(10,331		)	(e)	125,020
Other non-current liabilities	37,594			58,098		8,584			62,844			—				167,120
Total Liabilities	3,790,660			493,082		87,632			1,669,374			(1,644,856		)		4,395,892
Redeemable non-controlling interests	—			—		—			19,619			587,855			(d)	607,474
Stockholders’ Equity:
Common stock	0			—		—			—			—				0
Capital in excess of par	952,825			—		—			—			—				952,825
Retained earnings (accumulated deficit)	(100,225		)	1,441,767		(27,180		)	(4,059		)	(1,410,528		)	(c)(d)	(100,225		)
Subsidiary investment	—			3,219,700		277,089			454,301			(3,951,090		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	852,600			4,661,467		249,909			450,242			(5,361,618		)		852,600
Non-controlling interests	—			—		—			4,170			108,507			(d)	112,677
Total Equity	852,600			4,661,467		249,909			454,412			(5,253,111		)		965,277
Total Liabilities and Equity	$	4,643,260		$	5,154,549	$	337,541		$	2,143,405		$	(6,310,112	)		$	5,968,643

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

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

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

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

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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2018

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	17		$	701,764		$	195,067		$	356,116		$	—			$	1,252,964
Costs and expenses:
Cost of services	726			604,247			162,310			298,530			—				1,065,813
General and administrative	28,807			39			—			2,936			—				31,782
Depreciation and amortization	2,207			19,409			4,008			21,147			—				46,771
Total costs and expenses	31,740			623,695			166,318			322,613			—				1,144,366
Income (loss) from operations	(31,723		)	78,069			28,749			33,503			—				108,598
Other income and expense:
Intercompany interest and royalty fees	8,119			(4,146		)	(3,780		)	(193		)	—				—
Intercompany management fees	60,732			(49,574		)	(11,158		)	—			—				—
Loss on early retirement of debt	(2,229		)	—			—			(8,026		)	—				(10,255		)
Equity in earnings of unconsolidated subsidiaries	—			4,684			13			—			—				4,697
Non-operating gain	—			399			—			—			—				399
Interest expense	(31,071		)	(62		)	(156		)	(15,874		)	—				(47,163		)
Income before income taxes	3,828			29,370			13,668			9,410			—				56,276
Income tax expense (benefit)	514			11,848			180			(248		)	—				12,294
Equity in earnings of consolidated subsidiaries	30,425			8,267			—			—			(38,692		)	(a)	—
Net income	33,739			25,789			13,488			9,658			(38,692		)		43,982
Less: Net income attributable to non-controlling interests	—			—			4,666			5,577			—				10,243
Net income attributable to Select Medical Corporation	$	33,739		$	25,789		$	8,822		$	4,081		$	(38,692	)		$	33,739


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2018

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	33,739		$	25,789		$	13,488		$	9,658		$	(38,692	)	(a)	$	43,982
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	—			1,334			30			—			—				1,364
Depreciation and amortization	2,207			19,409			4,008			21,147			—				46,771
Provision for bad debts	—			42			—			43			—				85
Equity in earnings of unconsolidated subsidiaries	—			(4,684		)	(13		)	—			—				(4,697		)
Equity in earnings of consolidated subsidiaries	(30,425		)	(8,267		)	—			—			38,692			(a)	—
Loss on extinguishment of debt	115			—			—			297			—				412
Loss (gain) on sale of assets and businesses	—			(516		)	—			3			—				(513		)
Stock compensation expense	4,716			—			—			211			—				4,927
Amortization of debt discount, premium and issuance costs	1,837			—			—			1,299			—				3,136
Deferred income taxes	(503		)	1,383			(5		)	(797		)	—				78
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(28,661		)	(13,414		)	(3,736		)	—				(45,811		)
Other current assets	(5,890		)	(572		)	1,304			(3,787		)	—				(8,945		)
Other assets	3,788			(562		)	599			12,808			—				16,633
Accounts payable	731			(3,550		)	(870		)	(2,863		)	—				(6,552		)
Accrued expenses	(10,370		)	(2,366		)	434			321			—				(11,981		)
Income taxes	6,897			4,513			(111		)	539			—				11,838
Net cash provided by operating activities	6,842			3,292			5,450			35,143			—				50,727
Investing activities
Business combinations, net of cash acquired	—			(321		)	(22		)	(515,016		)	—				(515,359		)
Purchases of property and equipment	(2,269		)	(23,851		)	(6,876		)	(6,621		)	—				(39,617		)
Investment in businesses	—			(1,749		)	—			(5		)	—				(1,754		)
Proceeds from sale of assets and businesses	—			691			—			—			—				691
Net cash used in investing activities	(2,269		)	(25,230		)	(6,898		)	(521,642		)	—				(556,039		)
Financing activities
Borrowings on revolving facilities	165,000			—			—			—			—				165,000
Payments on revolving facilities	(150,000		)	—			—			—			—				(150,000		)
Proceeds from term loans (financing costs)	(11		)	—			—			779,915			—				779,904
Payments on term loans	(2,875		)	—			—			—			—				(2,875		)
Revolving facility debt issuance costs	(837		)	—			—			(496		)	—				(1,333		)
Borrowings of other debt	5,549			—			5,326			725			—				11,600
Principal payments on other debt	(3,226		)	(145		)	(957		)	(1,581		)	—				(5,909		)
Dividends paid to Holdings	(122		)	—			—			—			—				(122		)
Equity investment by Holdings	738			—			—			—			—				738
Intercompany	(10,873		)	22,729			(2,467		)	(9,389		)	—				—
Decrease in overdrafts	(7,916		)	—			—			—			—				(7,916		)
Distributions to non-controlling interests	—			—			(1,266		)	(285,375		)	—				(286,641		)
Net cash provided by (used in) financing activities	(4,573		)	22,584			636			483,799			—				502,446
Net increase (decrease) in cash and cash equivalents	—			646			(812		)	(2,700		)	—				(2,866		)
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	$	73		$	5,502		$	3,749		$	110,359		$	—			$	119,683


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

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2017

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 —
445,942
126,279
119,511
—
691,732
Intercompany receivables —
1,595,692
62,990
—
(1,658,682 ) (a) —
Prepaid income taxes 22,704
5,703
31
2,949
—
31,387
Other current assets 13,021
29,547
13,693
18,897
—
75,158
Total Current Assets 35,798
2,081,740
207,554
254,416
(1,658,682 ) 920,826
Property and equipment, net 39,836
622,445
79,653
170,657
—
912,591
Investment in affiliates 4,521,865
128,319
—
—
(4,650,184 ) (b)(c) —
Goodwill —
2,108,270
—
674,542
—
2,782,812
Identifiable intangible assets, net —
103,913
5,200
217,406
—
326,519
Other assets 36,494
98,492
35,523
23,898
(9,989 ) (e) 184,418
Total Assets $ 4,633,993
$ 5,143,179
$ 327,930
$ 1,340,919
$ (6,318,855 ) $ 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
85,096
17,868
12,726
—
128,194
Intercompany payables 1,595,692
62,990
—
—
(1,658,682 ) (a) —
Accrued payroll 16,736
98,834
4,872
40,120
—
160,562
Accrued vacation 4,083
58,043
12,607
18,142
—
92,875
Accrued interest 17,479
7
6
2,393
—
19,885
Accrued other 39,219
57,121
12,856
33,970
—
143,166
Income taxes payable —
1,190
142
7,739
—
9,071
Total Current Liabilities 1,731,811
364,021
50,563
117,690
(1,658,682 ) 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
56,718
8,141
44,591
—
145,709
Total Liabilities 3,810,625
509,242
84,214
818,334
(1,668,671 ) 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 ) 1,415,978
(33,368 ) 64,626
(1,447,236 ) (c)(d) (124,002 )
Subsidiary investment —
3,217,959
277,084
437,779
(3,932,822 ) (b)(d) —
Total Select Medical Corporation Stockholders’ Equity 823,368
4,633,937
243,716
502,405
(5,380,058 ) 823,368
Non-controlling interests —
—
—
3,910
105,326
(d) 109,236
Total Equity 823,368
4,633,937
243,716
506,315
(5,274,732 ) 932,604
Total Liabilities and Equity $ 4,633,993
$ 5,143,179
$ 327,930
$ 1,340,919
$ (6,318,855 ) $ 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.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2017

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
608

$
684,902

$
169,702

$
256,149

$
—

$
1,111,361

Costs and expenses:

Cost of services

532

577,885

141,648

208,292

—

928,357

General and administrative

28,036

39

—

—

—

28,075

Bad debt expense

—

11,699

3,355

5,571

—

20,625

Depreciation and amortization

1,575

21,221

3,620

16,123

—

42,539

Total costs and expenses

30,143

610,844

148,623

229,986

—

1,019,596

Income (loss) from operations

(29,535
)
74,058

21,079

26,163

—

91,765

Other income and expense:

Intercompany interest and royalty fees

(1,896
)
3,415

(1,519
)
—

—

—

Intercompany management fees

61,698

(52,421
)
(9,277
)
—

—

—

Loss on early retirement of debt

(19,719
)
—

—

—

—

(19,719
)
Equity in earnings of unconsolidated subsidiaries

—

5,493

28

—

—

5,521

Non-operating loss

—

(49
)
—

—

—

(49
)
Interest expense

(22,808
)
(8,070
)
(2,476
)
(7,499
)
—

(40,853
)

Income (loss) before income taxes

(12,260
)
22,426

7,835

18,664

—

36,665

Income tax expense

126

5,936

304

6,836

—

13,202

Equity in earnings of subsidiaries

28,256

6,247

—

—

(34,503
)(a)
—

Net income

15,870

22,737

7,531

11,828

(34,503
)
23,463

Less: Net income attributable to non-controlling interests

—

—

1,069

6,524

—

7,593

Net income attributable to Select Medical Corporation

$
15,870

$
22,737

$
6,462

$
5,304

$
(34,503
)
$
15,870



	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	$	608		$	678,415		$	161,905		$	250,589		$	—			$	1,091,517
Costs and expenses:
Cost of services	532			581,993			138,310			208,303			—				929,138
General and administrative	28,036			39			—			—			—				28,075
Depreciation and amortization	1,575			21,340			3,501			16,123			—				42,539
Total costs and expenses	30,143			603,372			141,811			224,426			—				999,752
Income (loss) from operations	(29,535		)	75,043			20,094			26,163			—				91,765
Other income and expense:
Intercompany interest and royalty fees	8,700			(4,844		)	(3,856		)	—			—				—
Intercompany management fees	61,698			(52,634		)	(9,064		)	—			—				—
Loss on early retirement of debt	(19,719		)	—			—			—			—				(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			5,493			28			—			—				5,521
Non-operating loss	—			(49		)	—			—			—				(49		)
Interest income (expense)	(33,404		)	89			(39		)	(7,499		)	—				(40,853		)
Income (loss) before income taxes	(12,260		)	23,098			7,163			18,664			—				36,665
Income tax expense	126			5,936			304			6,836			—				13,202
Equity in earnings of consolidated subsidiaries	28,256			5,575			—			—			(33,831		)	(a)	—
Net income	15,870			22,737			6,859			11,828			(33,831		)		23,463
Less: Net income attributable to non-controlling interests	—			—			1,069			6,524			—				7,593
Net income attributable to Select Medical Corporation	$	15,870		$	22,737		$	5,790		$	5,304		$	(33,831	)		$	15,870

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

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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2017

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
15,870

$
22,737

$
7,531

$
11,828

$
(34,503
)(a)
$
23,463

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries

—

4,893

18

—

—

4,911

Depreciation and amortization

1,575

21,221

3,620

16,123

—

42,539

Provision for bad debts

—

11,699

3,355

5,571

—

20,625

Equity in earnings of unconsolidated subsidiaries

—

(5,493
)
(28
)
—

—

(5,521
)
Equity in earnings of consolidated subsidiaries

(28,256
)
(6,247
)
—

—

34,503
(a)
—

Loss on early retirement of debt

6,527

—

—

—

—

6,527

Loss (gain) on sale of assets and businesses

—

62

(4,671
)
—

—

(4,609
)
Stock compensation expense

4,280

—

—

306

—

4,586

Amortization of debt discount, premium and issuance costs

2,590

—

—

832

—

3,422

Deferred income taxes

1,005

—

—

(4,430
)
—

(3,425
)
Changes in operating assets and liabilities, net of

effects of business combinations:

Accounts receivable

—

(92,404
)
(28,521
)
(17,188
)
—

(138,113
)
Other current assets

(5,761
)
(1,129
)
(1,511
)
780

—

(7,621
)
Other assets

(3,753
)
(11,531
)
15,072

164

—

(48
)
Accounts payable

2,574

694

(5,410
)
2,554

—

412

Accrued expenses

(13,406
)
(3,673
)
3,940

(5,290
)
—

(18,429
)
Income taxes

4,256

—

—

11,164

—

15,420

Net cash provided by (used in) operating activities

(12,499
)
(59,171
)
(6,605
)
22,414

—

(55,861
)

Investing activities

Acquisition of businesses, net of cash acquired

—

(445
)
—

(9,121
)
—

(9,566
)
Purchases of property and equipment

(2,937
)
(29,268
)
(9,762
)
(8,686
)
—

(50,653
)
Investment in businesses

—

(500
)
—

—

—

(500
)
Proceeds from sale of assets and businesses

—

7

19,505

—

—

19,512

Net cash provided by (used in) investing activities

(2,937
)
(30,206
)
9,743

(17,807
)
—

(41,207
)

Financing activities

Borrowings on revolving facilities

530,000

—

—

—

—

530,000

Payments on revolving facilities

(415,000
)
—

—

—

—

(415,000
)
Proceeds from term loans

1,139,822

—

—

—

—

1,139,822

Payments on term loans

(1,147,752
)
—

—

(23,065
)
—

(1,170,817
)
Revolving facility debt issuance costs

(3,887
)
—

—

—

—

(3,887
)
Borrowings of other debt

6,571

—

—

—

—

6,571

Principal payments on other debt

(3,704
)
(80
)
(695
)
(796
)
—

(5,275
)
Repayments of bank overdrafts

(17,062
)
—

—

—

—

(17,062
)
Dividends paid to Holdings

(156
)
—

—

—

—

(156
)
Equity investment by Holdings

617

—

—

—

—

617

Intercompany

(85,012
)
89,876

(4,864
)
—

—

—

Proceeds from issuance of non-controlling interests

—

—

2,094

—

—

2,094

Purchase of non-controlling interests

—

(50
)
—

—

—

(50
)
Distributions to non-controlling interests

—

—

(1,324
)
(2,283
)
—

(3,607
)
Net cash provided by (used in) financing activities

4,437

89,746

(4,789
)
(26,144
)
—

63,250

Net increase (decrease) in cash and cash equivalents

(10,999
)
369

(1,651
)
(21,537
)
—

(33,818
)

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

$
72

$
6,836

$
3,405

$
54,898

$
—

$
65,211



	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	$	15,870		$	22,737		$	6,859		$	11,828		$	(33,831	)	(a)	$	23,463
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			4,893			18			—			—				4,911
Depreciation and amortization	1,575			21,340			3,501			16,123			—				42,539
Provision for bad debts	—			770			—			11			—				781
Equity in earnings of unconsolidated subsidiaries	—			(5,493		)	(28		)	—			—				(5,521		)
Equity in earnings of consolidated subsidiaries	(28,256		)	(5,575		)	—			—			33,831			(a)	—
Loss on extinguishment of debt	6,527			—			—			—			—				6,527
Loss (gain) on sale of assets and businesses	—			62			(4,671		)	—			—				(4,609		)
Stock compensation expense	4,280			—			—			306			—				4,586
Amortization of debt discount, premium and issuance costs	2,590			—			—			832			—				3,422
Deferred income taxes	1,005			—			—			(4,430		)	—				(3,425		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(83,078		)	(23,563		)	(11,628		)	—				(118,269		)
Other current assets	(5,761		)	(1,126		)	(1,514		)	780			—				(7,621		)
Other assets	(3,753		)	(11,531		)	15,072			164			—				(48		)
Accounts payable	2,574			764			(5,480		)	2,554			—				412
Accrued expenses	(13,406		)	(5,075		)	5,342			(5,290		)	—				(18,429		)
Income taxes	4,256			—			—			11,164			—				15,420
Net cash provided by (used in) operating activities	(12,499		)	(61,312		)	(4,464		)	22,414			—				(55,861		)
Investing activities
Business combinations, net of cash acquired	—			(445		)	—			(9,121		)	—				(9,566		)
Purchases of property and equipment	(2,937		)	(29,325		)	(9,705		)	(8,686		)	—				(50,653		)
Investment in businesses	—			(500		)	—			—			—				(500		)
Proceeds from sale of assets and businesses	—			7			19,505			—			—				19,512
Net cash provided by (used in) investing activities	(2,937		)	(30,263		)	9,800			(17,807		)	—				(41,207		)
Financing activities
Borrowings on revolving facilities	530,000			—			—			—			—				530,000
Payments on revolving facilities	(415,000		)	—			—			—			—				(415,000		)
Proceeds from term loans	1,139,822			—			—			—			—				1,139,822
Payments on term loans	(1,147,752		)	—			—			(23,065		)	—				(1,170,817		)
Revolving facility debt issuance costs	(3,887		)	—			—			—			—				(3,887		)
Borrowings of other debt	6,571			—			—			—			—				6,571
Principal payments on other debt	(3,704		)	(80		)	(695		)	(796		)	—				(5,275		)
Dividends paid to Holdings	(156		)	—			—			—			—				(156		)
Equity investment by Holdings	617			—			—			—			—				617
Intercompany	(85,012		)	92,074			(7,062		)	—			—				—
Decrease in overdrafts	(17,062		)	—			—			—			—				(17,062		)
Proceeds from issuance of non-controlling interests	—			—			2,094			—			—				2,094
Distributions to non-controlling interests	—			(50		)	(1,324		)	(2,283		)	—				(3,657		)
Net cash provided by (used in) financing activities	4,437			91,944			(6,987		)	(26,144		)	—				63,250
Net increase (decrease) in cash and cash equivalents	(10,999		)	369			(1,651		)	(21,537		)	—				(33,818		)
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	$	72		$	6,836		$	3,405		$	54,898		$	—			$	65,211

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

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~December 31, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Assets

Current Assets:

Cash and cash equivalents

$
11,071

$
6,467

$
5,056

$
76,435

$
—

$
99,029

Accounts receivable, net

—

361,327

99,913

112,512

—

573,752

Intercompany receivables

—

2,237,362

157,324

—

(2,394,686
) (a)
—

Prepaid income taxes

6,658

—

—

5,765

—

12,423

Other current assets

11,953

33,860

10,367

21,519

—

77,699

Total Current Assets

29,682

2,639,016

272,660

216,231

(2,394,686
)
762,903

Property and equipment, net

48,697

601,426

52,851

189,243

—

892,217

Investment in affiliates

4,515,998

92,389

—

—

(4,608,387
) (b) (c)
—

Goodwill

—

2,090,963

—

660,037

—

2,751,000

Identifiable intangible assets, net

—

109,132

—

231,430

—

340,562

Other assets

45,636

84,803

53,954

16,235

(26,684
) (d)
173,944

Total Assets

$
4,640,013

$
5,617,729

$
379,465

$
1,313,176

$
(7,029,757
)
$
4,920,626

Liabilities and Equity

Current Liabilities:

Bank overdrafts

$
39,362

$
—

$
—

$
—

$
—

$
39,362

Current portion of long-term debt and notes payable

7,227

445

1,324

4,660

—

13,656

Accounts payable

10,775

78,166

22,839

14,778

—

126,558

Intercompany payables

2,237,362

157,324

—

—

(2,394,686
) (a)
—

Accrued payroll

16,963

92,187

4,275

32,972

—

146,397

Accrued vacation

3,440

55,297

10,857

13,667

—

83,261

Accrued interest

20,114

—

—

2,211

—

22,325

Accrued other

39,155

60,871

6,152

33,898

—

140,076

Total Current Liabilities

2,374,398

444,290

45,447

102,186

(2,394,686
)
571,635

Long-term debt, net of current portion

1,407,066

513,938

137,436

626,893

—

2,685,333

Non-current deferred tax liability

—

133,852

596

91,314

(26,684
) (d)
199,078

Other non-current liabilities

42,824

53,399

5,865

34,432

—

136,520

Total Liabilities

3,824,288

1,145,479

189,344

854,825

(2,421,370
)
3,592,566

Redeemable non-controlling interests

—

—

10,169

411,990

—

422,159

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

925,111

—

—

—

—

925,111

Retained earnings (accumulated deficit)

(109,386
)
1,295,603

(39,546
)
1,364

(1,257,421
) (c)
(109,386
)
Subsidiary investment

—

3,176,647

132,890

41,429

(3,350,966
) (b)
—

Total Select Medical Corporation Stockholder’s Equity

815,725

4,472,250

93,344

42,793

(4,608,387
)
815,725

Non-controlling interests

—

—

86,608

3,568

—

90,176

Total Equity

815,725

4,472,250

179,952

46,361

(4,608,387
)
905,901

Total Liabilities and Equity

$
4,640,013

$
5,617,729

$
379,465

$
1,313,176

$
(7,029,757
)
$
4,920,626


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

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

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

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

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended March 31, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
417

$
711,868

$
125,168

$
250,877

$
—

$
1,088,330

Costs and expenses:

Cost of services

344

602,521

106,195

213,202

—

922,262

General and administrative

28,387

(119
)
—

—

—

28,268

Bad debt expense

—

10,698

1,985

3,714

—

16,397

Depreciation and amortization

1,211

15,211

2,719

15,376

—

34,517

Total costs and expenses

29,942

628,311

110,899

232,292

—

1,001,444

Income (loss) from operations

(29,525
)
83,557

14,269

18,585

—

86,886

Other income and expense:

Intercompany interest and royalty fees

(1,058
)
2,854

(1,796
)
—

—

—

Intercompany management fees

55,357

(49,525
)
(5,832
)
—

—

—

Loss on early retirement of debt

(773
)
—

—

—

—

(773
)
Equity in earnings of unconsolidated subsidiaries

—

4,627

25

—

—

4,652

Non-operating gain (loss)

30,432

(5,345
)
—

—

—

25,087

Interest expense

(20,346
)
(6,634
)
(1,639
)
(10,229
)
—

(38,848
)

Income before income taxes

34,087

29,534

5,027

8,356

—

77,004

Income tax expense (benefit)

8,612

5,615

(65
)
2,898

—

17,060

Equity in earnings of subsidiaries

29,358

3,117

—

—

(32,475
) (a)
—

Net income

54,833

27,036

5,092

5,458

(32,475
)
59,944

Less: Net income attributable to non-controlling interests

—

—

1,886

3,225

—

5,111

Net income attributable to Select Medical Corporation

$
54,833

$
27,036

$
3,206

$
2,233

$
(32,475
)
$
54,833

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Three Months Ended March 31, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
54,833

$
27,036

$
5,092

$
5,458

$
(32,475
)(a)
$
59,944

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries

—

8,283

22

—

—

8,305

Depreciation and amortization

1,211

15,211

2,719

15,376

—

34,517

Provision for bad debts

—

10,698

1,985

3,714

—

16,397

Equity in earnings of unconsolidated subsidiaries

—

(4,627
)
(25
)
—

—

(4,652
)
Equity in earnings of consolidated subsidiaries

(29,358
)
(3,117
)
—

—

32,475
(a)
—

Loss on early retirement of debt

773

—

—

—

—

773

Loss (gain) on sale of assets and business

(30,432
)
23

16

—

—

(30,393
)
Impairment of equity investment

—

5,339

—

—

—

5,339

Stock compensation expense

3,784

—

—

192

—

3,976

Amortization of debt discount, premium and issuance costs

2,838

—

—

853

—

3,691

Deferred income taxes

(3,294
)
—

—

(181
)
—

(3,475
)
Changes in operating assets and liabilities, net of

effects of business combinations:

Accounts receivable

—

(18,362
)
(13,913
)
(6,889
)
—

(39,164
)
Other current assets

(5,472
)
4,411

(522
)
9,143

—

7,560

Other assets

155

(70
)
19

(995
)
—

(891
)
Accounts payable

(12
)
(18,456
)
(4,242
)
1,388

—

(21,322
)
Accrued expenses

(2,149
)
50,917

1,040

1,385

—

51,193

Income taxes

16,483

—

—

2,887

—

19,370

Net cash provided by (used in) operating activities

9,360

77,286

(7,809
)
32,331

—

111,168

Investing activities

Acquisition of businesses, net of cash acquired

(408,654
)
(605
)
—

(3,624
)
—

(412,883
)
Purchases of property and equipment

(4,909
)
(32,571
)
(6,078
)
(3,210
)
—

(46,768
)
Investment in businesses

—

(623
)
—

—

—

(623
)
Proceeds from sale of assets and business

62,597

—

3

—

—

62,600

Net cash used in investing activities

(350,966
)
(33,799
)
(6,075
)
(6,834
)
—

(397,674
)

