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 June 30, ~~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 Delaware		20-1764048 23-2872718
(State or Other Jurisdiction of Incorporation or Organization)		~~20-1764048~~ ~~23-2872718~~ (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 July 31, ~~2017,~~2018, Select Medical Holdings Corporation had outstanding ~~132,936,770~~135,376,051 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,

June 30,

December 31,

June 30,

2016

2017

2016

2017

ASSETS

Current Assets:

Cash and cash equivalents

$
99,029

$
73,799

$
99,029

$
73,799

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,769 at 2016 and 2017, respectively

573,752

714,236

573,752

714,236

Prepaid income taxes

12,423

—

12,423

—

Other current assets

77,699

83,211

77,699

83,211

Total Current Assets

762,903

871,246

762,903

871,246

Property and equipment, net

892,217

911,532

892,217

911,532

Goodwill

2,751,000

2,766,296

2,751,000

2,766,296

Identifiable intangible assets, net

340,562

335,704

340,562

335,704

Other assets

173,944

169,433

173,944

169,433

Total Assets

$
4,920,626

$
5,054,211

$
4,920,626

$
5,054,211

LIABILITIES AND EQUITY

Current Liabilities:

Bank overdrafts

$
39,362

$
34,134

$
39,362

$
34,134

Current portion of long-term debt and notes payable

13,656

26,577

13,656

26,577

Accounts payable

126,558

123,631

126,558

123,631

Accrued payroll

146,397

119,187

146,397

119,187

Accrued vacation

83,261

92,250

83,261

92,250

Accrued interest

22,325

19,277

22,325

19,277

Accrued other

140,076

146,853

140,076

146,853

Income taxes payable

—

6,976

—

6,976

Total Current Liabilities

571,635

568,885

571,635

568,885

Long-term debt, net of current portion

2,685,333

2,734,132

2,685,333

2,734,132

Non-current deferred tax liability

199,078

197,411

199,078

197,411

Other non-current liabilities

136,520

141,279

136,520

141,279

Total Liabilities

3,592,566

3,641,707

3,592,566

3,641,707

Commitments and contingencies (Note 8)

Redeemable non-controlling interests

422,159

468,850

422,159

468,850

Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,929,545 shares issued and outstanding at 2016 and 2017, respectively

132

133

—

—

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

—

—

0

0

Capital in excess of par

443,908

454,892

925,111

936,428

Retained earnings (accumulated deficit)

371,685

393,294

(109,386
)
(88,109
)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

815,725

848,319

815,725

848,319

Non-controlling interest

90,176

95,335

90,176

95,335

Total Equity

905,901

943,654

905,901

943,654

Total Liabilities and Equity

$
4,920,626

$
5,054,211

$
4,920,626

$
5,054,211

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

Current Assets:

Cash and cash equivalents $ 122,549
$ 141,029
$ 122,549
$ 141,029
Accounts receivable 691,732
775,610
691,732
775,610
Prepaid income taxes 31,387
14,488
31,387
14,488
Other current assets 75,158
88,215
75,158
88,215
Total Current Assets 920,826
1,019,342
920,826
1,019,342
Property and equipment, net 912,591
965,844
912,591
965,844
Goodwill 2,782,812
3,314,606
2,782,812
3,314,606
Identifiable intangible assets, net 326,519
451,932
326,519
451,932
Other assets 184,418
213,076
184,418
213,076
Total Assets $ 5,127,166
$ 5,964,800
$ 5,127,166
$ 5,964,800
LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts $ 29,463
$ 23,292
$ 29,463
$ 23,292
Current portion of long-term debt and notes payable 22,187
24,479
22,187
24,479
Accounts payable 128,194
131,830
128,194
131,830
Accrued payroll 160,562
149,967
160,562
149,967
Accrued vacation 92,875
109,958
92,875
109,958
Accrued interest 19,885
13,293
19,885
13,293
Accrued other 143,166
170,067
143,166
170,067
Income taxes payable 9,071
4,425
9,071
4,425
Total Current Liabilities 605,403
627,311
605,403
627,311
Long-term debt, net of current portion 2,677,715
3,386,209
2,677,715
3,386,209
Non-current deferred tax liability 124,917
150,694
124,917
150,694
Other non-current liabilities 145,709
172,427
145,709
172,427
Total Liabilities 3,553,744
4,336,641
3,553,744
4,336,641
Commitments and contingencies (Note 10)

Redeemable non-controlling interests 640,818
616,232
640,818
616,232
Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 134,326,823 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
474,812
947,370
959,173
Retained earnings (accumulated deficit) 359,735
420,525
(124,002 ) (63,702 )
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity 823,368
895,471
823,368
895,471
Non-controlling interests 109,236
116,456
109,236
116,456
Total Equity 932,604
1,011,927
932,604
1,011,927
Total Liabilities and Equity $ 5,127,166
$ 5,964,800
$ 5,127,166
$ 5,964,800

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 June 30,

For the Three Months Ended June 30,

2016

2017

2016

2017

Net operating revenues

$
1,097,631

$
1,120,675

$
1,097,631

$
1,120,675

Costs and expenses:

Cost of services

916,985

920,230

916,985

920,230

General and administrative

25,870

28,275

25,870

28,275

Bad debt expense

17,517

18,174

17,517

18,174

Depreciation and amortization

36,205

38,333

36,205

38,333

Total costs and expenses

996,577

1,005,012

996,577

1,005,012

Income from operations

101,054

115,663

101,054

115,663

Other income and expense:

Equity in earnings of unconsolidated subsidiaries

4,546

5,666

4,546

5,666

Non-operating gain

13,035

—

13,035

—

Interest expense

(44,332
)
(37,655
)
(44,332
)
(37,655
)

Income before income taxes

74,303

83,674

74,303

83,674

Income tax expense

33,450

32,374

33,450

32,374

Net income

40,853

51,300

40,853

51,300

Less: Net income attributable to non-controlling interests

6,918

9,245

6,918

9,245

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

$
33,935

$
42,055

$
33,935

$
42,055

Basic

$
0.26

$
0.32

Diluted

$
0.26

$
0.32

Weighted average shares outstanding:

Basic

127,626

128,624

Diluted

127,820

128,777

Select Medical Holdings Corporation Select Medical Corporation
For the Three Months Ended June 30, For the Three Months Ended June 30,
2017 2018 2017 2018
Net operating revenues $ 1,102,465
$ 1,296,210
$ 1,102,465
$ 1,296,210
Costs and expenses:

Cost of services 920,194
1,094,731
920,194
1,094,731
General and administrative 28,275
29,194
28,275
29,194
Depreciation and amortization 38,333
51,724
38,333
51,724
Total costs and expenses 986,802
1,175,649
986,802
1,175,649
Income from operations 115,663
120,561
115,663
120,561
Other income and expense:

Equity in earnings of unconsolidated subsidiaries 5,666
4,785
5,666
4,785
Non-operating gain —
6,478
—
6,478
Interest expense (37,655 ) (50,159 ) (37,655 ) (50,159 )
Income before income taxes 83,674
81,665
83,674
81,665
Income tax expense 32,374
21,106
32,374
21,106
Net income 51,300
60,559
51,300
60,559
Less: Net income attributable to non-controlling interests 9,245
14,048
9,245
14,048
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation $ 42,055
$ 46,511
$ 42,055
$ 46,511
Income per common share:

Basic $ 0.32
$ 0.35

Diluted $ 0.32
$ 0.35

Weighted average shares outstanding:

Basic 128,624
129,830

Diluted 128,777
129,924

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 Six Months Ended June 30,

For the Six Months Ended June 30,

2016

2017

2016

2017

Net operating revenues

$
2,185,961

$
2,232,036

$
2,185,961

$
2,232,036

Costs and expenses:

Cost of services

1,839,247

1,848,587

1,839,247

1,848,587

General and administrative

54,138

56,350

54,138

56,350

Bad debt expense

33,914

38,799

33,914

38,799

Depreciation and amortization

70,722

80,872

70,722

80,872

Total costs and expenses

1,998,021

2,024,608

1,998,021

2,024,608

Income from operations

187,940

207,428

187,940

207,428

Other income and expense:

Loss on early retirement of debt

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

9,198

11,187

9,198

11,187

Non-operating gain (loss)

38,122

(49
)
38,122

(49
)
Interest expense

(83,180
)
(78,508
)
(83,180
)
(78,508
)

Income before income taxes

151,307

120,339

151,307

120,339

Income tax expense

50,510

45,576

50,510

45,576

Net income

100,797

74,763

100,797

74,763

Less: Net income attributable to non-controlling interests

12,029

16,838

12,029

16,838

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

$
88,768

$
57,925

$
88,768

$
57,925

Basic

$
0.68

$
0.44

Diluted

$
0.68

$
0.44

Weighted average shares outstanding:

Basic

127,563

128,544

Diluted

127,709

128,703

Select Medical Holdings Corporation Select Medical Corporation
For the Six Months Ended June 30, For the Six Months Ended June 30,
2017 2018 2017 2018

Net operating revenues $ 2,193,982
$ 2,549,174
$ 2,193,982
$ 2,549,174
Costs and expenses:

Cost of services 1,849,332
2,160,544
1,849,332
2,160,544
General and administrative 56,350
60,976
56,350
60,976
Depreciation and amortization 80,872
98,495
80,872
98,495
Total costs and expenses 1,986,554
2,320,015
1,986,554
2,320,015
Income from operations 207,428
229,159
207,428
229,159
Other income and expense:

Loss on early retirement of debt (19,719 ) (10,255 ) (19,719 ) (10,255 )
Equity in earnings of unconsolidated subsidiaries 11,187
9,482
11,187
9,482
Non-operating gain (loss) (49 ) 6,877
(49 ) 6,877
Interest expense (78,508 ) (97,322 ) (78,508 ) (97,322 )
Income before income taxes 120,339
137,941
120,339
137,941
Income tax expense 45,576
33,400
45,576
33,400
Net income 74,763
104,541
74,763
104,541
Less: Net income attributable to non-controlling interests 16,838
24,291
16,838
24,291
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation $ 57,925
$ 80,250
$ 57,925
$ 80,250
Income per common share:

Basic $ 0.44
$ 0.60

Diluted $ 0.44
$ 0.60

Weighted average shares outstanding:

Basic 128,544
129,761

Diluted 128,703
129,871

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

57,925

57,925

57,925

Net income attributable to non-controlling interests

13,140

—

3,698

3,698

Issuance and vesting of restricted stock

268

1

8,700

8,701

8,701

Repurchase of common shares

(45
)
0

(332
)
(268
)
(600
)

(600
)
Exercise of stock options

109

0

963

963

963

Issuance of non-controlling interests

1,653

1,653

3,634

5,287

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(3,113
)

—

(2,303
)
(2,303
)
Redemption adjustment on non-controlling interests

36,292

(36,292
)
(36,292
)

(36,292
)
Other

499

237

237

130

367

Balance at June 30, 2017

$
468,850

132,929

$
133

$
454,892

$
393,294

$
848,319

$
95,335

$
943,654

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

57,925

57,925

57,925

Net income attributable to non-controlling interests

13,140

—

3,698

3,698

Additional investment by Holdings

963

963

963

Dividends declared and paid to Holdings

(600
)
(600
)

(600
)
Contribution related to restricted stock awards and stock option issuances by Holdings

8,701

8,701

8,701

Issuance of non-controlling interests

1,653

1,653

3,634

5,287

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(3,113
)

—

(2,303
)
(2,303
)
Redemption adjustment on non-controlling interests

36,292

(36,292
)
(36,292
)

(36,292
)
Other

499

237

237

130

367

Balance at June 30, 2017

$
468,850

0

$
0

$
936,428

$
(88,109
)
$
848,319

$
95,335

$
943,654

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

80,250
80,250

80,250
Net income attributable to non-controlling interests 16,652

—
7,639
7,639
Issuance of restricted stock
174
0
0

—

—
Forfeitures of unvested restricted stock (88 ) 0
0
—
—
Vesting of restricted stock 9,562
9,562
9,562
Repurchase of common shares
(49 ) 0
(490 ) (399 ) (889 )

(889 )
Exercise of stock options
175
0
1,620

1,620

1,620
Issuance and exchange of non-controlling interests 163,659
1,553
74,341
75,894
1,921
77,815
Distributions to and purchases of non-controlling interests (215,084 )

(932 ) (83,617 ) (84,549 ) (3,052 ) (87,601 )
Redemption adjustment on non-controlling interests 9,551

(9,551 ) (9,551 )

(9,551 )
Other 636

(234 ) (234 ) 712
478
Balance at June 30, 2018 $ 616,232
134,327
$ 134
$ 474,812
$ 420,525
$ 895,471
$ 116,456
$ 1,011,927

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

80,250
80,250

80,250
Net income attributable to non-controlling interests 16,652

—
7,639
7,639
Additional investment by Holdings

1,620

1,620

1,620
Dividends declared and paid to Holdings

(889 ) (889 )
(889 )
Contribution related to restricted stock award issuances by Holdings

9,562

9,562

9,562
Issuance and exchange of non-controlling interests 163,659
1,553
74,341
75,894
1,921
77,815
Distributions to and purchases of non-controlling interests (215,084 )

(932 ) (83,617 ) (84,549 ) (3,052 ) (87,601 )
Redemption adjustment on non-controlling interests 9,551

(9,551 ) (9,551 )
(9,551 )
Other 636

(234 ) (234 ) 712
478
Balance at June 30, 2018 $ 616,232
0
$ 0
$ 959,173
$ (63,702 ) $ 895,471
$ 116,456
$ 1,011,927

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 Six Months Ended June 30,

For the Six Months Ended June 30,

2016

2017

2016

2017

Operating activities

Net income

$
100,797

$
74,763

$
100,797

$
74,763

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

Distributions from unconsolidated subsidiaries

12,039

10,933

12,039

10,933

Depreciation and amortization

70,722

80,872

70,722

80,872

Provision for bad debts

33,914

38,799

33,914

38,799

Equity in earnings of unconsolidated subsidiaries

(9,198
)
(11,187
)
(9,198
)
(11,187
)
Loss on extinguishment of debt

773

6,527

773

6,527

Gain on sale of assets and businesses

(43,461
)
(9,523
)
(43,461
)
(9,523
)
Loss on disposal of assets

55

—

55

—

Impairment of equity investment

5,339

—

5,339

—

Stock compensation expense

8,174

9,270

8,174

9,270

Amortization of debt discount, premium and issuance costs

7,077

5,974

7,077

5,974

Deferred income taxes

(13,286
)
(1,474
)
(13,286
)
(1,474
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

(44,096
)
(179,003
)
(44,096
)
(179,003
)
Other current assets

11,011

(5,557
)
11,011

(5,557
)
Other assets

4,508

4,621

4,508

4,621

Accounts payable

(15,852
)
759

(15,852
)
759

Accrued expenses

20,632

(4,833
)
20,632

(4,833
)
Income taxes

29,090

19,399

29,090

19,399

Net cash provided by operating activities

178,238

40,340

178,238

40,340

Investing activities

Acquisition of businesses, net of cash acquired

(421,519
)
(18,508
)
(421,519
)
(18,508
)
Purchases of property and equipment

(80,258
)
(105,302
)
(80,258
)
(105,302
)
Investment in businesses

(1,590
)
(9,874
)
(1,590
)
(9,874
)
Proceeds from sale of assets and businesses

71,366

34,552

71,366

34,552

Net cash used in investing activities

(432,001
)
(99,132
)
(432,001
)
(99,132
)

Financing activities

Borrowings on revolving facilities

320,000

630,000

320,000

630,000

Payments on revolving facilities

(380,000
)
(550,000
)
(380,000
)
(550,000
)
Proceeds from term loans

600,127

1,139,487

600,127

1,139,487

Payments on term loans

(229,649
)
(1,173,692
)
(229,649
)
(1,173,692
)
Revolving facility debt issuance costs

—

(4,392
)
—

(4,392
)
Borrowings of other debt

22,082

9,444

22,082

9,444

Principal payments on other debt

(9,926
)
(10,437
)
(9,926
)
(10,437
)
Repayments of bank overdrafts

(2,138
)
(5,228
)
(2,138
)
(5,228
)
Repurchase of common stock

(506
)
(600
)
—

—

Dividends paid to Holdings

—

—

(506
)
(600
)
Proceeds from exercise of stock options

657

963

—

—

Equity investment by Holdings

—

—

657

963

Proceeds from issuance of non-controlling interests

3,103

3,553

3,103

3,553

Purchase of non-controlling interests

(1,294
)
(120
)
(1,294
)
(120
)
Distributions to non-controlling interests

(4,708
)
(5,416
)
(4,708
)
(5,416
)
Net cash provided by financing activities

317,748

33,562

317,748

33,562

Net increase (decrease) in cash and cash equivalents

63,985

(25,230
)
63,985

(25,230
)

Cash and cash equivalents at beginning of period

14,435

99,029

14,435

99,029

Cash and cash equivalents at end of period

$
78,420

$
73,799

$
78,420

$
73,799

Supplemental Information

Cash paid for interest

$
69,315

$
76,650

$
69,315

$
76,650

Cash paid for taxes

$
35,518

$
27,626

$
35,518

$
27,626

Select Medical Holdings Corporation Select Medical Corporation
For the Six Months Ended June 30, For the Six Months Ended June 30,
2017 2018 2017 2018
Operating activities

Net income $ 74,763
$ 104,541
$ 74,763
$ 104,541
Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries 10,933
7,830
10,933
7,830
Depreciation and amortization 80,872
98,495
80,872
98,495
Provision for bad debts 745
102
745
102
Equity in earnings of unconsolidated subsidiaries (11,187 ) (9,482 ) (11,187 ) (9,482 )
Loss on extinguishment of debt 6,527
484
6,527
484
Gain on sale of assets and businesses (9,523 ) (6,980 ) (9,523 ) (6,980 )
Stock compensation expense 9,270
10,911
9,270
10,911
Amortization of debt discount, premium and issuance costs 5,974
6,486
5,974
6,486
Deferred income taxes (1,474 ) (1,691 ) (1,474 ) (1,691 )
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable (140,949 ) (5,774 ) (140,949 ) (5,774 )
Other current assets (5,557 ) (3,011 ) (5,557 ) (3,011 )
Other assets 4,621
6,684
4,621
6,684
Accounts payable 759
(5,462 ) 759
(5,462 )
Accrued expenses (4,833 ) 1,207
(4,833 ) 1,207
Income taxes 19,399
12,610
19,399
12,610
Net cash provided by operating activities 40,340
216,950
40,340
216,950
Investing activities

Business combinations, net of cash acquired (18,508 ) (517,704 ) (18,508 ) (517,704 )
Purchases of property and equipment (105,302 ) (81,648 ) (105,302 ) (81,648 )
Investment in businesses (9,874 ) (3,291 ) (9,874 ) (3,291 )
Proceeds from sale of assets and businesses 34,552
6,672
34,552
6,672
Net cash used in investing activities (99,132 ) (595,971 ) (99,132 ) (595,971 )
Financing activities

Borrowings on revolving facilities 630,000
265,000
630,000
265,000
Payments on revolving facilities (550,000 ) (345,000 ) (550,000 ) (345,000 )
Proceeds from term loans 1,139,487
779,904
1,139,487
779,904
Payments on term loans (1,173,692 ) (5,750 ) (1,173,692 ) (5,750 )
Revolving facility debt issuance costs (4,392 ) (1,333 ) (4,392 ) (1,333 )
Borrowings of other debt 9,444
19,928
9,444
19,928
Principal payments on other debt (10,437 ) (11,521 ) (10,437 ) (11,521 )
Repurchase of common stock (600 ) (889 ) —
—
Dividends paid to Holdings —
—
(600 ) (889 )
Proceeds from exercise of stock options 963
1,620
—
—
Equity investment by Holdings —
—
963
1,620
Decrease in overdrafts (5,228 ) (6,171 ) (5,228 ) (6,171 )
Proceeds from issuance of non-controlling interests 3,553
2,926
3,553
2,926
Distributions to non-controlling interests (5,536 ) (301,213 ) (5,536 ) (301,213 )
Net cash provided by financing activities 33,562
397,501
33,562
397,501
Net increase (decrease) in cash and cash equivalents (25,230 ) 18,480
(25,230 ) 18,480
Cash and cash equivalents at beginning of period 99,029
122,549
99,029
122,549
Cash and cash equivalents at end of period $ 73,799
$ 141,029
$ 73,799
$ 141,029
Supplemental Information

Cash paid for interest $ 76,650
$ 97,338
$ 76,650
$ 97,338
Cash paid for taxes $ 27,626
$ 22,480
$ 27,626
$ 22,480
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”) 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 June 30, ~~2017,~~2018, and for the three and six month periods ended June 30, ~~2016~~2017 and ~~2017,~~2018, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and six months ended June 30, ~~2017~~2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2017.~~2018. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~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 contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Lease Accounting

~~In January 2017,~~Beginning in February 2016, the Financial Accounting Standards Board ~~(“FASB”~~(the “FASB”) issued several Accounting Standards ~~Update~~Updates (“ASU”) ~~2017-01,~~ ~~Business Combinations (Topic 805),~~ ~~Clarifying the Definition of a Business~~, which clarifies the definition of a business with the objective of adding guidance 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.established Topic 842,

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

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

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

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

The Company will implement the new standard beginning January 1, 2019. The Company has completed its inventory of leases and has begun to implement a new IT platform to account for leases under the new standard. The Company is currently validating the data in the IT platform to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

~~In May 2014, March 2016, April 2016, and December 2016, the FASB issued ASU 2014-09,~~

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 June 30, 2017
	As Reported		As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,120,675	$	1,102,465		$	(18,210	)
Bad debt expense	18,174		(36		)	(18,210		)



	Six Months Ended June 30, 2017
	As Reported			As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	2,232,036		$	2,193,982		$	(38,054	)
Bad debt expense	38,799			745			(38,054		)

Condensed Consolidated Statements of Cash Flows
Provision for bad debts	38,799			745			$	(38,054	)
Changes in accounts receivable	(179,003		)	(140,949		)	38,054

_____________________________________________________________

(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 standards require the selection of a retrospective or cumulative effect transition method.~~

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

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

~~Recently Adopted Accounting Pronouncements~~

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:~~

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

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 six months ended June 30, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.