Financing activities

Borrowings on revolving facilities

190,000

—

—

—

—

190,000

Payments on revolving facilities

(170,000
)
—

—

(5,000
)
—

(175,000
)
Proceeds from term loans

600,127

—

—

—

—

600,127

Payments on term loans

(225,837
)
—

—

(1,125
)
—

(226,962
)
Borrowings of other debt

6,727

—

—

—

—

6,727

Principal payments on other debt

(3,028
)
(37
)
(557
)
(842
)
—

(4,464
)
Repayments of bank overdrafts

(28,615
)
—

—

—

—

(28,615
)
Equity investment by Holdings

21

—

—

—

—

21

Intercompany

17,341

(36,170
)
18,829

—

—

—

Purchase of non-controlling interests

—

(1,294
)
—

—

—

(1,294
)
Distributions to non-controlling interests

(2,432
)
—

—

(629
)
—

(3,061
)
Net cash provided by (used in) financing activities

384,304

(37,501
)
18,272

(7,596
)
—

357,479

Net increase in cash and cash equivalents

42,698

5,986

4,388

17,901

—

70,973

Cash and cash equivalents at beginning of period

4,070

3,706

625

6,034

—

14,435

Cash and cash equivalents at end of period

$
46,768

$
9,692

$
5,013

$
23,935

$
—

$
85,408

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

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

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

Forward-Looking Statements

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

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

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

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

· ~~the failure of our specialty hospitals~~or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;

the failure of our long term acute 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, ~~2016,~~2017, as such risk factors may be updated from time to time in our periodic filings with the SEC.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

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

Overview

We began operations in 1997 and ~~based on number of facilities, are~~have grown to be one of the largest operators of ~~specialty~~long term acute care hospitals (“LTCHs”), inpatient rehabilitation facilities (“IRFs”), outpatient rehabilitation clinics and occupational ~~medicine~~health centers in the United ~~States.~~States based on the number of facilities. As of March 31, ~~2017, we had operations in 46 states and the District of Columbia. As of March 31, 2017,~~2018, we operated ~~122 specialty hospitals~~99 LTCHs in 27 states, 24 IRFs in 10 states, and ~~1,610~~1,617 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated ~~308 medical~~531 occupational health centers in 3841 states as of March 31, ~~2017.~~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.”

We As of March 31, 2018, we had operations in 47 states and the District of Columbia.

In 2017, we changed our internal segment reporting structure to reflect how we now manage our ~~Company through~~business operations, review operating performance, and allocate resources. Our reportable segments include long term acute care, inpatient rehabilitation, outpatient rehabilitation, and Concentra. Prior year results for the three ~~business~~months ended March 31, 2017, presented herein have been recast to conform to the current presentation. Previously, we disclosed our financial information in three reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.

We had net operating revenues of ~~$1,111.4~~$1,253.0 million for the three months ended March 31, ~~2017.~~2018. Of this total, we earned approximately ~~54%~~37% of our net operating revenues from our ~~specialty hospitals~~long term acute care segment, approximately ~~23%~~14% from our inpatient rehabilitation segment, approximately 21% from our outpatient rehabilitation segment, and approximately ~~23%~~28% from our Concentra segment. Patients are typically admitted to ~~our specialty hospitals~~the Company’s LTCHs and IRFs from general acute care hospitals. These patients have specialized needs, with serious and often complex medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of ~~medical~~occupational health centers and contract services provided at employer worksites ~~and Department of Veterans Affairs CBOCs~~ that deliver occupational medicine, physical therapy, ~~veteran’s healthcare,~~ and consumer health services.

Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted ~~accounting principles~~in the United States of America (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Physiotherapy~~ acquisition costs 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 ~~table~~ reconciles net income and income from operations to Adjusted EBITDA and should be ~~referred to~~referenced when we discuss Adjusted ~~EBITDA.~~

Three Months Ended March 31,

2016

2017

(in thousands)

Net income

$
59,944

$
23,463

Income tax expense

17,060

13,202

Interest expense

38,848

40,853

Non-operating loss (gain)

(25,087
)
49

Equity in earnings of unconsolidated subsidiaries

(4,652
)
(5,521
)
Loss on early retirement of debt

773

19,719

Income from operations

86,886

91,765

Stock compensation expense:

Included in general and administrative

3,248

3,749

Included in cost of services

728

837

Depreciation and amortization

34,517

42,539

Physiotherapy acquisition costs

3,236

—

Adjusted EBITDA

$
128,615

$
138,890

EBITDA:

Three Months Ended March 31,
2017 2018
(in thousands)
Net income $ 23,463
$ 43,982
Income tax expense 13,202
12,294
Interest expense 40,853
47,163
Non-operating loss (gain) 49
(399 )
Equity in earnings of unconsolidated subsidiaries (5,521 ) (4,697 )
Loss on early retirement of debt 19,719
10,255
Income from operations 91,765
108,598
Stock compensation expense:

Included in general and administrative 3,749
3,990
Included in cost of services 837
937
Depreciation and amortization 42,539
46,771
U.S. HealthWorks acquisition costs —
2,936
Adjusted EBITDA $ 138,890
$ 163,232

Summary Financial Results

Three Months Ended March 31, ~~2017~~2018

For the three months ended March 31, ~~2017,~~2018, our net operating revenues increased ~~2.1%~~14.8% to ~~$1,111.4~~$1,253.0 million, compared to $~~1,088.3~~$1,091.5 million for the three months ended March 31, ~~2016.~~2017. Income from operations increased ~~5.6%~~18.3% to $108.6 million for the three months ended March 31, 2018, compared to $91.8 million for the three months ended March 31, ~~2017, compared~~2017.

Net income increased 87.5% to ~~$86.9~~$44.0 million for the three months ended March 31, ~~2016. Net income was~~2018, compared to $23.5 million for the three months ended March 31, 2017. Net income for the three months ended March 31, 2018 included a pre-tax loss on early retirement of debt of $10.3 million. Net income for the three months ended March 31, 2017 ~~which includes~~included a pre-tax loss on early retirement of debt of $19.7 million. ~~Net income was $59.9~~

Adjusted EBITDA increased 17.5% to $163.2 million for the three months ended March 31, ~~2016, which includes a pre-tax non-operating gain of $25.1 million and a pre-tax loss on early retirement of debt of $0.8 million. Our Adjusted EBITDA increased 8.0%~~2018, compared to $138.9 million for the three months ended March 31, ~~2017, compared to $128.6 million~~2017. Our Adjusted EBITDA margin was 13.0% for the three months ended March 31, ~~2016. Our Adjusted EBITDA margin was 12.5%~~2018, compared to 12.7% for the three months ended March 31, ~~2017, compared~~2017.

The following tables provide a reconciliation of our segment performance measures to ~~11.8%~~our consolidated operating results:



	Three Months Ended March 31, 2018
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	464,676		$	174,774		$	257,381		$	356,116		$	17		$	1,252,964
Operating expenses	391,704			147,998			226,856			301,466			29,571			1,097,595
Depreciation and amortization	11,058			5,722			6,637			21,147			2,207			46,771
Income (loss) from operations	$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598
Depreciation and amortization	11,058			5,722			6,637			21,147			2,207			46,771
Stock compensation expense	—			—			—			211			4,716			4,927
U.S. HealthWorks acquisition costs	—			—			—			2,936			—			2,936
Adjusted EBITDA	$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)	$	163,232
Adjusted EBITDA margin	15.7		%	15.3		%	11.9		%	16.2		%	N/M			13.0		%



	Three Months Ended March 31, 2017
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	445,123		$	144,825		$	250,371		$	250,589		$	609		$	1,091,517
Operating expenses	372,786			128,497			219,020			208,303			28,607			957,213
Depreciation and amortization	13,042			5,458			6,340			16,123			1,576			42,539
Income (loss) from operations	$	59,295		$	10,870		$	25,011		$	26,163		$	(29,574	)	$	91,765
Depreciation and amortization	13,042			5,458			6,340			16,123			1,576			42,539
Stock compensation expense	—			—			—			306			4,280			4,586
Adjusted EBITDA	$	72,337		$	16,328		$	31,351		$	42,592		$	(23,718	)	$	138,890
Adjusted EBITDA margin	16.3		%	11.3		%	12.5		%	17.0		%	N/M			12.7		%

N/M — Not Meaningful.

The following table provides the change in segment performance measures for the three months ended March 31, ~~2016.~~2018, compared to the three months ended March 31, 2017:



	Long Term Acute Care		Inpatient Rehabilitation		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	4.4	%	20.7	%	2.8	%	42.1	%	N/M		14.8	%
Change in income from operations	4.4	%	93.7	%	(4.5	)%	28.1	%	(7.4	)%	18.3	%
Change in Adjusted EBITDA	0.9	%	64.0	%	(2.6	)%	35.7	%	(4.7	)%	17.5	%

N/M—Not Meaningful.

Significant Events

~~Refinancing~~

Acquisition of U.S. HealthWorks

On ~~March 6, 2017,~~February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care provider, pursuant to the terms of the Purchase Agreement.

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

Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the 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 ~~a new senior secured~~the Concentra second lien credit agreement that provides for ~~$1.6 billion~~$240.0 million in ~~senior secured~~term loans with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit ~~facilities comprising~~agreement bear interest at a ~~$1.15 billion, seven-year~~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%).

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) decreases the applicable interest rate on the Select term ~~loan~~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 ~~$450.0 million, five-year~~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) decreases the applicable interest rate on the loans outstanding under the Select revolving credit facility ~~including~~from the Adjusted LIBO Rate plus a ~~$75.0 million sublimit~~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) extends the maturity date for the ~~issuance of standby letters of credit.~~ Select ~~used borrowings under~~term loans from March 6, 2024 to March 6, 2025; and (iv) makes certain other technical amendments to the ~~new~~ Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and (ii) pay fees and expenses in connection with the refinancing.

agreement as set forth therein.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, filed with the SEC on February ~~23, 2017,~~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 28% of our net operating revenues for the three months ended March 31, 2018, and 30% of our net operating revenues for ~~both the three months ended March 31, 2017 and for~~ the year ended December 31, ~~2016.~~

2017.

Medicare Reimbursement of ~~LTCH~~Long Term Acute Care Hospital Services

There have been significant regulatory changes affecting 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 LTCHs are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCHs are generally published in ~~April or~~ May, finalized in August and effective on October ~~1st~~1 of each year.

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

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

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~~fixed‑loss amount for high cost outlier cases paid under ~~LTCH-PPS~~LTCH‑PPS was set at $21,943, an increase from the ~~fixed-loss~~fixed‑loss amount in the 2016 fiscal year of $16,423. The ~~fixed-loss~~fixed‑loss amount for high cost outlier cases paid under the ~~site-neutral~~site‑neutral payment rate was set at $23,573, an increase from the ~~fixed-loss~~fixed‑loss amount in the 2016 fiscal year of $22,538.

Fiscal Year 2018. On ~~April~~August 14, 2017, CMS ~~released an advanced copy of~~published the ~~proposed~~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 ~~would be~~was set at ~~$41,497,~~$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 ~~if adopted, would include~~included a market basket increase of ~~2.8%~~2.7%, less a productivity adjustment of ~~0.4%~~0.6%, and less a reduction of 0.75% mandated by the ACA. The update to the standard federal rate ~~would be~~for fiscal year 2018 was impacted further ~~reduced~~ by the ~~proposed short-stay outlier changes, as described below.~~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 ~~if adopted, would be~~was set at ~~$30,081,~~$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 ~~if adopted, would be~~was set at ~~$26,713,~~$26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

~~Patient Criteria~~Fiscal Year 2019

~~The BBA~~. On April 24, 2018, CMS released an advanced copy of ~~2013, enacted December 26, 2013, establishes a dual-rate~~the proposed policies and payment rates for the LTCH-PPS for ~~Medicare patients discharged from an LTCH. Specifically, for Medicare patients discharged in~~fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2015, LTCHs will be reimbursed at the LTCH-PPS~~2018 through September 30, 2019). The standard federal ~~payment~~ rate ~~only if, immediately preceding the patient’s LTCH admission, the patient was discharged~~would be set at $41,483, an increase from a “subsection (d) hospital” (generally, a short-term acute care hospital paid under the inpatient prospective payment system, or “IPPS”) and either the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d) hospital, or the patient was assigned to Medicare severity diagnosis-related group (“MS-LTC-DRG”) for LTCHs for cases receiving at least 96 hours of ventilator services in the LTCH. In addition, to be paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH will be paid a lower “site neutral” payment rate, which will be the lower of: (i) IPPS comparable per diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) payment rate plus any outlier payments; or (ii) 100 percent of the estimated costs for services.