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

Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, ~~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 ~~quarter 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	$	181,189
Identifiable intangible assets	140,406
Goodwill	534,347
Total assets	855,942
Total liabilities	102,942
Consideration given	$	753,000

A preliminary estimate for goodwill of ~~$343.2~~$534.3 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 three months ended June 30, 2018, U.S. HealthWorks had net operating revenues of $139.4 million which is reflected in the Company’s consolidated statements of operations. For the period February 1, 2018 through June 30, 2018, U.S. HealthWorks had net operating revenues of $229.4 million which is reflected in the Company’s consolidated statements of operations for the six months ended June 30, 2018. 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 June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
	(in thousands, except per share amounts)
Net revenue	$	1,243,221	$	1,296,210	$	2,471,705	$	2,596,755
Net income	51,080		62,612		66,668		107,524
Net income attributable to the Company	38,954		48,563		46,070		82,365
Income per common share:
Basic	$	0.29	$	0.36	$	0.35	$	0.61
Diluted	$	0.29	$	0.36	$	0.35	$	0.61

The ~~Company’s results of operations for the three months ended June 30, 2016 and for the three and six months ended June 30, 2017 include Physiotherapy for the entire period. There were no~~ pro forma ~~adjustments during these periods; therefore, no pro forma~~financial information is ~~presented for~~based on the ~~periods.~~

For the Six Months
Ended June 30, 2016

(in thousands, except per
share amounts)

Net revenue

$
2,239,491

Net income attributable to Holdings

86,948

Income per common share:

Basic

$
0.66

Diluted

$
0.66

preliminary allocation of the purchase price of the U.S. HealthWorks acquisition and is therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period. The net income tax impact was calculated at a statutory rate, as if ~~Physiotherapy~~U.S. HealthWorks had been a subsidiary of the Company as of January 1, ~~2015. Pro forma results for~~2017.

For the six months ended June 30, ~~2016~~2017, pro forma results were adjusted to ~~exclude~~include the U.S. HealthWorks acquisition costs recognized by the Company during 2017 and 2018, which were approximately ~~$3.2 million of Physiotherapy acquisition costs.~~

~~Other Acquisitions~~

~~The Company completed acquisitions within our specialty hospitals, outpatient rehabilitation, and Concentra segments during~~$5.7 million. For the six months ended June 30, ~~2017. The Company provided total consideration of $20.2 million, consisting principally of $18.5~~2018, pro forma results were adjusted to exclude approximately $2.9 million of ~~cash, net of cash received, and~~U.S. HealthWorks acquisition costs which were recognized by the issuance of non-controlling interests. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $0.7 million, $0.3 million, and $14.5 million of goodwill was recognized in our specialty hospitals, outpatient rehabilitation, and Concentra reporting units, respectively.

Company during the period.

4.Intangible Assets ~~and Liabilities~~

Goodwill

The following table shows changes in the carrying ~~amount~~amounts of goodwill by reporting unit for the six months ended June 30, ~~2017:~~2018:



	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation			Concentra			Total
	(in thousands)
Balance as of December 31, 2017	$	1,045,220	$	415,528	$	647,522		$	674,542		$	2,782,812
Acquired	—		1,118		2,465			535,595			539,178
Measurement period adjustment	—		—		—			(1,248		)	(1,248		)
Sold	—		—		(6,136		)	—			(6,136		)
Balance as of June 30, 2018	$	1,045,220	$	416,646	$	643,851		$	1,208,889		$	3,314,606

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

654

311

14,505

15,470

Measurement period adjustment

(342
)
168

—

(174
)
Balance as of June 30, 2017

$
1,447,718

$
644,036

$
674,542

$
2,766,296

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


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

Identifiable Intangible Assets ~~and Liabilities~~

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

December 31, 2016

June 30, 2017

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

(in thousands)

Indefinite-lived assets:

Trademarks

$
166,698

$
—

$
166,698

$
166,698

$
—

$
166,698

Certificates of need

17,026

—

17,026

19,207

—

19,207

Accreditations

2,235

—

2,235

2,074

—

2,074

Finite-lived assets:

Customer relationships

142,198

(23,185
)
119,013

143,953

(30,681
)
113,272

Favorable leasehold interests

13,089

(2,317
)
10,772

13,295

(3,255
)
10,040

Non-compete agreements

26,655

(1,837
)
24,818

27,267

(2,854
)
24,413

Total identifiable intangible assets

$
367,901

$
(27,339
)
$
340,562

$
372,494

$
(36,790
)
$
335,704

Finite-lived liabilities:

Unfavorable leasehold interests

$
5,139

$
(1,410
)
$
3,729

$
5,343

$
(1,957
)
$
3,386

assets:



	December 31, 2017							June 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,155		—			19,155		19,173		—			19,173
Accreditations	1,895		—			1,895		1,895		—			1,895
Finite-lived intangible assets:
Trademarks	—		—			—		5,000		(2,083		)	2,917
Customer relationships	143,953		(38,281		)	105,672		278,969		(49,617		)	229,352
Favorable leasehold interests	13,295		(4,319		)	8,976		13,553		(5,148		)	8,405
Non-compete agreements	28,023		(3,900		)	24,123		28,472		(4,980		)	23,492
Total identifiable intangible assets	$	373,019	$	(46,500	)	$	326,519	$	513,760	$	(61,828	)	$	451,932

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At June 30, 2018, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 8.7 years, respectively.

The Company’s finite-lived customer relationships, ~~and~~ non-compete agreements, and trademarks amortize over their estimated useful lives. Amortization expense was $4.3 million and $7.8 million for ~~both~~ the three months ended June 30, ~~2016~~2017 and ~~2017.~~2018, respectively. Amortization expense was ~~$8.1~~$8.7 million and ~~$8.7~~$14.2 million for the six months ended June 30, ~~2016~~2017 and ~~2017,~~2018, respectively.

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

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At June 30, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.4 years, respectively.

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 June 30, 2018, the Company’s long-term debt and notes payable ~~as of June 30, 2017~~ are as follows (in thousands):

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value

Select:

6.375% senior notes

$
710,000

$
892

$
(7,510
)
$
703,382

$
732,152

Credit facilities:

Revolving facility

300,000

—

—

300,000

276,000

Term loan

1,147,125

(13,480
)
(13,540
)
1,120,105

1,158,596

Other

25,700

—

—

25,700

25,700

Total Select debt

$
2,182,825

$
(12,588
)
$
(21,050
)
$
2,149,187

$
2,192,448

Concentra:

Credit facilities:

Term loan

$
619,175

$
(2,513
)
$
(11,867
)
$
604,795

$
617,434

Other

6,727

—

—

6,727

6,727

Total Concentra debt

$
625,902

$
(2,513
)
$
(11,867
)
$
611,522

$
624,161

Total debt

$
2,808,727

$
(15,101
)
$
(32,917
)
$
2,760,709

$
2,816,609



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	664		$	(5,601	)	$	705,063	$	718,094
Credit facilities:
Revolving facility	150,000		—			—			150,000		138,000
Term loans	1,135,625		(11,444		)	(11,504		)	1,112,677		1,148,401
Other	43,680		—			(500		)	43,180		43,180
Total Select debt	2,039,305		(10,780		)	(17,605		)	2,010,920		2,047,675
Concentra:
Credit facilities:
Term loans	1,414,175		(3,288		)	(21,720		)	1,389,167		1,414,840
Other	10,601		—			—			10,601		10,601
Total Concentra debt	1,424,776		(3,288		)	(21,720		)	1,399,768		1,425,441
Total debt	$	3,464,081	$	(14,068	)	$	(39,325	)	$	3,410,688	$	3,473,116

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

2017

2018

2019

2020

2021

Thereafter

Total

Select:

6.375% senior notes

$
—

$
—

$
—

$
—

$
710,000

$
—

$
710,000

Credit facilities:

Revolving facility

—

—

—

—

—

300,000

300,000

Term loan

5,750

11,500

11,500

11,500

11,500

1,095,375

1,147,125

Other

10,251

3,530

11,827

68

14

10

25,700

Total Select debt

$
16,001

$
15,030

$
23,327

$
11,568

$
721,514

$
1,395,385

$
2,182,825

Concentra:

Credit facilities:

Term loan

$
—

$
—

$
—

$
3,016

$
6,520

$
609,639

$
619,175

Other

1,309

1,394

144

161

160

3,559

6,727

Total Concentra debt

$
1,309

$
1,394

$
144

$
3,177

$
6,680

$
613,198

$
625,902

Total debt

$
17,310

$
16,424

$
23,471

$
14,745

$
728,194

$
2,008,583

$
2,808,727

~~The~~



	2018		2019		2020		2021		2022		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	710,000	$	—	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		150,000		—		150,000
Term loans	5,750		11,500		11,500		11,500		11,500		1,083,875		1,135,625
Other	6,119		3,321		25,285		221		—		8,734		43,680
Total Select debt	11,869		14,821		36,785		721,721		161,500		1,092,609		2,039,305
Concentra:
Credit facilities:
Term loans	—		—		5,719		12,365		1,156,091		240,000		1,414,175
Other	2,860		3,418		322		320		308		3,373		10,601
Total Concentra debt	2,860		3,418		6,041		12,685		1,156,399		243,373		1,424,776
Total debt	$	14,729	$	18,239	$	42,826	$	734,406	$	1,317,899	$	1,335,982	$	3,464,081

As of December 31, 2017, the Company’s long-term debt and notes payable ~~as of December 31, 2016~~ are as follows (in thousands):

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value

Select:

6.375% senior notes

$
710,000

$
1,006

$
(8,461
)
$
702,545

$
710,000

Credit facilities:

Revolving facility

220,000

—

—

220,000

204,600

Term loans

1,147,751

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

1,165,860

Other

22,688

—

—

22,688

22,688

Total Select debt

$
2,100,439

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

$
2,103,148

Concentra:

Credit facilities:

Term loan

$
642,239

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

$
644,648

Other

5,178

—

—

5,178

5,178

Total Concentra debt

$
647,417

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

$
649,826

Total debt

$
2,747,856

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

$
2,752,974

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

6.375% senior notes $ 710,000
$ 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) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.

Concentra Credit Facilities

Concentra First Lien Credit Agreement

On February 1, 2018, Concentra entered into an amendment to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015, by and among Concentra, as the borrower, Concentra Holdings, Inc., a subsidiary of Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other lenders party thereto. Concentra used borrowings under the ~~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) ~~repay~~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, which resulted in $6.5~~$50.0 million, ~~of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.~~

~~Borrowings~~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 provided for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the ~~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 June 30, 2017, Select’s leverage ratio was 5.86 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~~if any.

Loss on Early Retirement of Debt

The amendments to the Select ~~or a domestic subsidiary.~~

~~Excess Cash Flow Payment~~

~~On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with the Concentra first lien term loans in accordance with the provision in the~~credit facilities and Concentra credit facilities ~~that requires mandatory prepayments~~resulted in losses on early retirement of ~~term loans as a result~~debt totaling $10.3 million for the six months ended June 30, 2018. The losses on early retirement of ~~annual excess cash flow, as defined in~~debt consisted of $0.5 million of debt extinguishment losses and $9.8 million of debt modification losses during the ~~Concentra credit facilities.~~

six months ended June 30, 2018.

Fair Value

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

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

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 the critical illness recovery hospital segment (previously referred to as the long term acute care segment), rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment), outpatient rehabilitation segment, and Concentra segment. Prior year results for the three and six months ended June 30, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.

Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~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 June 30,

Six Months Ended June 30,

2016

2017

2016

2017

(in thousands)

Net operating revenues:

Specialty hospitals

$
585,816

$
600,960

$
1,184,770

$
1,199,747

Outpatient rehabilitation(1)

256,928

258,106

495,010

513,923

Concentra

254,868

261,586

505,745

517,735

Other

19

23

436

631

Total Company

$
1,097,631

$
1,120,675

$
2,185,961

$
2,232,036

Adjusted EBITDA:

Specialty hospitals

$
82,739

$
98,172

$
169,495

$
186,837

Outpatient rehabilitation(1)

38,132

41,926

67,011

73,277

Concentra

43,039

43,061

77,192

85,653

Other

(22,453
)
(24,479
)
(43,626
)
(48,197
)
Total Company

$
141,457

$
158,680

$
270,072

$
297,570

Total assets:(2)

Specialty hospitals

$
2,457,948

$
2,655,617

$
2,457,948

$
2,655,617

Outpatient rehabilitation

959,748

982,811

959,748

982,811

Concentra

1,328,243

1,310,483

1,328,243

1,310,483

Other

73,950

105,300

73,950

105,300

Total Company

$
4,819,889

$
5,054,211

$
4,819,889

$
5,054,211

Purchases of property and equipment, net:

Specialty hospitals

$
21,313

$
36,691

$
54,988

$
69,048

Outpatient rehabilitation(1)

3,825

6,201

8,798

12,874

Concentra

4,716

7,601

7,927

16,287

Other

3,636

4,156

8,545

7,093

Total Company

$
33,490

$
54,649

$
80,258

$
105,302



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2018			2017				2018
	(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital⁽²⁾	$	439,194		$	442,452		$	884,317			$	907,128
Rehabilitation hospital⁽²⁾	151,378			173,769			296,203				348,543
Outpatient rehabilitation	254,984			267,183			505,355				524,564
Concentra	256,887			412,823			507,476				768,939
Other	22			(17		)	631				—
Total Company	$	1,102,465		$	1,296,210		$	2,193,982			$	2,549,174
Adjusted EBITDA:
Critical illness recovery hospital⁽²⁾	$	75,043		$	60,725		$	147,380			$	133,697
Rehabilitation hospital⁽²⁾	23,129			28,195			39,457				54,971
Outpatient rehabilitation	41,926			41,947			73,277				72,472
Concentra	43,061			72,568			85,653				130,365
Other	(24,479		)	(25,207		)	(48,197		)		(50,045		)
Total Company	$	158,680		$	178,228		$	297,570			$	341,460
Total assets:
Critical illness recovery hospital⁽²⁾	$	1,989,618		$	1,828,038		$	1,989,618			$	1,828,038
Rehabilitation hospital⁽²⁾	665,999			867,175			665,999				867,175
Outpatient rehabilitation	982,811			979,678			982,811				979,678
Concentra	1,310,483			2,174,931			1,310,483				2,174,931
Other	105,300			114,978			105,300				114,978
Total Company	$	5,054,211		$	5,964,800		$	5,054,211			$	5,964,800
Purchases of property and equipment, net:
Critical illness recovery hospital⁽²⁾	$	9,771		$	12,849		$	20,714			$	23,321
Rehabilitation hospital⁽²⁾	26,920			8,080			48,334				20,997
Outpatient rehabilitation	6,201			8,018			12,874			��	15,356
Concentra	7,601			10,121			16,287				16,742
Other	4,156			2,963			7,093				5,232
Total Company	$	54,649		$	42,031		$	105,302			$	81,648

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

Three Months Ended June 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
82,739

$
38,132

$
43,039

$
(22,453
)

Depreciation and amortization

(13,812
)
(6,202
)
(14,916
)
(1,275
)

Stock compensation expense

—

—

(192
)
(4,006
)

Income (loss) from operations

$
68,927

$
31,930

$
27,931

$
(27,734
)
$
101,054

Equity in earnings of unconsolidated subsidiaries

4,546

Non-operating gain

13,035

Interest expense

(44,332
)
Income before income taxes

$
74,303

Three Months Ended June 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
98,172

$
41,926

$
43,061

$
(24,479
)

Depreciation and amortization

(15,454
)
(5,878
)
(15,429
)
(1,572
)

Stock compensation expense

—

—

(264
)
(4,420
)

Income (loss) from operations

$
82,718

$
36,048

$
27,368

$
(30,471
)
$
115,663

Equity in earnings of unconsolidated subsidiaries

5,666

Interest expense

(37,655
)
Income before income taxes

$
83,674

Six Months Ended June 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
169,495

$
67,011

$
77,192

$
(43,626
)

Depreciation and amortization

(27,705
)
(10,238
)
(30,292
)
(2,487
)

Stock compensation expense

—

—

(384
)
(7,790
)

Physiotherapy acquisition costs

—

—

—

(3,236
)

Income (loss) from operations

$
141,790

$
56,773

$
46,516

$
(57,139
)
$
187,940

Loss on early retirement of debt

(773
)
Equity in earnings of unconsolidated subsidiaries

9,198

Non-operating gain

38,122

Interest expense

(83,180
)
Income before income taxes

$
151,307

Six Months Ended June 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
186,837

$
73,277

$
85,653

$
(48,197
)

Depreciation and amortization

(33,954
)
(12,218
)
(31,552
)
(3,148
)

Stock compensation expense

—

—

(570
)
(8,700
)

Income (loss) from operations

$
152,883

$
61,059

$
53,531

$
(60,045
)
$
207,428

Loss on early retirement of debt

(19,719
)
Equity in earnings of unconsolidated subsidiaries

11,187

Non-operating loss

(49
)
Interest expense

(78,508
)
Income before income taxes

$
120,339



	Three Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	75,043		$	23,129		$	41,926		$	43,061		$	(24,479	)
Depreciation and amortization	(10,917		)	(4,537		)	(5,878		)	(15,429		)	(1,572		)
Stock compensation expense	—			—			—			(264		)	(4,420		)
Income (loss) from operations	$	64,126		$	18,592		$	36,048		$	27,368		$	(30,471	)	$	115,663
Equity in earnings of unconsolidated subsidiaries																5,666
Interest expense																(37,655		)
Income before income taxes																$	83,674



	Three Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)
Depreciation and amortization	(11,952		)	(6,015		)	(6,704		)	(24,697		)	(2,356		)
Stock compensation expense	—			—			—			(1,138		)	(4,846		)
U.S. HealthWorks acquisition costs	—			—			—			41			—
Income (loss) from operations	$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561
Equity in earnings of unconsolidated subsidiaries																4,785
Non-operating gain																6,478
Interest expense																(50,159		)
Income before income taxes																$	81,665



	Six Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	147,380		$	39,457		$	73,277		$	85,653		$	(48,197	)
Depreciation and amortization	(23,959		)	(9,995		)	(12,218		)	(31,552		)	(3,148		)
Stock compensation expense	—			—			—			(570		)	(8,700		)
Income (loss) from operations	$	123,421		$	29,462		$	61,059		$	53,531		$	(60,045	)	$	207,428
Loss on early retirement of debt																(19,719		)
Equity in earnings of unconsolidated subsidiaries																11,187
Non-operating loss																(49		)
Interest expense																(78,508		)
Income before income taxes																$	120,339



	Six Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽²⁾			Rehabilitation Hospital⁽²⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	133,697		$	54,971		$	72,472		$	130,365		$	(50,045	)
Depreciation and amortization	(23,010		)	(11,737		)	(13,341		)	(45,844		)	(4,563		)
Stock compensation expense	—			—			—			(1,349		)	(9,562		)
U.S. HealthWorks acquisition costs	—			—			—			(2,895		)	—
Income (loss) from operations	$	110,687		$	43,234		$	59,131		$	80,277		$	(64,170	)	$	229,159
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																9,482
Non-operating gain																6,877
Interest expense																(97,322		)
Income before income taxes																$	137,941


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


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

7. Revenue from Contracts with Customers

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



	Three Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	228,733	$	62,089	$	38,119	$	571
Non-Medicare	207,875		51,434		189,009		254,107
Total patient services revenues	436,608		113,523		227,128		254,678
Other revenues	2,586		37,855		27,856		2,209
Total net operating revenues	$	439,194	$	151,378	$	254,984	$	256,887



	Three Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	225,857	$	73,054	$	41,475	$	517
Non-Medicare	213,083		62,387		194,611		409,922
Total patient services revenues	438,940		135,441		236,086		410,439
Other revenues	3,512		38,328		31,097		2,384
Total net operating revenues	$	442,452	$	173,769	$	267,183	$	412,823



	Six Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	465,170	$	119,593	$	74,817	$	1,116
Non-Medicare	414,500		98,677		372,812		501,908
Total patient services revenues	879,670		218,270		447,629		503,024
Other revenues	4,647		77,933		57,726		4,452
Total net operating revenues	$	884,317	$	296,203	$	505,355	$	507,476



	Six Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	466,849	$	145,895	$	79,665	$	1,145
Non-Medicare	433,089		124,289		383,511		763,174
Total patient services revenues	899,938		270,184		463,176		764,319
Other revenues	7,190		78,359		61,388		4,620
Total net operating revenues	$	907,128	$	348,543	$	524,564	$	768,939


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

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

In the outpatient rehabilitation ~~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.~~

~~(2)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of June 30, 2016 were retrospectively conformed to reflect the adoption~~2017. Reconciliations of the ~~standard, resulting in a reduction~~statutory federal income tax rate to ~~total assets of $18.5 million.~~

the effective income tax rate are as follows:



	Three Months Ended June 30,
	2017		2018
Federal income tax at statutory rate	35.0	%	21.0	%
State and local income taxes, less federal income tax benefit	3.7		4.6
Permanent differences	1.2		2.0
Valuation allowance	0.6		(0.7	)
Uncertain tax positions	0.2		0.2
Non-controlling interest	(1.7	)	(1.6	)
Stock-based compensation	(0.2	)	(0.6	)
Other	(0.1	)	0.9
Total effective income tax rate	38.7	%	25.8	%



	Six Months Ended June 30,
	2017		2018
Federal income tax at statutory rate	35.0	%	21.0	%
State and local income taxes, less federal income tax benefit	3.8		4.6
Permanent differences	1.1		1.9
Valuation allowance	0.1		(0.2	)
Uncertain tax positions	0.2		0.2
Non-controlling interest	(1.9	)	(2.1	)
Stock-based compensation	(0.4	)	(2.5	)
Other	—		1.3
Total effective income tax rate	37.9	%	24.2	%

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 June 30,

Six Months Ended June 30,

2016

2017

2016

2017

(in thousands, except per share amounts)

Numerator:

Net income attributable to Select Medical Holdings Corporation

$
33,935

$
42,055

$
88,768

$
57,925

Less: Earnings allocated to unvested restricted stockholders

972

1,341

2,552

1,849

Net income available to common stockholders

$
32,963

$
40,714

$
86,216

$
56,076

Denominator:

Weighted average shares—basic

127,626

128,624

127,563

128,544

Effect of dilutive securities:

Stock options

194

153

146

159

Weighted average shares—diluted

127,820

128,777

127,709

128,703

Basic income per common share:

$
0.26

$
0.32

$
0.68

$
0.44

Diluted income per common share:

$
0.26

$
0.32

$
0.68

$
0.44

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

Net income attributable to Select Medical Holdings Corporation $ 42,055
$ 46,511
$ 57,925
$ 80,250
Less: Earnings allocated to unvested restricted stockholders 1,341
1,517
1,849
2,630
Net income available to common stockholders $ 40,714
$ 44,994
$ 56,076
$ 77,620
Denominator:

Weighted average shares—basic 128,624
129,830
128,544
129,761
Effect of dilutive securities:

Stock options 153
94
159
110
Weighted average shares—diluted 128,777
129,924
128,703
129,871
Basic income per common share: $ 0.32
$ 0.35
$ 0.44
$ 0.60
Diluted income per common share: $ 0.32
$ 0.35
$ 0.44
$ 0.60

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 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. The case has been fully briefed in~~District Court denied such request. In December 2017, the Court of ~~Appeals. The Company intends to vigorously defend this action, but at this time~~Appeals, relying on the ~~Company is unable to predict~~public disclosure bar, denied the ~~timing~~appeal of the plaintiff‑relator and ~~outcome~~affirmed the judgment of ~~this matter.~~

the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018.

Wilmington ~~Litigation~~Litigation.

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

On In March ~~24,~~2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the 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,~~SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. ~~The motion is currently pending.~~

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

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

Contract Therapy ~~Subpoena~~Subpoena.

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

11. Condensed Consolidating Financial Information

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

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

June 30, ~~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

$
5,533

$
4,946

$
63,248

$
—

$
73,799

Accounts receivable, net

—

467,412

120,272

126,552

—

714,236

Intercompany receivables

—

1,489,631

58,333

—

(1,547,964
) (a)
—

Other current assets

17,584

28,326

12,786

24,515

—

83,211

Total Current Assets

17,656

1,990,902

196,337

214,315

(1,547,964
)
871,246

Property and equipment, net

56,568

620,364

54,964

179,636

—

911,532

Investment in affiliates

4,523,727

118,248

—

—

(4,641,975
) (b) (c)
—

Goodwill

—

2,091,754

—

674,542

—

2,766,296

Identifiable intangible assets, net

—

109,913

—

225,791

—

335,704

Other assets

42,452

98,649

36,528

16,199

(24,395
) (d)
169,433

Total Assets

$
4,640,403

$
5,029,830

$
287,829

$
1,310,483

$
(6,214,334
)
$
5,054,211

Liabilities and Equity

Current Liabilities:

Bank overdrafts

$
34,134

$
—

$
—

$
—

$
—

$
34,134

Current portion of long-term debt and notes payable

23,052

644

244

2,637

—

26,577

Accounts payable

10,362

75,105

22,387

15,777

—

123,631

Intercompany payables

1,489,631

58,333

—

—

(1,547,964
) (a)
—

Accrued payroll

7,526

80,245

3,545

27,871

—

119,187

Accrued vacation

3,927

58,895

12,214

17,214

—

92,250

Accrued interest

17,096

5

4

2,172

—

19,277

Accrued other

44,032

60,078

10,533

32,210

—

146,853

Income taxes payable

2,709

—

—

4,267

—

6,976

Total Current Liabilities

1,632,469

333,305

48,927

102,148

(1,547,964
)
568,885

Long-term debt, net of current portion

2,115,318

266

9,663

608,885

—

2,734,132

Non-current deferred tax liability

—

136,920

736

84,150

(24,395
) (d)
197,411

Other non-current liabilities

44,297

54,100

7,688

35,194

—

141,279

Total Liabilities

3,792,084

524,591

67,014

830,377

(1,572,359
)
3,641,707

Redeemable non-controlling interests

—

—

10,079

458,771

—

468,850

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

936,428

—

—

—

—

936,428

Retained earnings (accumulated deficit)

(88,109
)
1,314,773

(37,110
)
12,447

(1,290,110
) (c)
(88,109
)
Subsidiary investment

—

3,190,466

156,262

5,137

(3,351,865
) (b)
—

Total Select Medical Corporation Stockholder’s Equity

848,319

4,505,239

119,152

17,584

(4,641,975
)
848,319

Non-controlling interests

—

—

91,584

3,751

—

95,335

Total Equity

848,319

4,505,239

210,736

21,335

(4,641,975
)
943,654

Total Liabilities and Equity

$
4,640,403

$
5,029,830

$
287,829

$
1,310,483

$
(6,214,334
)
$
5,054,211



	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	$	15,074		$	6,360	$	4,396		$	115,199		$	—			$	141,029
Accounts receivable	—			439,614		129,585			206,411			—				775,610
Intercompany receivables	—			1,672,980		80,189			—			(1,753,169		)	(a)	—
Prepaid income taxes	10,691			—		—			3,797			—				14,488
Other current assets	13,897			28,254		10,075			35,989			—				88,215
Total Current Assets	39,662			2,147,208		224,245			361,396			(1,753,169		)		1,019,342
Property and equipment, net	37,157			616,853		84,834			227,000			—				965,844
Investment in affiliates	4,566,506			132,640		—			—			(4,699,146		)	(b)(c)	—
Goodwill	—			2,105,717		—			1,208,889			—				3,314,606
Identifiable intangible assets, net	3			103,119		4,968			343,842			—				451,932
Other assets	35,011			119,499		34,360			33,804			(9,598		)	(e)	213,076
Total Assets	$	4,678,339		$	5,225,036	$	348,407		$	2,174,931		$	(6,461,913	)		$	5,964,800
Liabilities and Equity
Current Liabilities:
Overdrafts	$	23,292		$	—	$	—		$	—		$	—			$	23,292
Current portion of long-term debt and notes payable	17,390			527		967			5,595			—				24,479
Accounts payable	9,929			71,355		18,508			32,038			—				131,830
Intercompany payables	1,672,980			80,189		—			—			(1,753,169		)	(a)	—
Accrued payroll	8,649			89,842		3,650			47,826			—				149,967
Accrued vacation	4,551			61,895		14,091			29,421			—				109,958
Accrued interest	6,926			11		20			6,336			—				13,293
Accrued other	39,928			64,563		15,172			50,404			—				170,067
Income taxes payable	2,387			—		—			2,038			—				4,425
Total Current Liabilities	1,786,032			368,382		52,408			173,658			(1,753,169		)		627,311
Long-term debt, net of current portion	1,958,529			90		33,417			1,394,173			—				3,386,209
Non-current deferred tax liability	—			89,230		820			70,242			(9,598		)	(e)	150,694
Other non-current liabilities	38,307			63,983		9,482			60,655			—				172,427
Total Liabilities	3,782,868			521,685		96,127			1,698,728			(1,762,767		)		4,336,641
Redeemable non-controlling interests	—			—		—			18,549			597,683			(d)	616,232
Stockholders’ Equity:
Common stock	0			—		—			—			—				0
Capital in excess of par	959,173			—		—			—			—				959,173
Retained earnings (accumulated deficit)	(63,702		)	1,478,075		(20,267		)	(3,529		)	(1,454,279		)	(c)(d)	(63,702		)
Subsidiary investment	—			3,225,276		272,547			455,753			(3,953,576		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	895,471			4,703,351		252,280			452,224			(5,407,855		)		895,471
Non-controlling interests	—			—		—			5,430			111,026			(d)	116,456
Total Equity	895,471			4,703,351		252,280			457,654			(5,296,829		)		1,011,927
Total Liabilities and Equity	$	4,678,339		$	5,225,036	$	348,407		$	2,174,931		$	(6,461,913	)		$	5,964,800

~~(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 June 30, 2018

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	(17	)	$	690,766		$	192,638		$	412,823		$	—			$	1,296,210
Costs and expenses:
Cost of services	799			589,707			162,832			341,393			—				1,094,731
General and administrative	29,208			27			—			(41		)	—				29,194
Depreciation and amortization	2,355			20,535			4,137			24,697			—				51,724
Total costs and expenses	32,362			610,269			166,969			366,049			—				1,175,649
Income (loss) from operations	(32,379		)	80,497			25,669			46,774			—				120,561
Other income and expense:
Intercompany interest and royalty fees	7,553			(3,629		)	(3,609		)	(315		)	—				—
Intercompany management fees	55,416			(43,931		)	(11,485		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			4,776			9			—			—				4,785
Non-operating gain	1,654			4,824			—			—			—				6,478
Interest income (expense)	(29,412		)	188			(186		)	(20,749		)	—				(50,159		)
Income before income taxes	2,832			42,725			10,398			25,710			—				81,665
Income tax expense	831			14,254			145			5,876			—				21,106
Equity in earnings of consolidated subsidiaries	44,510			6,840			—			—			(51,350		)	(a)	—
Net income	46,511			35,311			10,253			19,834			(51,350		)		60,559
Less: Net income attributable to non-controlling interests	—			12			3,413			10,623			—				14,048
Net income attributable to Select Medical Corporation	$	46,511		$	35,299		$	6,840		$	9,211		$	(51,350	)		$	46,511


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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2018