The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid at the LTCH-PPS standard federal payment rate. During the transition period (applicable to hospital cost reporting periods beginning on or after October 1, 2015 and on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral payment rate amount and 50% of the standard federal ~~payment~~ rate amount. Thereafter, an LTCH will be paid solely based on the site-neutral payment rate for Medicare patients not meeting the patient criteria. For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral payment rate will apply for Medicare patients not meeting the new criteria.

~~In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges from an LTCH will continue~~applicable during fiscal year 2018 of $41,415. The update to be paid at the LTCH-PPS standard federal payment rate, unless the number of discharges for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the LTCH for that period. If the number of discharges for which payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment rate to be reinstated for payment under the dual-rate LTCH-PPS.

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

~~Medicare Market Basket Adjustments~~

~~The ACA instituted~~fiscal year 2019, if adopted, includes a market basket ~~payment~~increase of 2.7%, less a productivity adjustment ~~to LTCHs. In fiscal years 2018~~of 0.8%, and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket paymentless a reduction of 0.75% mandated by the ACA. The ~~ACA specifically allows these market basket reductions to result~~standard federal rate, if adopted, also includes a proposed area wage budget neutrality factor of 0.999713 and a proposed one-time permanent budget neutrality adjustment of 0.990535 in ~~less than a 0% payment update and payment rates that are less than~~connection with the ~~prior year.~~

proposed elimination of the 25 Percent Rule (discussed further below). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS, if adopted, would be set at $30,639, which is an increase 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, if adopted, would be set at $27,545, an increase from the fixed-loss amount in the 2018 fiscal year of $26,537.

25 Percent Rule

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

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

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule. As a result, the 25 Percent Rule does not apply until discharges occurring on or after October 1, 2018. After the expiration of the ~~statutory relief, as described above,~~regulatory moratorium, our LTCHs (whether freestanding, HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were admitted from a ~~co-located~~co‑located or a non-co-located hospital and that exceed the applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes ~~will~~ have the potential to cause an adverse financial impact on the net operating revenues and profitability of many of these hospitals for discharges on or after October 1, ~~2017.~~

2018.

For fiscal year ~~2018,~~2019, CMS is proposing to eliminate the 25 Percent Rule in a ~~regulatory~~budget neutral manner. CMS intends to accomplish this by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments in fiscal year 2019 would equal the projection of aggregate LTCH payments in fiscal year 2019 that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. Under this proposal, the LTCH-PPS standard federal payment rate is adjusted downward by a factor of 0.990535 to maintain aggregate LTCH-PPS payments at the estimated levels they would be in absence of this proposed change. As proposed, the elimination of the 25 Percent Rule would be accomplished through a one-time, permanent adjustment to the fiscal year 2019 LTCH-PPS standard federal payment rate. CMS has requested public comments on the proposal to permanently eliminate the 25 Percent Rule in a budget neutral manner, or, in the alternative, the adoption of an additional one year delay on the implementation of the 25 Percent ~~Rule. If adopted in the final rule, the 25 Percent~~ Rule would apply to discharges occurring on or after October 1, 2018. Moreover, if this proposal is not finalized, CMS proposes to apply the 25 Percent Rule to discharges occurring on or after October 1, 2017.

with a budget neutrality adjustment.

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~~five‑sixths of the geometric average length of stay for that particular ~~MS-LTC-DRG,~~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 ~~are~~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.

For fiscal year 2018, CMS ~~is proposing~~adopted changes to ~~change~~the SSO policy such that all SSO cases discharged on or after October 1, 2017 ~~would be~~are paid ~~using only the last of these four options -~~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. If adopted, CMS anticipates that~~IPPS (i.e., the fourth option under the prior policy). Under this ~~proposed change to~~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 formula for SSO cases would result in a net increase in aggregate Medicare LTCH payments compared to aggregate Medicare LTCH payments under the current methodology, which would be offset by a budget neutrality adjustment decreasing payment to non-SSO cases.

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

~~Current law imposes a moratorium~~based on the ~~establishment and classification of new LTCHs or LTCH satellite facilities, and on~~IPPS comparable amount decreases. In addition, the increase of LTCH beds in existing LTCHs or satellite facilities through September 30, 2017. There are three exceptions to the moratorium for projects that were under development when the moratorium began on April 1, 2014. Only one exception needs to apply.

very short stay outlier category was eliminated.

Medicare Reimbursement of Inpatient Rehabilitation Facility Services

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

~~Fiscal Year 2016~~. On August 6, 2015, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard payment conversion factor for discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.

Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment rates for the ~~IRF-PPS~~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 ~~April 27,~~August 3, 2017, CMS ~~released an advanced copy of~~published the ~~proposed~~final rule updating policies and payment rates for the ~~IRF-PPS~~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 ~~would be~~was set at ~~$15,835,~~$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 ~~if adopted, would include~~included a market basket increase of ~~2.7%~~2.6%, less a productivity adjustment of ~~0.4%~~0.6%, and less a reduction of 0.75% mandated by the ACA. ~~As noted below, the proposed update to the~~The standard payment conversion factor for fiscal year 2018 iswas impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. CMS ~~proposed to increase~~increased the outlier threshold amount for fiscal year 2018 to ~~$8,656~~$8,679 from $7,984 established in the final rule for fiscal year 2017.

~~Medicare Market Basket Adjustments~~Fiscal Year 2019

. On April 27, 2018, CMS released an advanced copy of the proposed policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The ~~ACA instituted~~standard payment conversion factor for discharges for fiscal year 2019 would be set at $16,020, 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, if adopted, would include a market basket ~~payment~~increase of 2.9%, less a productivity adjustment ~~for IRFs. In fiscal years 2018~~of 0.8%, and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket paymentless a reduction of 0.75% mandated by the ACA. ~~The ACA specifically allows these market basket reductions~~CMS proposed to ~~result in less than a 0% payment update and payment rates that are less than~~increase the ~~prior year.~~

~~Patient Classification Criteria~~

In order to qualify as an IRF a hospital must demonstrate that during its most recent twelve month cost reporting period it served an inpatient population of whom at least 60% required intensive rehabilitation servicesoutlier threshold amount for one or more of 13 conditions specified by regulation. Compliance with the 60% rule is demonstrated through either medical review or the “presumptive” method, in which a patient’s diagnosis codes are compared to a “presumptive compliance” list. For fiscal year ~~2018, CMS is proposing changes~~2019 to $10,509 from $8,679 established in the ~~60% rule’s presumptive methodology, including (i) addressing certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes~~final rule for patients with traumatic brain injury and hip fracture conditions; (ii) identifying major multiple trauma codes that did not translate exactly (one-for-one) between International Classification of Diseases, Ninth Revision, Clinical Modification (“ICD-9-CM”) and ICD-10-CM; (iii) removing certain non-specific and arthritis diagnosis codes that were inadvertently re-introduced through the ICD-10-CM conversion process; and (iv) removing one ICD-10-CM code, G72.89—~~Other specified myopathies~~.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~~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. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and comment ~~rule-making.~~

rule‑making.

Therapy Caps

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

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

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

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 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 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 also recognized as a constraint to revenue in the period services are rendered. Under the previous standard, these adjustments were recorded as bad debt expense.

In the long term acute care and inpatient rehabilitation segments, we derive 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 derive a per diem rate. The 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 derive 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 derive 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.

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 March 31,

2016

2017

Specialty hospitals data:(1)

Number of hospitals owned—start of period

118

115

Number of hospitals acquired

—

—

Number of hospital start-ups

—

—

Number of hospitals closed/sold

—

(1
)
Number of hospitals owned—end of period

118

114

Number of hospitals managed—end of period

9

8

Total number of hospitals (all)—end of period

127

122

Long term acute care hospitals

109

102

Rehabilitation hospitals

18

20

Available licensed beds(2)

5,172

5,148

Admissions(2)

13,861

13,895

Patient days(2)

337,971

317,365

Average length of stay (days)(2)

24

23

Net revenue per patient day(2)(3)

$
1,632

$
1,716

Occupancy rate(2)

72
%
68
%
Percent patient days—Medicare(2)

57
%
55
%

Outpatient rehabilitation data:

Number of clinics owned—start of period

896

1,445

Number of clinics acquired

543

1

Number of clinic start-ups

6

8

Number of clinics closed/sold

(4
)
(9
)
Number of clinics owned—end of period

1,441

1,445

Number of clinics managed—end of period

160

165

Total number of clinics (all)—end of period

1,601

1,610

Number of visits(2)

1,576,554

2,075,790

Net revenue per visit(2)(4)

$
103

$
102

Concentra data:

Number of centers owned—start of period

300

300

Number of centers acquired

2

6

Number of center start-ups

—

2

Number of centers closed/sold

(1
)
—

Number of centers owned—end of period

301

308

Number of visits(5)

1,845,715

1,886,815

Net revenue per visit(5)(6)

$
118

$
118



	Three Months Ended March 31,
	2017			2018
Long term acute care data:
Number of hospitals owned—start of period	102			99
Number of hospitals acquired	—			—
Number of hospital start-ups	—			1
Number of hospitals closed/sold	(1		)	(1		)
Number of hospitals owned—end of period	101			99
Number of hospitals managed—end of period	1			—
Total number of hospitals (all)—end of period	102			99
Available licensed beds⁽¹⁾	4,165			4,158
Admissions⁽¹⁾	9,309			9,833
Patient days⁽¹⁾	255,097			265,840
Average length of stay (days)⁽¹⁾	28			27
Net revenue per patient day^(1)(2)(4)	$	1,731		$	1,730
Occupancy rate⁽¹⁾	68		%	71		%
Percent patient days—Medicare⁽¹⁾	55		%	53		%
Inpatient rehabilitation data:
Number of facilities owned—start of period	13			16
Number of facilities acquired	—			—
Number of facilities start-ups	—			—
Number of facilities closed/sold	—			—
Number of facilities owned—end of period	13			16
Number of facilities managed—end of period	7			8
Total number of facilities (all)—end of period	20			24
Available licensed beds⁽¹⁾	983			1,133
Admissions⁽¹⁾	4,376			5,394
Patient days⁽¹⁾	62,268			76,890
Average length of stay (days)⁽¹⁾	14			14
Net revenue per patient day^(1)(2)(4)	$	1,517		$	1,623
Occupancy rate⁽¹⁾	70		%	75		%
Percent patient days—Medicare⁽¹⁾	54		%	54		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,445			1,447
Number of clinics acquired	1			3
Number of clinic start-ups	8			8
Number of clinics closed/sold	(9		)	(9		)
Number of clinics owned—end of period	1,445			1,449
Number of clinics managed—end of period	165			168
Total number of clinics (all)—end of period	1,610			1,617
Number of visits⁽¹⁾	2,075,790			2,067,465
Net revenue per visit^(1)(3)(4)	$	99		$	103



	Three Months Ended March 31,
	2017		2018
Concentra data:
Number of centers owned—start of period	300		312
Number of centers acquired	6		219
Number of clinic start-ups	2		—
Number of centers closed/sold	—		—
Number of centers owned—end of period	308		531
Number of visits⁽¹⁾	1,886,815		2,596,059
Net revenue per visit^(1)(3)(4)	$	116	$	124

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

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

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

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

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

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


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


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


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


(4)	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 March 31,

2016

2017

Net operating revenues

100.0
%
100.0
%
Cost of services(1)

84.7

83.5

General and administrative

2.6

2.5

Bad debt expense

1.5

1.9

Depreciation and amortization

3.2

3.8

Income from operations

8.0

8.3

Loss on early retirement of debt

(0.1
)
(1.8
)
Equity in earnings of unconsolidated subsidiaries

0.4

0.5

Non-operating gain (loss)

2.3

(0.0
)
Interest expense

(3.5
)
(3.7
)
Income before income taxes

7.1

3.3

Income tax expense

1.6

1.2

Net income

5.5

2.1

Net income attributable to non-controlling interests

0.5

0.7

Net income attributable to Holdings and Select

5.0
%
1.4
%



	Three Months Ended March 31,
	2017		2018
Net operating revenues	100.0	%	100.0	%
Cost of services⁽¹⁾	85.2		85.1
General and administrative	2.6		2.5
Depreciation and amortization	3.8		3.7
Income from operations	8.4		8.7
Loss on early retirement of debt	(1.8	)	(0.8	)
Equity in earnings of unconsolidated subsidiaries	0.5		0.4
Non-operating gain (loss)	(0.0	)	0.0
Interest expense	(3.7	)	(3.8	)
Income before income taxes	3.4		4.5
Income tax expense	1.3		1.0
Net income	2.1		3.5
Net income attributable to non-controlling interests	0.6		0.8
Net income attributable to Holdings and Select	1.5	%	2.7	%

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


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

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



	Three Months Ended March 31,
	2017			2018			% Change
	(in thousands)
Net operating revenues:⁽²⁾
Long term acute care	$	445,123		$	464,676		4.4	%
Inpatient rehabilitation	144,825			174,774			20.7
Outpatient rehabilitation	250,371			257,381			2.8
Concentra	250,589			356,116			42.1
Other⁽¹⁾	609			17			N/M
Total Company	$	1,091,517		$	1,252,964		14.8	%
Income (loss) from operations:
Long term acute care	$	59,295		$	61,914		4.4	%
Inpatient rehabilitation	10,870			21,054			93.7
Outpatient rehabilitation	25,011			23,888			(4.5	)
Concentra	26,163			33,503			28.1
Other⁽¹⁾	(29,574		)	(31,761		)	(7.4	)
Total Company	$	91,765		$	108,598		18.3	%
Adjusted EBITDA:
Long term acute care	$	72,337		$	72,972		0.9	%
Inpatient rehabilitation	16,328			26,776			64.0
Outpatient rehabilitation	31,351			30,525			(2.6	)
Concentra	42,592			57,797			35.7
Other⁽¹⁾	(23,718		)	(24,838		)	(4.7	)
Total Company	$	138,890		$	163,232		17.5	%
Adjusted EBITDA margins:
Long term acute care	16.3		%	15.7		%
Inpatient rehabilitation	11.3			15.3
Outpatient rehabilitation	12.5			11.9
Concentra	17.0			16.2
Other⁽¹⁾	N/M			N/M
Total Company	12.7		%	13.0		%
Total assets:
Long term acute care	$	1,978,226		$	1,862,791
Inpatient rehabilitation	643,994			877,750
Outpatient rehabilitation	980,261			973,122
Concentra	1,297,672			2,143,405
Other⁽¹⁾	102,784			111,575
Total Company	$	5,002,937		$	5,968,643
Purchases of property and equipment, net:
Long term acute care	$	10,943		$	10,472
Inpatient rehabilitation	21,414			12,917
Outpatient rehabilitation	6,673			7,338
Concentra	8,686			6,621
Other⁽¹⁾	2,937			2,269
Total Company	$	50,653		$	39,617

Three Months Ended March 31,

2016

2017

% Change

(in thousands)

Net operating revenues:

Specialty hospitals

$
598,954

$
598,787

(0.0
)%
Outpatient rehabilitation(1)

238,082

255,817

7.4

Concentra

250,877

256,149

2.1

Other(2)

417

608

N/M

Total Company

$
1,088,330

$
1,111,361

2.1
%
Income (loss) from operations:

Specialty hospitals

$
72,863

$
70,165

(3.7
)%
Outpatient rehabilitation(1)

24,843

25,011

0.7

Concentra

18,585

26,163

40.8

Other(2)

(29,405
)
(29,574
)
(0.6
)
Total Company

$
86,886

$
91,765

5.6
%
Adjusted EBITDA:

Specialty hospitals

$
86,756

$
88,665

2.2
%
Outpatient rehabilitation(1)

28,879

31,351

8.6

Concentra

34,153

42,592

24.7

Other(2)

(21,173
)
(23,718
)
(12.0
)
Total Company

$
128,615

$
138,890

8.0
%
Adjusted EBITDA margins:

Specialty hospitals

14.5
%
14.8
%

Outpatient rehabilitation(1)

12.1

12.3

Concentra

13.6

16.6

Other(2)

N/M

N/M

Total Company

11.8
%
12.5
%

Total assets: (3)

Specialty hospitals

$
2,434,405

$
2,622,220

Outpatient rehabilitation(1)

974,264

980,261

Concentra

1,310,317

1,297,672

Other(2)

103,878

102,784

Total Company

$
4,822,864

$
5,002,937

Purchases of property and equipment, net:

Specialty hospitals

$
33,675

$
32,357

Outpatient rehabilitation(1)

4,974

6,673

Concentra

3,210

8,686

Other(2)

4,909

2,937

Total Company

$
46,768

$
50,653

N/M—Not Meaningful.

~~(1)~~ The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

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

~~(3)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.~~

(1) Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.
(2)
Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with Customers.

Three Months Ended March 31, ~~2017~~2018, Compared to Three Months Ended March 31, ~~2016~~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,~~ interest expense, income taxes, and net income attributable to non-controlling ~~interest,~~interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~2.1%~~14.8% to ~~$1,111.4~~$1,253.0 million for the three months ended March 31, ~~2017,~~2018, compared to $~~1,088.3~~$1,091.5 million for the three months ended March 31, 2016. The principal changes in our net operating revenues for the three months ended March 31, 2017 were caused by increases at our outpatient rehabilitation segment, which were driven by our acquisition of Physiotherapy on March 4, 2016, offset in part by a decrease in net operating revenues due to the sale of our contract therapy businesses on March 31, 2016, and increases in net operating revenues at our Concentra segment.

2017.

~~Specialty Hospitals~~Long Term Acute Care Segment. Net operating revenues ~~were $598.8~~increased 4.4% to $464.7 million for the three months ended March 31, ~~2017,~~2018, compared to ~~$599.0~~$445.1 million for the three months ended March 31, 2016 for our specialty hospitals segment. Net operating revenues for the three months ended March 31, 2017 were substantially unchanged compared to the three months ended March 31, 2016. We continue to experience transitions, as described below, in our specialty hospitals operations which we expect to positively impact our net operating revenues in the future.

We recently commenced specialty hospital operations at four new inpatient rehabilitation facilities which are now contributing to our specialty hospital net operating revenues; however, during the three months ended March 31, 2017, the contributions from these hospitals were offset by decreases in our net operating revenues at our LTCHs, as discussed above under “~~Regulatory Changes—Medicare Reimbursement of LTCH Services—Patient Criteria,~~” and closed specialty hospitals. The implementation of the Medicare patient criteria regulatory changes afforded us an opportunity to adjust our LTCH operations to better align to those patients which meet LTCH patient criteria. This has resulted in increases in occupancy of higher acuity patient populations at our LTCHs, as our LTCHs became subject to the new rules beginning October 1, 2015. Our LTCH occupancy rates, as illustrated in the table below, reveal the sequential trend showing our occupancy rate decline as our hospitals phased in the new patient criteria eligibility requirements and the subsequent case mix index improvements we experienced to date as we transitioned our services towards higher acuity patients in our LTCH operations.

2015

2016

2017

Occupancy
Percentage

Case Mix
Index

Occupancy
Percentage

Case Mix
Index

Occupancy
Percentage

Case Mix
Index

Three months ended:

March 31

71
%
1.22

71
%
1.24

68
%
1.28

June 30

70
%
1.21

67
%
1.27

September 30

70
%
1.18

61
%
1.26

December 31

70
%
1.21

63
%
1.26

Our overall specialty hospitals average net operating revenue per patient day increased 5.1% to $1,716 for the three months ended March 31, 2017, compared to $1,632 for the three months ended March 31, 2016.

~~Outpatient Rehabilitation Segment.~~ Net operating revenues increased 7.4% to $255.8 million for the three months ended March 31, 2017, compared to $238.1 million for the three months ended March 31, 2016 for our outpatient rehabilitation segment.2017. The increase in net operating revenues was principally due to an increase in ~~visits from~~patient volumes during the three months ended March 31, 2018. Our patient days increased 4.2% to 265,840 days for the three months ended March 31, 2018, compared to 255,097 days for the three months ended March 31, 2017. Additionally, our ~~Physiotherapy outpatient~~occupancy increased to 71% for the three months ended March 31, 2018, compared to 68% for the three months ended March 31, 2017. Our net revenue per patient day was $1,730 for the three months ended March 31, 2018, compared to $1,731 for the three months ended March 31, 2017.

Inpatient Rehabilitation Segment. Net operating revenues increased 20.7% to $174.8 million for the three months ended March 31, 2018, compared to $144.8 million for the three months ended March 31, 2017. The increase in net operating revenues was principally attributable to an increase in patient volumes during the three months ended March 31, 2018. Our patient days increased 23.5% to 76,890 days for the three months ended March 31, 2018, compared to 62,268 days for the three months ended March 31, 2017. The increases in net operating revenues and patient days were principally due to the maturation of our inpatient rehabilitation ~~clinics,~~hospitals which ~~we acquired on March 4,~~commenced operations during 2016 and ~~growth~~2017. Additionally, occupancy increased to 75% for the three months ended March 31, 2018, compared to 70% for the three months ended March 31, 2017. Our net revenue per patient day increased 7.0% to $1,623 for the three months ended March 31, 2018, compared to $1,517 for the three months ended March 31, 2017. This increase was principally attributable to an increase in ~~visits at~~reimbursement rates with our ~~other outpatient rehabilitation clinics.~~commercial payors.

Outpatient Rehabilitation Segment. Net operating revenues increased 2.8% to $257.4 million for the three months ended March 31, 2018, compared to $250.4 million for the three months ended March 31, 2017. The increase in net operating revenues was principally attributable to an increase in our net revenue per visit, which increased 4.0% to $103 for the three months ended March 31, 2018, compared to $99 for the three months ended March 31, 2017. The increase in our net revenue per visit was primarily due to reimbursement rate increases related to contract renewals with some of our payors. Visits ~~increased 31.7%~~were 2,067,465 for the three months ended March 31, 2018, compared to 2,075,790 visits for the three months ended March 31, ~~2017,~~2017. The decrease in visits occurred primarily within regions impacted by severe winter weather conditions.

Concentra Segment. Net operating revenues increased 42.1% to $356.1 million for the three months ended March 31, 2018, compared to ~~1,576,554~~$250.6 million for the three months ended March 31, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $89.9 million of net operating revenues during the quarter. Visits in our centers increased 37.6% to 2,596,059 for the three months ended March 31, 2018, compared to 1,886,815 visits for the three months ended March 31, ~~2016.~~2017. Net revenue per visit ~~was $102~~increased 6.9% to $124 for the three months ended March 31, ~~2017,~~2018, compared to ~~$103~~$116 for the three months ended March 31, ~~2016.~~2017. The ~~decrease~~increase in net revenue per visit ~~is the result of lower~~was driven principally by U.S. HealthWorks, which yield higher per visit rates, ~~at our Physiotherapy clinics.~~

~~Concentra Segment.~~ Net operating revenues increased 2.1% to $256.1 million for the three months ended March 31, 2017, compared to $250.9 million for the three months ended March 31, 2016 for our Concentra segment. The increase in net operating revenues was due toas well as an increase in ~~visits principally from newly acquired and developed medical centers. We had 1,886,815 visits~~workers’ compensation reimbursement rates in our centers for the three months ended March 31, 2017, compared to 1,845,715 visits for the three months ended March 31, 2016. Net revenue per visit was $118 for both the three months ended March 31, 2017 and 2016.

existing Concentra centers.