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	—		$	1,397,178		$	383,057		$	768,939		$	—			$	2,549,174
Costs and expenses:
Cost of services	1,525			1,197,733			321,363			639,923			—				2,160,544
General and administrative	58,015			66			—			2,895			—				60,976
Depreciation and amortization	4,562			39,982			8,107			45,844			—				98,495
Total costs and expenses	64,102			1,237,781			329,470			688,662			—				2,320,015
Income (loss) from operations	(64,102		)	159,397			53,587			80,277			—				229,159
Other income and expense:
Intercompany interest and royalty fees	15,672			(7,924		)	(7,240		)	(508		)	—				—
Intercompany management fees	116,148			(93,471		)	(22,677		)	—			—				—
Loss on early retirement of debt	(2,229		)	—			—			(8,026		)	—				(10,255		)
Equity in earnings of unconsolidated subsidiaries	—			9,460			22			—			—				9,482
Non-operating gain	1,654			5,223			—			—			—				6,877
Interest income (expense)	(60,483		)	121			(337		)	(36,623		)	—				(97,322		)
Income before income taxes	6,660			72,806			23,355			35,120			—				137,941
Income tax expense	1,345			26,189			238			5,628			—				33,400
Equity in earnings of consolidated subsidiaries	74,935			15,123			—			—			(90,058		)	(a)	—
Net income	80,250			61,740			23,117			29,492			(90,058		)		104,541
Less: Net income attributable to non-controlling interests	—			97			7,994			16,200			—				24,291
Net income attributable to Select Medical Corporation	$	80,250		$	61,643		$	15,123		$	13,292		$	(90,058	)		$	80,250


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2018

(unaudited)

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Operating activities

Net income $ 80,250
$ 61,740
$ 23,117
$ 29,492
$ (90,058 ) (a) $ 104,541
Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries —
7,800
30
—
—
7,830
Depreciation and amortization 4,562
39,982
8,107
45,844
—
98,495
Provision for bad debts —
41
—
61
—
102
Equity in earnings of unconsolidated subsidiaries —
(9,460 ) (22 ) —
—
(9,482 )
Equity in earnings of consolidated subsidiaries (74,935 ) (15,123 ) —
—
90,058
(a) —
Loss on extinguishment of debt 115
—
—
369
—
484
Gain on sale of assets and businesses (1,642 ) (5,338 ) —
—
—
(6,980 )
Stock compensation expense 9,562
—
—
1,349
—
10,911
Amortization of debt discount, premium and issuance costs 3,553
—
—
2,933
—
6,486
Deferred income taxes 664
1,056
40
(3,451 ) —
(1,691 )
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable —
9,838
(6,857 ) (8,755 ) —
(5,774 )
Other current assets (876 ) 1,927
2,956
(7,018 ) —
(3,011 )
Other assets 945
(9,261 ) 1,110
13,890
—
6,684
Accounts payable (1,470 ) (7,516 ) 1,864
1,660
—
(5,462 )
Accrued expenses (15,020 ) 14,589
4,914
(3,276 ) —
1,207
Income taxes 14,757
4,401
1
(6,549 ) —
12,610
Net cash provided by operating activities 20,465
94,676
35,260
66,549
—
216,950
Investing activities

Business combinations, net of cash acquired —
(2,666 ) (22 ) (515,016 ) —
(517,704 )
Purchases of property and equipment (5,232 ) (44,865 ) (14,809 ) (16,742 ) —
(81,648 )
Investment in businesses —
(3,286 ) —
(5 ) —
(3,291 )
Proceeds from sale of assets and businesses 1,655
5,017
—
—
—
6,672
Net cash used in investing activities (3,577 ) (45,800 ) (14,831 ) (531,763 ) —
(595,971 )
Financing activities

Borrowings on revolving facilities 265,000
—
—
—
—
265,000
Payments on revolving facilities (345,000 ) —
—
—
—
(345,000 )
Proceeds from term loans (financing costs) (11 ) —
—
779,915
—
779,904
Payments on term loans (5,750 ) —
—
—
—
(5,750 )
Revolving facility debt issuance costs (837 ) —
—
(496 ) —
(1,333 )
Borrowings of other debt 5,549
—
9,820
4,559
—
19,928
Principal payments on other debt (5,987 ) (261 ) (2,400 ) (2,873 ) —
(11,521 )
Dividends paid to Holdings (889 ) —
—
—
—
(889 )
Equity investment by Holdings 1,620
—
—
—
—
1,620
Intercompany 90,589
(45,661 ) (27,290 ) (17,638 ) —
—
Decrease in overdrafts (6,171 ) —
—
—
—
(6,171 )
Proceeds from issuance of non-controlling interests —
—
957
1,969
—
2,926
Distributions to non-controlling interests —
(1,450 ) (1,681 ) (298,082 ) —
(301,213 )
Net cash provided by (used in) financing activities (1,887 ) (47,372 ) (20,594 ) 467,354
—
397,501
Net increase (decrease) in cash and cash equivalents 15,001
1,504
(165 ) 2,140
—
18,480
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 $ 15,074
$ 6,360
$ 4,396
$ 115,199
$ —
$ 141,029


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

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2017

(unaudited)

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Assets

Current Assets:

Cash and cash equivalents $ 73
$ 4,856
$ 4,561
$ 113,059
$ —
$ 122,549
Accounts receivable —
449,493
122,728
119,511
—
691,732
Intercompany receivables —
1,598,212
60,707
—
(1,658,919 ) (a) —
Prepaid income taxes 22,704
5,703
31
2,949
—
31,387
Other current assets 13,021
30,209
13,031
18,897
—
75,158
Total Current Assets 35,798
2,088,473
201,058
254,416
(1,658,919 ) 920,826
Property and equipment, net 39,836
623,085
79,013
170,657
—
912,591
Investment in affiliates 4,524,385
124,104
—
—
(4,648,489 ) (b)(c) —
Goodwill —
2,108,270
—
674,542
—
2,782,812
Identifiable intangible assets, net —
104,067
5,046
217,406
—
326,519
Other assets 36,494
98,575
35,440
23,898
(9,989 ) (e) 184,418
Total Assets $ 4,636,513
$ 5,146,574
$ 320,557
$ 1,340,919
$ (6,317,397 ) $ 5,127,166
Liabilities and Equity

Current Liabilities:

Overdrafts $ 29,463
$ —
$ —
$ —
$ —
$ 29,463
Current portion of long-term debt and notes payable 16,635
740
2,212
2,600
—
22,187
Accounts payable 12,504
85,489
17,475
12,726
—
128,194
Intercompany payables 1,598,212
60,707
—
—
(1,658,919 ) (a) —
Accrued payroll 16,736
98,887
4,819
40,120
—
160,562
Accrued vacation 4,083
58,355
12,295
18,142
—
92,875
Accrued interest 17,479
7
6
2,393
—
19,885
Accrued other 39,219
57,378
12,599
33,970
—
143,166
Income taxes payable —
1,302
30
7,739
—
9,071
Total Current Liabilities 1,734,331
362,865
49,436
117,690
(1,658,919 ) 605,403
Long-term debt, net of current portion 2,042,555
127
24,730
610,303
—
2,677,715
Non-current deferred tax liability —
88,376
780
45,750
(9,989 ) (e) 124,917
Other non-current liabilities 36,259
56,721
8,138
44,591
—
145,709
Total Liabilities 3,813,145
508,089
83,084
818,334
(1,668,908 ) 3,553,744
Redeemable non-controlling interests —
—
—
16,270
624,548
(d) 640,818
Stockholders’ Equity:

Common stock 0
—
—
—
—
0
Capital in excess of par 947,370
—
—
—
—
947,370
Retained earnings (accumulated deficit) (124,002 ) 1,416,857
(35,942 ) 64,626
(1,445,541 ) (c)(d) (124,002 )
Subsidiary investment —
3,221,628
273,415
437,779
(3,932,822 ) (b)(d) —
Total Select Medical Corporation Stockholders’ Equity 823,368
4,638,485
237,473
502,405
(5,378,363 ) 823,368
Non-controlling interests —
—
—
3,910
105,326
(d) 109,236
Total Equity 823,368
4,638,485
237,473
506,315
(5,273,037 ) 932,604
Total Liabilities and Equity $ 4,636,513
$ 5,146,574
$ 320,557
$ 1,340,919
$ (6,317,397 ) $ 5,127,166


(a)	Elimination of intercompany balances.


(b)	Elimination of investments in consolidated subsidiaries.


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


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


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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2017

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
23

$
687,886

$
171,180

$
261,586

$
—

$
1,120,675

Costs and expenses:

Cost of services

644

561,304

144,211

214,071

—

920,230

General and administrative

28,227

48

—

—

—

28,275

Bad debt expense

—

9,829

3,627

4,718

—

18,174

Depreciation and amortization

1,573

18,149

3,182

15,429

—

38,333

Total costs and expenses

30,444

589,330

151,020

234,218

—

1,005,012

Income (loss) from operations

(30,421
)
98,556

20,160

27,368

—

115,663

Other income and expense:

Intercompany interest and royalty fees

(2,263
)
3,596

(1,333
)
—

—

—

Intercompany management fees

63,504

(53,435
)
(10,069
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

5,646

20

—

—

5,666

Interest expense

(19,623
)
(8,234
)
(2,360
)
(7,438
)
—

(37,655
)

Income before income taxes

11,197

46,129

6,418

19,930

—

83,674

Income tax expense (benefit)

(2,324
)
27,307

309

7,082

—

32,374

Equity in earnings of consolidated subsidiaries

28,534

4,200

—

—

(32,734
) (a)
—

Net income

42,055

23,022

6,109

12,848

(32,734
)
51,300

Less: Net income attributable to non-controlling interests

—

—

2,175

7,070

—

9,245

Net income attributable to Select Medical Corporation

$
42,055

$
23,022

$
3,934

$
5,778

$
(32,734
)
$
42,055



	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	$	23		$	681,564		$	163,991		$	256,887		$	—			$	1,102,465
Costs and expenses:
Cost of services	644			564,781			140,679			214,090			—				920,194
General and administrative	28,227			48			—			—			—				28,275
Depreciation and amortization	1,573			18,182			3,149			15,429			—				38,333
Total costs and expenses	30,444			583,011			143,828			229,519			—				986,802
Income (loss) from operations	(30,421		)	98,553			20,163			27,368			—				115,663
Other income and expense:
Intercompany interest and royalty fees	8,195			(4,735		)	(3,460		)	—			—				—
Intercompany management fees	63,504			(53,414		)	(10,090		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			5,646			20			—			—				5,666
Interest expense	(30,081		)	(49		)	(87		)	(7,438		)	—				(37,655		)
Income before income taxes	11,197			46,001			6,546			19,930			—				83,674
Income tax expense (benefit)	(2,324		)	27,473			143			7,082			—				32,374
Equity in earnings of consolidated subsidiaries	28,534			4,189			—			—			(32,723		)	(a)	—
Net income	42,055			22,717			6,403			12,848			(32,723		)		51,300
Less: Net income (loss) attributable to non-controlling interests	—			(39		)	2,214			7,070			—				9,245
Net income attributable to Select Medical Corporation	$	42,055		$	22,756		$	4,189		$	5,778		$	(32,723	)		$	42,055

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

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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2017

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
631

$
1,377,279

$
336,391

$
517,735

$
—

$
2,232,036

Costs and expenses:

Cost of services

1,176

1,142,527

282,521

422,363

—

1,848,587

General and administrative

56,263

87

—

—

—

56,350

Bad debt expense

—

21,577

6,933

10,289

—

38,799

Depreciation and amortization

3,148

39,489

6,683

31,552

—

80,872

Total costs and expenses

60,587

1,203,680

296,137

464,204

—

2,024,608

Income (loss) from operations

(59,956
)
173,599

40,254

53,531

—

207,428

Other income and expense:

Intercompany interest and royalty fees

(4,159
)
6,914

(2,755
)
—

—

—

Intercompany management fees

125,202

(106,069
)
(19,133
)
—

—

—

Loss on early retirement of debt

(19,719
)
—

—

—

—

(19,719
)
Equity in earnings of unconsolidated subsidiaries

—

11,139

48

—

—

11,187

Non-operating loss

—

(49
)
—

—

—

(49
)
Interest expense

(42,431
)
(16,307
)
(4,833
)
(14,937
)
—

(78,508
)

Income (loss) before income taxes

(1,063
)
69,227

13,581

38,594

—

120,339

Income tax expense (benefit)

(2,198
)
33,243

613

13,918

—

45,576

Equity in earnings of consolidated subsidiaries

56,790

9,775

—

—

(66,565
) (a)
—

Net income

57,925

45,759

12,968

24,676

(66,565
)
74,763

Less: Net income attributable to non-controlling interests

—

—

3,244

13,594

—

16,838

Net income attributable to Select Medical Corporation

$
57,925

$
45,759

$
9,724

$
11,082

$
(66,565
)
$
57,925



	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	$	631		$	1,364,617		$	321,258		$	507,476		$	—			$	2,193,982
Costs and expenses:
Cost of services	1,176			1,150,810			274,953			422,393			—				1,849,332
General and administrative	56,263			87			—			—			—				56,350
Depreciation and amortization	3,148			39,553			6,619			31,552			—				80,872
Total costs and expenses	60,587			1,190,450			281,572			453,945			—				1,986,554
Income (loss) from operations	(59,956		)	174,167			39,686			53,531			—				207,428
Other income and expense:
Intercompany interest and royalty fees	16,895			(9,701		)	(7,194		)	—			—				—
Intercompany management fees	125,202			(106,011		)	(19,191		)	—			—				—
Loss on early retirement of debt	(19,719		)	—			—			—			—				(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			11,139			48			—			—				11,187
Non-operating loss	—			(49		)	—			—			—				(49		)
Interest expense	(63,485		)	(1		)	(85		)	(14,937		)	—				(78,508		)
Income (loss) before income taxes	(1,063		)	69,544			13,264			38,594			—				120,339
Income tax expense (benefit)	(2,198		)	33,573			283			13,918			—				45,576
Equity in earnings of consolidated subsidiaries	56,790			9,734			—			—			(66,524		)	(a)	—
Net income	57,925			45,705			12,981			24,676			(66,524		)		74,763
Less: Net income (loss) attributable to non-controlling interests	—			(3		)	3,247			13,594			—				16,838
Net income attributable to Select Medical Corporation	$	57,925		$	45,708		$	9,734		$	11,082		$	(66,524	)		$	57,925

~~(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 Six Months Ended June 30, 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

$
57,925

$
45,759

$
12,968

$
24,676

$
(66,565
) (a)
$
74,763

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

Distributions from unconsolidated subsidiaries

—

10,902

31

—

—

10,933

Depreciation and amortization

3,148

39,489

6,683

31,552

—

80,872

Provision for bad debts

—

21,577

6,933

10,289

—

38,799

Equity in earnings of unconsolidated subsidiaries

—

(11,139
)
(48
)
—

—

(11,187
)
Equity in earnings of consolidated subsidiaries

(56,790
)
(9,775
)
—

—

66,565
(a)
—

Loss on extinguishment of debt

6,527

—

—

—

—

6,527

Gain on sale of assets and businesses

(8
)
(4,828
)
(4,687
)
—

—

(9,523
)
Stock compensation expense

8,700

—

—

570

—

9,270

Amortization of debt discount, premium and issuance costs

4,342

—

—

1,632

—

5,974

Deferred income taxes

5,987

—

—

(7,461
)
—

(1,474
)
Changes in operating assets and liabilities, net of effects of business combinations:

��

Accounts receivable

—

(125,418
)
(29,435
)
(24,150
)
—

(179,003
)
Other current assets

(5,631
)
5,452

(2,517
)
(2,861
)
—

(5,557
)
Other assets

3,184

(16,925
)
17,426

936

—

4,621

Accounts payable

(413
)
(1,550
)
(10
)
2,732

—

759

Accrued expenses

(5,618
)
(4,817
)
8,704

(3,102
)
—

(4,833
)
Income taxes

9,366

—

—

10,033

—

19,399

Net cash provided by (used in) operating activities

30,719

(51,273
)
16,048

44,846

—

40,340

Investing activities

Acquisition of businesses, net of cash acquired

—

(2,305
)
—

(16,203
)
—

(18,508
)
Purchases of property and equipment

(7,093
)
(71,813
)
(10,109
)
(16,287
)
—

(105,302
)
Investment in businesses

—

(9,874
)
—

—

—

(9,874
)
Proceeds from sale of assets and businesses

8

15,007

19,537

—

—

34,552

Net cash provided by (used in) investing activities

(7,085
)
(68,985
)
9,428

(32,490
)
—

(99,132
)

Financing activities

Borrowings on revolving facilities

630,000

—

—

—

—

630,000

Payments on revolving facilities

(550,000
)
—

—

—

—

(550,000
)
Proceeds from term loans

1,139,487

—

—

—

—

1,139,487

Payments on term loans

(1,150,627
)
—

—

(23,065
)
—

(1,173,692
)
Revolving facility debt issuance costs

(4,392
)
—

—

—

—

(4,392
)
Borrowings of other debt

6,572

—

105

2,767

—

9,444

Principal payments on other debt

(7,353
)
(204
)
(1,183
)
(1,697
)
—

(10,437
)
Repayments of bank overdrafts

(5,228
)
—

—

—

—

(5,228
)
Dividends paid to Holdings

(600
)
—

—

—

—

(600
)
Equity investment by Holdings

963

—

—

—

—

963

Intercompany

(93,455
)
119,528

(26,073
)
—

—

—

Proceeds from issuance of non-controlling interests

—

—

3,553

—

—

3,553

Purchase of non-controlling interests

—

—

(120
)
—

—

(120
)
Distributions to non-controlling interests

—

—

(1,868
)
(3,548
)
—

(5,416
)
Net cash provided by (used in) financing activities

(34,633
)
119,324

(25,586
)
(25,543
)
—

33,562

Net decrease in cash and cash equivalents

(10,999
)
(934
)
(110
)
(13,187
)
—

(25,230
)

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

$
5,533

$
4,946

$
63,248

$
—

$
73,799



	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	$	57,925		$	45,705		$	12,981		$	24,676		$	(66,524	)	(a)	$	74,763
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			10,902			31			—			—				10,933
Depreciation and amortization	3,148			39,553			6,619			31,552			—				80,872
Provision for bad debts	—			715			—			30			—				745
Equity in earnings of unconsolidated subsidiaries	—			(11,139		)	(48		)	—			—				(11,187		)
Equity in earnings of consolidated subsidiaries	(56,790		)	(9,734		)	—			—			66,524			(a)	—
Loss on extinguishment of debt	6,527			—			—			—			—				6,527
Gain on sale of assets and businesses	(8		)	(4,828		)	(4,687		)	—			—				(9,523		)
Stock compensation expense	8,700			—			—			570			—				9,270
Amortization of debt discount, premium and issuance costs	4,342			—			—			1,632			—				5,974
Deferred income taxes	5,987			—			—			(7,461		)	—				(1,474		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(104,767		)	(22,291		)	(13,891		)	—				(140,949		)
Other current assets	(5,631		)	6,047			(3,112		)	(2,861		)	—				(5,557		)
Other assets	3,184			(16,925		)	17,426			936			—				4,621
Accounts payable	(413		)	(1,697		)	137			2,732			—				759
Accrued expenses	(5,618		)	(4,507		)	8,394			(3,102		)	—				(4,833		)
Income taxes	9,366			—			—			10,033			—				19,399
Net cash provided by (used in) operating activities	30,719			(50,675		)	15,450			44,846			—				40,340
Investing activities
Business combinations, net of cash acquired	—			(2,305		)	—			(16,203		)	—				(18,508		)
Purchases of property and equipment	(7,093		)	(72,005		)	(9,917		)	(16,287		)	—				(105,302		)
Investment in businesses	—			(9,874		)	—			—			—				(9,874		)
Proceeds from sale of assets and businesses	8			15,007			19,537			—			—				34,552
Net cash provided by (used in) investing activities	(7,085		)	(69,177		)	9,620			(32,490		)	—				(99,132		)
Financing activities
Borrowings on revolving facilities	630,000			—			—			—			—				630,000
Payments on revolving facilities	(550,000		)	—			—			—			—				(550,000		)
Proceeds from term loans	1,139,487			—			—			—			—				1,139,487
Payments on term loans	(1,150,627		)	—			—			(23,065		)	—				(1,173,692		)
Revolving facility debt issuance costs	(4,392		)	—			—			—			—				(4,392		)
Borrowings of other debt	6,572			—			105			2,767			—				9,444
Principal payments on other debt	(7,353		)	(204		)	(1,183		)	(1,697		)	—				(10,437		)
Dividends paid to Holdings	(600		)	—			—			—			—				(600		)
Equity investment by Holdings	963			—			—			—			—				963
Intercompany	(93,455		)	119,128			(25,673		)	—			—				—
Decrease in overdrafts	(5,228		)	—			—			—			—				(5,228		)
Proceeds from issuance of non-controlling interests	—			—			3,553			—			—				3,553
Distributions to non-controlling interests	—			(6		)	(1,982		)	(3,548		)	—				(5,536		)
Net cash provided by (used in) financing activities	(34,633		)	118,918			(25,180		)	(25,543		)	—				33,562
Net decrease in cash and cash equivalents	(10,999		)	(934		)	(110		)	(13,187		)	—				(25,230		)
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		$	5,533		$	4,946		$	63,248		$	—			$	73,799