Operating Expenses

Our operating expenses ~~include our~~consist principally of cost of services and general and administrative ~~expense, and bad debt expense.~~expenses. Our operating expenses ~~increased to $977.1~~were $1,097.6 million, or ~~87.9%~~87.6% of net operating revenues, for the three months ended March 31, ~~2017,~~2018, compared to ~~$966.9~~$957.2 million, or ~~88.8%~~87.8% of net operating revenues, for the three months ended March 31, ~~2016.~~2017. Our cost of services, a major component of which is labor expense, was ~~$928.4~~$1,065.8 million, or ~~83.5%~~85.1% of net operating revenues, for the three months ended March 31, ~~2017,~~2018, compared to ~~$922.3~~$929.1 million, or ~~84.7%~~85.2% of net operating revenues, for the three months ended March 31, ~~2016.~~2017. The decrease in our ~~relative~~ operating expenses isrelative to our net operating revenues was principally due to ~~the sale of~~improved operating performance in our ~~contract therapy businesses on March 31, 2016, specialty hospital closures, and cost reductions achieved by Concentra.~~inpatient rehabilitation segment. Facility rent expense, a component of cost of services, was $64.4 million for the three months ended March 31, 2018, compared to $56.5 million for the three months ended March 31, ~~2017, compared~~2017. The increase in our facility rent expense was primarily attributable to ~~$52.0 million for~~ the ~~three months ended March 31, 2016.~~acquisition of U.S. HealthWorks. General and administrative expenses were $28.1 million for the three months ended March 31, 2017, compared $28.3 million for the three months ended March 31, 2016, which included $3.2 million of Physiotherapy acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended March 31, 2017, compared to 2.6% for the three months ended March 31, 2016. Our bad debt expense was $20.6$31.8 million, or ~~1.9%~~2.5% of net operating revenues, for the three months ended March 31, ~~2017,~~2018, compared to $~~16.4~~$28.1 million, or ~~1.5%~~2.6% of net operating revenues, for the three months ended March 31, ~~2016. The increase was principally~~2017. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the ~~result of increases in bad debt expense in our outpatient rehabilitation segment, primarily due to Physiotherapy, and in our Concentra segment.~~

three months ended March 31, 2018.

Adjusted EBITDA

~~Specialty Hospitals~~Long Term Acute Care Segment. Adjusted EBITDA increased ~~2.2%~~0.9% to ~~$88.7~~$73.0 million for the three months ended March 31, ~~2017,~~2018, compared to ~~$86.8~~$72.3 million for the three months ended March 31, ~~2016 for our specialty hospitals segment.~~2017. Our Adjusted EBITDA margin for the long term acute care segment was ~~14.8%~~15.7% for the three months ended March 31, 2018, compared to 16.3% for the three months ended March 31, 2017. Our Adjusted EBITDA increased as a result of increased patient volume, as discussed above under “Net Operating Revenues.” Additionally, for the three months ended March 31, 2017, ~~compared to 14.5% for~~our Adjusted EBITDA and Adjusted EBITDA margin were positively impacted by gains which resulted from closed hospitals which did not recur in the three months ended March 31, ~~2016. The increase in~~2018.

Inpatient Rehabilitation Segment. Adjusted EBITDA for our specialty hospitals segment was primarily driven by reductions in Adjusted EBITDA losses in our start-up specialty hospitals. Adjusted EBITDA losses in our start-up specialty hospitals were $2.0increased 64.0% to $26.8 million for the three months ended March 31, ~~2017,~~2018, compared to ~~$3.8~~$16.3 million for the three months ended March 31, ~~2016.~~

2017. Our Adjusted EBITDA margin for the inpatient rehabilitation segment was 15.3% for the three months ended March 31, 2018, compared to 11.3% for the three months ended March 31, 2017. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our inpatient rehabilitation segment were primarily driven by increased patient volume, as discussed above under “Net Operating Revenues.” Additionally, our inpatient rehabilitation facilities which commenced operations during 2016 and 2017 have continued to increase their occupancy, allowing our facilities to operate at lower relative costs compared to the prior period. Adjusted EBITDA losses in our start-up hospitals were $0.8 million for the three months ended March 31, 2018, compared to $2.0 million or the three months ended March 31, 2017.

Outpatient Rehabilitation Segment. Adjusted EBITDA ~~increased 8.6%~~was $30.5 million for the three months ended March 31, 2018, compared to $31.4 million for the three months ended March 31, 2017, compared to $28.9 million for the three months ended March 31, 2016 for our outpatient rehabilitation segment. The increase in Adjusted EBITDA for our outpatient rehabilitation segment was principally the result of increases in net operating revenues, as discussed above under “~~Net Operating Revenues~~.”2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~12.3%~~11.9% for the three months ended March 31, ~~2017,~~2018, compared to ~~12.1%~~12.5% for the three months ended March 31, ~~2016. The increase was principally due to~~2017. For the ~~sale of our contract therapy businesses on~~three months ended March 31, ~~2016, which operated at lower~~2018, our Adjusted EBITDA ~~margins than our outpatient rehabilitation clinics.~~

and Adjusted EBITDA margin were impacted as a result of a decline in patient visits in regions impacted by severe winter weather conditions, as discussed above under “Net Operating Revenues,” without a corresponding reduction in costs.

Concentra Segment. Adjusted EBITDA increased ~~24.7%~~35.7% to $57.8 million for the three months ended March 31, 2018, compared to $42.6 million for the three months ended March 31, ~~2017, compared~~2017. The increase in Adjusted EBITDA was principally due to ~~$34.2 million for~~an increase in net operating revenues resulting from the ~~three months ended March 31, 2016 for our Concentra segment.~~acquisition of U.S. HealthWorks. Our Adjusted EBITDA margin for the Concentra segment was ~~16.6%~~16.2% for the three months ended March 31, ~~2017,~~2018, compared to ~~13.6%~~17.0% for the three months ended March 31, ~~2016.~~2017. The ~~increase~~decrease in Adjusted EBITDA ~~for our Concentra segment~~margin was ~~principally~~ the result of ~~cost reductions we have achieved.~~

U.S. HealthWorks centers operating at lower margins than Concentra’s existing occupational health centers as well as incremental costs associated with the integration of U.S. HealthWorks.

Other. The Adjusted EBITDA loss was $24.8 million for the three months ended March 31, 2018, compared to an Adjusted EBITDA loss of $23.7 million for the three months ended March 31, ~~2017, compared to an~~2017. The increase in our Adjusted EBITDA loss was ~~$21.2~~due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was $46.8 million for the three months ended March 31, ~~2016.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense was~~2018, compared to $42.5 million for the three months ended March 31, ~~2017,~~2017. The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.

Income from Operations

For the three months ended March 31, 2018, we had income from operations of $108.6 million, compared to ~~$34.5~~$91.8 million for the three months ended March 31, ~~2016.~~2017. The increase ~~was~~in income from operations resulted principally ~~due to new~~from the improved performance of our inpatient rehabilitation ~~facilities operating in our specialty hospitals segment~~ and ~~Physiotherapy, which we acquired~~Concentra segments, as discussed above.

Loss on ~~March 4, 2016.~~

Early Retirement of Debt

~~Income from Operations~~

~~For~~During the three months ended March 31, ~~2017,~~2018, we ~~had income from operations~~amended both Select and Concentra’s credit facilities, as discussed above under “Significant Events,” which resulted in losses on early retirement of ~~$91.8~~debt of $10.3 million ~~compared to~~ ~~$86.9 million for~~during the three months ended March 31, ~~2016. The increase resulted principally from the improved operating performance in our Concentra segment.~~

~~Loss on Early Retirement of Debt~~2018.

During the three months ended March 31, 2017, we refinanced Select’s senior secured credit facilities which ~~consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018, which~~ resulted in ~~losses~~a loss on early retirement of debt of $19.7 ~~million.~~

million during the three months ended March 31, 2017.

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 March 31, ~~2017,~~2018, we had equity in earnings of unconsolidated subsidiaries of ~~$5.5~~$4.7 million, compared ~~$4.7~~to $5.5 million for the three months ended March 31, 2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from improved performance in our inpatient rehabilitation businesses in which we have a minority interest.

~~Non-Operating Gain~~

~~We recognized a non-operating gain of $25.1~~2017.

Interest Expense

Interest expense was $47.2 million ~~during~~for the three months ended March 31, ~~2016, principally due~~2018, compared to ~~the sale of our contract therapy businesses.~~

~~Interest Expense~~

~~Interest expense was~~ $40.9 million for the three months ended March 31, ~~2017, compared to~~ ~~$38.8 million for the three months ended March 31, 2016.~~2017. The increase in interest expense was principally ~~the result of~~due to increases in our indebtedness as a result of the acquisition of ~~Physiotherapy.~~

U.S. HealthWorks.

Income Taxes

We recorded income tax expense of $12.3 million for the three months ended March 31, 2018, which represented an effective tax rate of 21.8%. We recorded income tax expense of $13.2 million for the three months ended March 31, 2017, which represented an effective tax rate of 36.0%. ~~We recorded~~The lower effective tax rate for the three months ended March 31, 2018, resulted from the effects resulting from the federal tax reform legislation enacted on December 22, 2017 and the discrete tax benefits realized from certain equity interests redeemed as part of the closing of the U.S. HealthWorks transaction.

Net Income Attributable to Non-Controlling Interests

Net income ~~tax expense of~~ ~~$17.1~~attributable to non-controlling interests was $10.2 million for the three months ended March 31, 2016, which represented an effective tax rate of 22.2%. Our effective tax rate for the three months March 31, 2016 benefited from the sale of our contract therapy businesses. Our tax basis in our contract therapy businesses exceeded our selling price. As a result, we had no tax expense related2018, compared to ~~the gain on the sale of our contract therapy businesses.~~

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

~~Net income attributable to non-controlling interests was~~ $7.6 million for the three months ended March 31, ~~2017, compared to~~ ~~$5.1 million for the three months ended March 31, 2016.~~2017. The increase iswas principally due to the ~~minority interest owners’ share~~improved operating performance of ~~income from Concentra.~~

several of our joint venture inpatient rehabilitation facilities.

Liquidity and Capital Resources

Cash Flows for the Three Months Ended March 31, ~~2017~~2018 and Three Months Ended March 31, ~~2016~~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.

Three Months Ended March 31,

2016

2017

(in thousands)

Cash flows provided by (used in) operating activities

$
111,168

$
(55,861
)
Cash flows used in investing activities

(397,674
)
(41,207
)
Cash flows provided by financing activities

357,479

63,250

Net increase (decrease) in cash and cash equivalents

70,973

(33,818
)
Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$
85,408

$
65,211



	Three Months Ended March 31,
	2017			2018
	(in thousands)
Cash flows provided by (used in) operating activities	$	(55,861	)	$	50,727
Cash flows used in investing activities	(41,207		)	(556,039		)
Cash flows provided by financing activities	63,250			502,446
Net decrease in cash and cash equivalents	(33,818		)	(2,866		)
Cash and cash equivalents at beginning of period	99,029			122,549
Cash and cash equivalents at end of period	$	65,211		$	119,683

Operating activities provided $50.7 million of cash flows for the three months ended March 31, 2018, compared to cash outflows of $55.9 million for the three months ended March 31, 2017. The increase in operating cash flows for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, was principally driven by the change in our accounts receivable in their respective periods. During the three months ended March 31, 2017, our days sales outstanding increased from 51 days at December 31, 2016 to 57 days at March 31, 2017 due to the significant underpayments we received through the periodic interim payment program from Medicare in our LTCHs and the repayment of overpayments we received in 2016 during the first quarter of 2017. During the three months ended March 31, 2018, our days sales outstanding decreased from 58 days at December 31, 2017 to 56 days at March 31, 2018. Our days sales outstanding will fluctuate based upon variability in our collection cycles.

Investing activities used ~~$55.9~~$556.0 million of cash flows for the three months ended March 31, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and $39.6 million for purchases of property and equipment. Investing activities used $41.2 million of cash flows for the three months ended March 31, 2017. The decrease in operating cash flows for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 is principally due to increases in our accounts receivable. Our days sales outstanding was 56 days at March 31, 2017, compared to 51 days at December 31, 2016 and 52 days at March 31, 2016. Our days sales outstanding will fluctuate based upon variability in our collection cycles. The increase in our days sales outstanding and related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

~~Investing activities used $41.2 million for the three months ended March 31, 2017. The~~ principal ~~use~~uses of cash ~~was~~were $50.7 million for purchases of property and equipment and $9.6 million ~~for the acquisition~~ of ~~Concentra centers and outpatient rehabilitation clinics,~~acquisition-related payments, offset in part by $19.5 million of proceeds from the sale of assets. ~~Investing~~

Financing activities ~~used $397.7~~provided $502.4 million of cash ~~flow~~flows for the three months ended March 31, ~~2016, principally due~~2018. The principal sources of cash were from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 million and $15.0 million of net borrowings under the Select revolving facility. This was offset in part by $286.6 million of distributions to non-controlling interests, of which $285.4 million related to the ~~acquisition of Physiotherapy.~~

redemption and reorganization transactions executed under the Purchase Agreement, as described above under “Significant Events.”

Financing activities provided $63.3 million of cash flows for the three months ended March 31, 2017. The principal source of cash was net borrowings under the Select revolving facility of $115.0 million, offset by $8.3 million of cash used for financing costs, and $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities.

Financing activities provided $357.5 million of cash flows for the three months ended March 31, 2016. The principal source of cash was the issuance of $625.0 million aggregate principal amount of series F tranche B term loans, net of discounts and debt issuance costs of $24.9 million, offset by $215.7 million of cash used to repay the series D tranche B term loans.

Capital Resources

Working capital. We had net working capital of ~~$305.7~~$415.6 million at March 31, ~~2017, compare~~2018, compared to ~~$191.3~~$315.4 million at December 31, ~~2016.~~2017. The increase in net working capital iswas primarily due to the acquisition of U.S. HealthWorks and an increase in our accounts receivable.

Select credit facilities.

On March ~~6, 2017,~~22, 2018, Select entered into a new senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of standby letters of credit. Select used borrowings underAmendment No. 1 to the Select credit ~~facilities to:~~agreement dated March 6, 2017. Amendment No. 1 (i) ~~repay~~decreases the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility due March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

~~Borrowings under the Select credit facilities bear~~applicable interest ~~at a~~ rate ~~equal to: (i) in the case of~~on the Select term ~~loan,~~loans from the Adjusted LIBO Rate (as defined in the Select credit ~~agreement) plus 3.50% (subject~~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 ~~Alternate~~from the Alternative Base Rate (as defined in the Select credit ~~agreement) plus 2.50% (subject~~agreement and subject to an Alternate Base Rate floor of 2.00%)~~; and (ii)~~ 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 ~~case of~~Select credit agreement); (ii) decreases 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 ~~Alternate~~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.~~

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021,ratio; (iii) extends the maturity date for the Select term ~~loan will become~~loans from March ~~1, 2021. The Select revolving facility will be payable on~~6, 2024 to March ~~8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.~~

~~Select will be required~~6, 2025; and (iv) makes certain other technical amendments to ~~prepay borrowings under~~ the Select credit ~~facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or~~agreement as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

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

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

set forth therein.

At March 31, ~~2017,~~2018, Select had outstanding borrowings under the Select credit facilities consisting of ~~the $1,150.0~~$1,138.5 million in Select term ~~loan~~loans (excluding unamortized discounts and debt issuance costs of ~~$27.9~~$23.8 million) and borrowings of ~~$335.0~~$245.0 million (excluding letters of credit) under the Select revolving facility. At March 31, ~~2017,~~2018, Select had ~~$74.1~~$167.0 million of availability under the Select revolving facility after giving effect to ~~$40.9~~$38.0 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 ~~March~~February 1, ~~2017,~~2018, in connection with the transactions executed under the Purchase Agreement, as described above under “Significant Events,” Concentra ~~made a principal prepayment of $23.1 million associated with its~~amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans ~~in accordance~~that, along with the ~~provision~~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 ~~facilities that requires mandatory prepayments~~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 provides 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%).

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 ~~annual~~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 ~~facilities.~~

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 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 March 31, ~~2017,~~2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of ~~$619.2~~$1,414.2 million of term loans (excluding unamortized discounts and debt issuance costs of ~~$15.1~~$26.5 million) ~~of first lien term loans.~~. Concentra did not have any borrowings under the Concentra revolving facility. At March 31, ~~2017,~~2018, Concentra had ~~$43.4~~$65.9 million of availability under its revolving facility after giving effect to ~~$6.6~~$9.1 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, ~~2017,~~2018, 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 March 31, ~~2017.~~2018. Since the inception of the program through March 31, ~~2017,~~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.

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

Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers and from time to time we may also develop new inpatient rehabilitation hospitals and occupational ~~medicine~~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.~~

acquisitions, such as the acquisition of U.S. HealthWorks.

Contractual Obligations

Our contractual obligations and commercial commitments have changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, due to the following:

the incremental $555.0 million in tranche B term loans provided for under the Concentra first lien credit agreement;

the $240.0 million of term loans provided for under the Concentra second lien credit agreement;

the additional $25.0 million five-year revolving credit facility made available under the Concentra first lien credit agreement; and

the extension of the maturity date for the Select term loans under the Amendment No. 1 to the Select credit agreement from March 6, 2024 to March 6, 2025.

Recent Accounting Pronouncements

Leases

In February ~~2017,~~2016, the Financial Accounting Standards Board (the ~~“FASB”~~“FASB��) issued Accounting Standards Update (“ASU”) ~~2017~~-~~05,~~2016‑02, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset. The standard provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

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

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers~~, ASU 2016-08,~~



	Three Months Ended March 31, 2017
	As Reported			As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,111,361		$	1,091,517		$	(19,844	)
Bad debt expense	20,625			781			(19,844		)

Condensed Consolidated Statements of Cash Flows
Provision for bad debts	20,625			781			(19,844		)
Changes in accounts receivable	(138,113		)	(118,269		)	19,844

_____________________________________________________________

(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’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.~~

~~Recently Adopted Accounting Pronouncements~~

Note 7.

Income Taxes

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

~~As of~~

At March 31, ~~2017,~~2018, Select had ~~a $1,150.0~~outstanding borrowings under the Select credit facilities consisting of $1,138.5 million of Select term ~~loan~~loans (excluding unamortized discounts and debt issuance ~~discounts) outstanding~~costs of $23.8 million) and ~~$335.0~~borrowings of $245.0 million ~~in revolving borrowings outstanding~~(excluding letters of credit) under the Select ~~credit facilities,~~revolving facility, which bear interest at variable rates.

~~As of~~

At March 31, ~~2017,~~2018, Concentra had ~~$619.2~~outstanding borrowings under the Concentra credit facilities consisting of $1,414.2 million of Concentra term loans (excluding unamortized discounts and debt issuance ~~costs) in term loans outstanding under the Concentra credit facilities,~~costs of $26.5 million), which bear interest at variable rates. Concentra did not have any ~~outstanding~~borrowings under the Concentra revolving ~~borrowings at~~facility.

At March 31, ~~2017.~~

~~Certain of Select’s and Concentra’s outstanding borrowings that bear interest at variable rates may be effectively fixed based upon then current interest rates if~~2018, the ~~Adjusted LIBO Rate does not exceed the applicable Adjusted LIBO Rate floors for such borrowings:~~

· ~~The $1,150.0 million Select term loan is subject to an Adjusted LIBO Rate floor of 1.00%~~3-month LIBOR rate was 2.31%. ~~Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 4.50%.~~

· The $619.2 million Concentra first lien term loans are subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Concentra’s interest rate on this indebtedness is effectively fixed at 4.00%.

~~However, the Select and Concentra revolving borrowings are not subject to an Adjusted LIBO Rate floor.~~

~~The following table summarizes the impact of hypothetical increases~~Consequently, each 0.25% increase in market interest rates ~~as of March 31, 2017 on our consolidated interest expense over the subsequent twelve month period:~~

Increase in
Market
Interest Rate

Interest Rate Expense
Increases Per Annum
(in thousands)(1)

0.25
%
$
5,260

0.50
%
10,521

0.75
%
15,781

1.00
%
21,042

~~(1)~~ ~~Based on the 3-month LIBOR rate of 1.15% as of March 31, 2017, an increase in interest rates would~~will impact the interest ~~rate paid~~expense on Select’s and Concentra’s variable rate debt ~~as indicated in the table above.~~

by $7.0 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 March 31, 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 ~~as of March 31, 2017~~ to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

U.S. HealthWorks Acquisition

On February1, 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 first quarter ended March 31, ~~2017~~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.

PART IIII: OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

Evansville ~~Litigation~~Litigation.

and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the ~~plaintiff-relators’~~plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the ~~plaintiff-relators’~~plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants 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 ~~opposed.~~ 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~~Litigation.

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~~Litigation.

The Company intends to vigorously defend ~~this action if the plaintiff-relator pursues it,~~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.

Northern District of Alabama Investigation

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, ~~2016.~~

2017.

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, ~~2017~~2018 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 March 31, ~~2017~~2018 under the authorized common stock repurchase program.

The following table provides information regarding repurchases of our common stock during the three months ended March 31, ~~2017:~~

Total Number of
Shares
Purchased(1)

Average Price
Paid Per Share

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

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

January 1 - January 31, 2017

1,868

$
13.25

—

$
185,249,408

February 1 - February 28, 2017

10,350

12.70

—

185,249,408

March 1 - March 31, 2017

—

—

—

185,249,408

Total

12,218

$
12.78

—

$
185,249,408

~~(1)~~ ~~Represents~~2018. As set forth below, the shares repurchased during the three months ended March 31, 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 Publically
Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be
Purchased Under Plans or Programs
January 1 - January 31, 2018 6,737
$ 18.05
—
$ 185,249,408
February 1 - February 28, 2018 —
—
—
185,249,408
March 1 - March 31, 2018 —
—
—
185,249,408
Total 6,737
$ 18.05
—
$ 185,249,408

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

~~The exhibits to this report are listed in the Exhibit Index appearing on page 49 hereof.~~

~~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~~

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

	~~By:~~	~~/s/ Scott A. Romberger~~
		~~Scott A. Romberger~~
		~~Senior Vice President, Chief Accounting Officer~~Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, LLC, dated February 1, 2018, by and ~~Controller~~
		~~(Principal Accounting Officer)~~
~~Dated: May 4, 2017~~

	~~SELECT MEDICAL HOLDINGS CORPORATION~~


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

	~~By:~~	~~/s/ Scott A. Romberger~~
		~~Scott A. Romberger~~
		~~Senior Vice President, Chief Accounting Officer and Controller~~
		~~(Principal Accounting Officer)~~
~~Dated: May 4, 2017~~

~~EXHIBIT INDEX~~

~~Number~~		~~Description~~

~~10.1~~		~~Credit Agreement, dated as of March 6, 2017,~~ among ~~Select Medical~~Concentra Group Holdings ~~Corporation,~~Parent, LLC, Select Medical Corporation, ~~JPMorgan Chase Bank, N.A.~~Welsh, Carson, Anderson & Stowe XII, L.P., ~~as Administrative and Collateral Agent, Wells Fargo Securities, LLC and Deutsche Bank Securities Inc., as Co-Syndication Agents and RBC Capital Markets, Merrill Lynch, Pierce, Fenner~~Dignity Health Holding Corporation, Cressey & ~~Smith Incorporated, Goldman Sachs Bank USA, PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., as CoDocumentation Agents~~Company IV LP, and the other ~~lenders and issuing banks party thereto,~~members named therein, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed ~~on March 7, 2017 (Reg~~February 2, 2018 (Reg. Nos. ~~001- 34465~~001-34465 and ~~001-314411)~~001-31441).
10.2		Amendment No. 3, dated February 1, 2018, to the First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Inc., MJ Acquisition Corporation, Concentra Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and 001-31441).
~~10.2~~ 10.3		~~Change of Control~~ Second Lien Credit Agreement, dated February ~~16, 2017, between~~1, 2018, by and among Concentra Inc., Concentra Holdings, Inc., the Lenders party thereto and Wells Fargo Bank, National Association, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and ~~John A. Saich.~~ 001-31441).
10.4		Amendment No. 1, dated March 22, 2018, to the Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed March 23, 2018 (Reg Nos. 001-34465 and 001-31441).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
~~31.2~~		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
~~32.1~~		Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
~~101~~		The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2017~~2018 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and ~~2016,~~2018, (ii) Condensed Consolidated Balance Sheets as of March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and ~~2016,~~2018, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the three months ended March 31, ~~2017~~2018 and (v) Notes to Condensed Consolidated Financial Statements.

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: May 3, 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: May 3, 2018



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	5

	Condensed consolidated statements of cash flows	6

	Notes to condensed consolidated financial statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26 29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43 48

ITEM 4.	CONTROLS AND PROCEDURES	44 49

PART II	OTHER INFORMATION	45 50

ITEM 1.	LEGAL PROCEEDINGS	45 50

ITEM 1A.	RISK FACTORS	46 52

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47 53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47 53

ITEM 4.	MINE SAFETY DISCLOSURES	47 53

ITEM 5.	OTHER INFORMATION	47 53

ITEM 6.	EXHIBITS	47 54

SIGNATURES

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		March 31,		December 31,			March 31,
	2016		2017		2016			2017

ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	65,211	$	99,029		$	65,211
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively	573,752		691,520		573,752			691,520
Prepaid income taxes	12,423		2,402		12,423			2,402
Other current assets	77,699		85,081		77,699			85,081
Total Current Assets	762,903		844,214		762,903			844,214

Property and equipment, net	892,217		897,146		892,217			897,146
Goodwill	2,751,000		2,759,764		2,751,000			2,759,764
Identifiable intangible assets, net	340,562		337,076		340,562			337,076
Other assets	173,944		164,737		173,944			164,737

Total Assets	$	4,920,626	$	5,002,937	$	4,920,626		$	5,002,937

LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	39,362	$	22,299	$	39,362		$	22,299
Current portion of long-term debt and notes payable	13,656		22,013		13,656			22,013
Accounts payable	126,558		125,118		126,558			125,118
Accrued payroll	146,397		110,196		146,397			110,196
Accrued vacation	83,261		88,736		83,261			88,736
Accrued interest	22,325		21,558		22,325			21,558
Accrued other	140,076		143,180		140,076			143,180
Income taxes payable	—		5,399		—			5,399
Total Current Liabilities	571,635		538,499		571,635			538,499

Long-term debt, net of current portion	2,685,333		2,771,410		2,685,333			2,771,410
Non-current deferred tax liability	199,078		195,729		199,078			195,729
Other non-current liabilities	136,520		142,208		136,520			142,208

Total Liabilities	3,592,566		3,647,846		3,592,566			3,647,846

Commitments and contingencies (Note 9)

Redeemable non-controlling interests	422,159		462,680		422,159			462,680

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,753,444 shares issued and outstanding at 2016 and 2017, respectively	132		132		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	443,908		450,373		925,111			931,661
Retained earnings (accumulated deficit)	371,685		351,224		(109,386		)	(129,932		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		801,729		815,725			801,729
Non-controlling interest	90,176		90,682		90,176			90,682
Total Equity	905,901		892,411		905,901			892,411

Total Liabilities and Equity	$	4,920,626	$	5,002,937	$	4,920,626		$	5,002,937

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2016			2017			2016			2017

Net operating revenues	$	1,088,330		$	1,111,361		$	1,088,330		$	1,111,361

Costs and expenses:
Cost of services	922,262			928,357			922,262			928,357
General and administrative	28,268			28,075			28,268			28,075
Bad debt expense	16,397			20,625			16,397			20,625
Depreciation and amortization	34,517			42,539			34,517			42,539
Total costs and expenses	1,001,444			1,019,596			1,001,444			1,019,596

Income from operations	86,886			91,765			86,886			91,765

Other income and expense:
Loss on early retirement of debt	(773		)	(19,719		)	(773		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	4,652			5,521			4,652			5,521
Non-operating gain (loss)	25,087			(49		)	25,087			(49		)
Interest expense	(38,848		)	(40,853		)	(38,848		)	(40,853		)

Income before income taxes	77,004			36,665			77,004			36,665

Income tax expense	17,060			13,202			17,060			13,202
Net income	59,944			23,463			59,944			23,463

Less: Net income attributable to non-controlling interests	5,111			7,593			5,111			7,593

Net income attributable to Select Medical Holdings
Corporation and Select Medical Corporation	$	54,833		$	15,870		$	54,833		$	15,870

Basic	$	0.42		$	0.12
Diluted	$	0.42		$	0.12

Weighted average shares outstanding:
Basic	127,500			128,464
Diluted	127,581			128,628



	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2018			2017			2018
Net operating revenues	$	1,091,517		$	1,252,964		$	1,091,517		$	1,252,964
Costs and expenses:
Cost of services	929,138			1,065,813			929,138			1,065,813
General and administrative	28,075			31,782			28,075			31,782
Depreciation and amortization	42,539			46,771			42,539			46,771
Total costs and expenses	999,752			1,144,366			999,752			1,144,366
Income from operations	91,765			108,598			91,765			108,598
Other income and expense:
Loss on early retirement of debt	(19,719		)	(10,255		)	(19,719		)	(10,255		)
Equity in earnings of unconsolidated subsidiaries	5,521			4,697			5,521			4,697
Non-operating gain (loss)	(49		)	399			(49		)	399
Interest expense	(40,853		)	(47,163		)	(40,853		)	(47,163		)
Income before income taxes	36,665			56,276			36,665			56,276
Income tax expense	13,202			12,294			13,202			12,294
Net income	23,463			43,982			23,463			43,982
Less: Net income attributable to non-controlling interests	7,593			10,243			7,593			10,243
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	15,870		$	33,739		$	15,870		$	33,739
Income per common share:
Basic	$	0.12		$	0.25
Diluted	$	0.12		$	0.25
Weighted average shares outstanding:
Basic	128,464			129,691
Diluted	128,628			129,816

				Select Medical Holdings Corporation Stockholders
	Redeemable Non-controlling interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2016	$	422,159		132,597		$	132	$	443,908		$	371,685		$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Holdings Corporation											15,870			15,870						15,870
Net income attributable to non-controlling interests	6,090													—			1,503			1,503
Issuance and vesting of restricted stock				101		0		4,280						4,280						4,280
Repurchase of common shares				(12	)	0		(85		)	(71		)	(156		)				(156		)
Exercise of stock options				67		0		617						617						617
Issuance of non-controlling interests								1,653						1,653			441			2,094
Purchase of non-controlling interests	(57		)								7			7						7
Distributions to non-controlling interests	(2,075		)											—			(1,532		)	(1,532		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	271										25			25			94			119
Balance at March 31, 2017	$	462,680		132,753		$	132	$	450,373		$	351,224		$	801,729		$	90,682		$	892,411



				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									33,739			33,739						33,739
Net income attributable to non-controlling interests	5,743											—			4,500			4,500
Additional investment by Holdings							738					738						738
Dividends declared and paid to Holdings									(122		)	(122		)				(122		)
Contribution related to restricted stock award issuances by Holdings							4,717					4,717						4,717
Exchange of interests	163,659								74,341			74,341						74,341
Distributions to non-controlling interests	(203,972		)						(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests	1,051								(1,051		)	(1,051		)				(1,051		)
Other	175								103			103			35			138
Balance at March 31, 2018	$	607,474		0	$	0	$	952,825	$	(100,225	)	$	852,600		$	112,677		$	965,277

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

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

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

	For the Three Months Ended March 31, 2016
	(in thousands, except per share amounts)
Net revenue	$	1,141,860
Net income	53,014
Income per common share:
Basic	$	0.40
Diluted	$	0.40

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	—			311		8,627		8,938
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of March 31, 2017	$	1,447,064		$	644,036	$	668,664	$	2,759,764

	December 31, 2016		March 31, 2017
	(in thousands)
Select 6.375% senior notes(1)	$	702,545	$	702,966
Select credit facilities:
Select revolving facility	220,000		335,000
Select term loan(2)	1,122,203		1,122,052
Other—Select	22,688		24,842
Total Select debt	2,067,436		2,184,860
Less: Select current maturities	8,996		21,641
Select long-term debt maturities	$	2,058,440	$	2,163,219
Concentra credit facilities:
Concentra term loans(3)	$	626,375	$	604,068
Other—Concentra	5,178		4,495
Total Concentra debt	631,553		608,563
Less: Concentra current maturities	4,660		372
Concentra long-term debt maturities	$	626,893	$	608,191

Total current maturities	$	13,656	$	22,013
Total long-term debt maturities	2,685,333		2,771,410
Total debt	$	2,698,989	$	2,793,423

	Select			Concentra			Total
	(in thousands)
April 1, 2017 — December 31, 2017	$	18,072		$	343		$	18,415
2018	14,976			128			15,104
2019	23,327			144			23,471
2020	11,568			3,177			14,745
2021	721,514			6,680			728,194
2022 and beyond	1,430,385			613,198			2,043,583
Total principal	2,219,842			623,670			2,843,512
Unamortized discounts and premiums	(13,051		)	(2,641		)	(15,692		)
Unamortized debt issuance costs	(21,931		)	(12,466		)	(34,397		)
Total	$	2,184,860		$	608,563		$	2,793,423

	December 31, 2016						March 31, 2017
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	702,545	$	710,000	$	710,000	$	702,966	$	715,325
Select credit facilities(2)	1,367,751		1,342,203		1,370,460		1,485,000		1,457,052		1,474,013
Concentra credit facilities(3)	642,239		626,375		644,648		619,175		604,068		622,271

	Three Months Ended March 31, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,954	$	238,082	$	250,877	$	417		$	1,088,330
Adjusted EBITDA	86,756		28,879		34,153		(21,173		)	128,615
Total assets(2)	2,434,405		974,264		1,310,317		103,878			4,822,864
Capital expenditures	33,675		4,974		3,210		4,909			46,768

	Three Months Ended March 31, 2017
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,787	$	255,817	$	256,149	$	608		$	1,111,361
Adjusted EBITDA	88,665		31,351		42,592		(23,718		)	138,890
Total assets	2,622,220		980,261		1,297,672		102,784			5,002,937
Capital expenditures	32,357		6,673		8,686		2,937			50,653

	Three Months Ended March 31,
	2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	54,833	$	15,870
Less: Earnings allocated to unvested restricted stockholders	1,582		507
Net income available to common stockholders	$	53,251	$	15,363
Denominator:
Weighted average shares—basic	127,500		128,464
Effect of dilutive securities:
Stock options	81		164
Weighted average shares—diluted	127,581		128,628

Basic income per common share:	$	0.42	$	0.12
Diluted income per common share:	$	0.42	$	0.12

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	72		$	6,836	$	3,405		$	54,898	$	—		$	65,211
Accounts receivable, net	—			442,132		125,079			124,309		—			691,520
Intercompany receivables	—			2,183,527		169,816			—		(2,353,343		) (a)	—
Prepaid income taxes	2,402			—		—			—		—			2,402
Other current assets	17,714			34,693		11,878			20,796		—			85,081
Total Current Assets	20,188			2,667,188		310,178			200,003		(2,353,343		)	844,214

Property and equipment, net	49,309			609,822		54,118			183,897		—			897,146
Investment in affiliates	4,513,416			100,095		—			—		(4,613,511		) (b) (c)	—
Goodwill	—			2,091,100		—			668,664		—			2,759,764
Identifiable intangible assets, net	—			108,545		—			228,531		—			337,076
Other assets	50,355			86,384		38,882			16,577		(27,461		) (d)	164,737

Total Assets	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937

Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	22,299		$	—	$	—		$	—	$	—		$	22,299
Current portion of long-term debt and notes payable	20,506			502		633			372					22,013
Accounts payable	13,349			78,195		17,429			16,145		—			125,118
Intercompany payables	2,183,527			169,816		—			—		(2,353,343		) (a)	—
Accrued payroll	4,268			76,290		2,488			27,150		—			110,196
Accrued vacation	3,740			57,763		11,968			15,265		—			88,736
Accrued interest	19,390			—		4			2,164		—			21,558
Accrued other	38,937			62,607		9,780			31,856		—			143,180
Income taxes payable	—			—		—			5,399		—			5,399
Total Current Liabilities	2,306,016			445,173		42,302			98,351		(2,353,343		)	538,499

Long-term debt, net of current portion	1,482,768			525,263		155,188			608,191		—			2,771,410
Non-current deferred tax liability	—			135,640		667			86,883		(27,461		) (d)	195,729
Other non-current liabilities	42,755			56,617		6,849			35,987		—			142,208

Total Liabilities	3,831,539			1,162,693		205,006			829,412		(2,380,804		)	3,647,846

Redeemable non-controlling interests	—			—		9,899			452,781		—			462,680

Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	931,661			—		—			—		—			931,661
Retained earnings (accumulated deficit)	(129,932		)	1,318,340		(40,858		)	6,668		(1,284,150		) (c)	(129,932		)
Subsidiary investment	—			3,182,101		142,123			5,137		(3,329,361		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	801,729			4,500,441		101,265			11,805		(4,613,511		)	801,729

Non-controlling interests	—			—		87,008			3,674		—			90,682
Total Equity	801,729			4,500,441		188,273			15,479		(4,613,511		)	892,411

Total Liabilities and Equity	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937


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

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

Increase in Market Interest Rate		Interest Rate Expense Increases Per Annum (in thousands)(1)
0.25	%	$	5,260
0.50	%	10,521
0.75	%	15,781
1.00	%	21,042

	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 1 - January 31, 2017	1,868	$	13.25	—	$	185,249,408
February 1 - February 28, 2017	10,350	12.70		—	185,249,408
March 1 - March 31, 2017	—	—		—	185,249,408
Total	12,218	$	12.78	—	$	185,249,408



	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 1 - January 31, 2018	6,737	$	18.05	—	$	185,249,408
February 1 - February 28, 2018	—	—		—	185,249,408
March 1 - March 31, 2018	—	—		—	185,249,408
Total	6,737	$	18.05	—	$	185,249,408