~~(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

—

363,470

97,770

112,512

—

573,752

Intercompany receivables

—

1,573,960

28,271

—

(1,602,231
) (a)
—

Prepaid income taxes

6,658

—

—

5,765

—

12,423

Other current assets

11,953

33,958

10,269

21,519

—

77,699

Total Current Assets

29,682

1,977,855

141,366

216,231

(1,602,231
)
762,903

Property and equipment, net

48,697

603,408

50,869

189,243

—

892,217

Investment in affiliates

4,493,684

89,288

—

—

(4,582,972
) (b) (c)
—

Goodwill

—

2,090,963

—

660,037

—

2,751,000

Identifiable intangible assets, net

—

109,132

—

231,430

—

340,562

Other assets

45,636

84,803

53,954

16,235

(26,684
) (d)
173,944

Total Assets

$
4,617,699

$
4,955,449

$
246,189

$
1,313,176

$
(6,211,887
)
$
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

78,608

22,397

14,778

—

126,558

Intercompany payables

1,573,960

28,271

—

—

(1,602,231
) (a)
—

Accrued payroll

16,963

92,216

4,246

32,972

—

146,397

Accrued vacation

3,440

55,486

10,668

13,667

—

83,261

Accrued interest

20,114

—

—

2,211

—

22,325

Accrued other

39,155

62,384

4,639

33,898

—

140,076

Total Current Liabilities

1,710,996

317,410

43,274

102,186

(1,602,231
)
571,635

Long-term debt, net of current portion

2,048,154

601

9,685

626,893

—

2,685,333

Non-current deferred tax liability

—

133,852

596

91,314

(26,684
) (d)
199,078

Other non-current liabilities

42,824

53,537

5,727

34,432

��

136,520

Total Liabilities

3,801,974

505,400

59,282

854,825

(1,628,915
)
3,592,566

Redeemable non-controlling interests

—

113

10,056

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
)
1,269,014

(38,313
)
1,364

(1,232,065
) (c)
(109,386
)
Subsidiary investment

—

3,180,922

128,556

41,429

(3,350,907
) (b)
—

Total Select Medical Corporation Stockholder’s Equity

815,725

4,449,936

90,243

42,793

(4,582,972
)
815,725

Non-controlling interests

—

—

86,608

3,568

—

90,176

Total Equity

815,725

4,449,936

176,851

46,361

(4,582,972
)
905,901

Total Liabilities and Equity

$
4,617,699

$
4,955,449

$
246,189

$
1,313,176

$
(6,211,887
)
$
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 June 30, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
20

$
723,859

$
118,884

$
254,868

$
—

$
1,097,631

Costs and expenses:

Cost of services

606

605,730

103,767

206,882

—

916,985

General and administrative

25,844

26

—

—

—

25,870

Bad debt expense

—

10,285

2,093

5,139

—

17,517

Depreciation and amortization

1,276

17,316

2,697

14,916

—

36,205

Total costs and expenses

27,726

633,357

108,557

226,937

—

996,577

Income (loss) from operations

(27,706
)
90,502

10,327

27,931

—

101,054

Other income and expense:

Intercompany interest and royalty fees

(1,532
)
3,274

(1,742
)
—

—

—

Intercompany management fees

38,783

(32,430
)
(6,353
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

4,519

27

—

—

4,546

Non-operating gain

10,463

2,572

—

—

—

13,035

Interest expense

(25,544
)
(6,684
)
(1,852
)
(10,252
)
—

(44,332
)

Income (loss) before income taxes

(5,536
)
61,753

407

17,679

—

74,303

Income tax expense (benefit)

(473
)
26,370

672

6,881

—

33,450

Equity in earnings of consolidated subsidiaries

38,998

(1,133
)
—

—

(37,865
) (a)
—

Net income (loss)

33,935

34,250

(265
)
10,798

(37,865
)
40,853

Less: Net income attributable to non-controlling interests

—

18

824

6,076

—

6,918

Net income (loss) attributable to Select Medical Corporation

$
33,935

$
34,232

$
(1,089
)
$
4,722

$
(37,865
)
$
33,935

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Six Months Ended June 30, 2016~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
437

$
1,439,439

$
240,340

$
505,745

$
—

$
2,185,961

Costs and expenses:

Cost of services

950

1,211,439

206,774

420,084

—

1,839,247

General and administrative

54,231

(93
)
—

—

—

54,138

Bad debt expense

—

21,003

4,058

8,853

—

33,914

Depreciation and amortization

2,487

32,648

5,295

30,292

—

70,722

Total costs and expenses

57,668

1,264,997

216,127

459,229

—

1,998,021

Income (loss) from operations

(57,231
)
174,442

24,213

46,516

—

187,940

Other income and expense:

Intercompany interest and royalty fees

(2,590
)
6,044

(3,454
)
—

—

—

Intercompany management fees

94,139

(82,127
)
(12,012
)
—

—

—

Loss on early retirement of debt

(773
)
—

—

—

—

(773
)
Equity in earnings of unconsolidated subsidiaries

—

9,146

52

—

—

9,198

Non-operating gain (loss)

40,895

(2,773
)
—

—

—

38,122

Interest expense

(45,890
)
(13,318
)
(3,491
)
(20,481
)
—

(83,180
)

Income before income taxes

28,550

91,414

5,308

26,035

—

151,307

Income tax expense

8,139

31,985

607

9,779

—

50,510

Equity in earnings of consolidated subsidiaries

68,357

1,873

—

—

(70,230
) (a)
—

Net income

88,768

61,302

4,701

16,256

(70,230
)
100,797

Less: Net income attributable to non-controlling interests

—

33

2,695

9,301

—

12,029

Net income attributable to Select Medical Corporation

$
88,768

$
61,269

$
2,006

$
6,955

$
(70,230
)
$
88,768

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Six Months Ended June 30, 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

$
88,768

$
61,302

$
4,701

$
16,256

$
(70,230
) (a)
$
100,797

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

Distributions from unconsolidated subsidiaries

—

12,000

39

—

—

12,039

Depreciation and amortization

2,487

32,648

5,295

30,292

—

70,722

Provision for bad debts

—

21,003

4,058

8,853

—

33,914

Equity in earnings of unconsolidated subsidiaries

—

(9,146
)
(52
)
—

—

(9,198
)
Equity in earnings of consolidated subsidiaries

(68,357
)
(1,873
)
—

—

70,230
(a)
—

Loss on extinguishment of debt

773

—

—

—

—

773

Gain on sale of assets and businesses

(40,895
)
(2,566
)
—

—

—

(43,461
)
Loss on disposal of assets

—

37

12

6

—

55

Impairment of equity investment

—

5,339

—

—

—

5,339

Stock compensation expense

7,790

—

—

384

—

8,174

Amortization of debt discount, premium and issuance costs

5,371

—

2

1,704

—

7,077

Deferred income taxes

997

—

—

(14,283
)
—

(13,286
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

—

(22,896
)
(9,711
)
(11,489
)
—

(44,096
)
Other current assets

(2,938
)
7,342

(1,273
)
7,880

—

11,011

Other assets

(4,268
)
(341
)
(424
)
9,541

—

4,508

Accounts payable

(2,241
)
(17,695
)
(3,371
)
7,455

—

(15,852
)
Accrued expenses

(10,175
)
36,088

(2,441
)
(2,840
)
—

20,632

Income taxes

9,101

—

—

19,989

—

29,090

Net cash provided by (used in) operating activities

(13,587
)
121,242

(3,165
)
73,748

—

178,238

Investing activities

Acquisition of businesses, net of cash acquired

(408,654
)
(605
)
(8,395
)
(3,865
)
—

(421,519
)
Purchases of property and equipment

(8,545
)
(52,591
)
(11,195
)
(7,927
)
—

(80,258
)
Investment in businesses

—

(1,590
)
—

—

—

(1,590
)
Proceeds from sale of assets and businesses

63,418

7,942

6

—

—

71,366

Net cash used in investing activities

(353,781
)
(46,844
)
(19,584
)
(11,792
)
—

(432,001
)

Financing activities

Borrowings on revolving facilities

320,000

—

—

—

—

320,000

Payments on revolving facilities

(375,000
)
—

—

(5,000
)
—

(380,000
)
Proceeds from term loans

600,127

—

—

—

—

600,127

Payments on term loans

(227,399
)
—

—

(2,250
)
—

(229,649
)
Borrowings of other debt

9,765

—

9,500

2,817

—

22,082

Principal payments on other debt

(7,278
)
(385
)
(876
)
(1,387
)
—

(9,926
)
Repayments of bank overdrafts

(2,138
)
—

—

—

—

(2,138
)
Dividends paid to Holdings

(506
)
—

—

—

—

(506
)
Equity investment by Holdings

657

—

—

—

—

657

Intercompany

49,141

(68,206
)
19,065

—

—

—

Proceeds from issuance of non-controlling interests

—

—

3,103

—

—

3,103

Purchase of non-controlling interests

—

(1,294
)
—

—

—

(1,294
)
Distributions to non-controlling interests

—

(108
)
(3,294
)
(1,306
)
—

(4,708
)
Net cash provided by (used in) financing activities

367,369

(69,993
)
27,498

(7,126
)
—

317,748

Net increase in cash and cash equivalents

1

4,405

4,749

54,830

—

63,985

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

$
4,071

$
8,111

$
5,374

$
60,864

$
—

$
78,420

~~(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 Medicare-certified long term ~~acute~~ care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

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

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

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

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

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

our plans and expectations related to 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 one of the largest operators of ~~specialty~~critical illness recovery hospitals (previously referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient rehabilitation facilities), outpatient rehabilitation clinics and occupational ~~medicine~~health centers in the United ~~States.~~States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. As of June 30, ~~2017,~~2018, we ~~had operations~~operated 98 critical illness recovery hospitals in 4627 states, 26 rehabilitation hospitals in 11 states, and ~~the District of Columbia. As of June 30, 2017, we operated 123 specialty hospitals in 28 states and 1,608~~1,638 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated ~~315 medical~~527 occupational health centers in 3841 states as of June 30, ~~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 manage our Company through three business segments: specialty hospitals, outpatient rehabilitation,~~ As of June 30, 2018, we had operations in 47 states and ~~Concentra.~~ the District of Columbia.

We had net operating revenues of ~~$2,232.0~~$2,549.2 million for the six months ended June 30, ~~2017.~~2018. Of this total, we earned approximately ~~54%~~36% of our net operating revenues from our ~~specialty hospitals~~critical illness recovery hospital segment, approximately ~~23%~~14% from our rehabilitation hospital segment, approximately 20% from our outpatient rehabilitation segment, and approximately ~~23%~~30% from our Concentra segment. Patients are typically admitted to ~~our specialty~~the Company’s critical illness recovery and rehabilitation hospitals from general acute care hospitals. These patients have specialized needs, with serious and often complex medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of ~~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,~~definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

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

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

Three Months Ended June 30,

Six Months Ended June 30,

2016

2017

2016

2017

(in thousands)

Net income

$
40,853

$
51,300

$
100,797

$
74,763

Income tax expense

33,450

32,374

50,510

45,576

Interest expense

44,332

37,655

83,180

78,508

Non-operating loss (gain)

(13,035
)
—

(38,122
)
49

Equity in earnings of unconsolidated subsidiaries

(4,546
)
(5,666
)
(9,198
)
(11,187
)
Loss on early retirement of debt

—

—

773

19,719

Income from operations

$
101,054

$
115,663

$
187,940

$
207,428

Stock compensation expense:

Included in general and administrative

3,399

3,775

6,839

7,524

Included in cost of services

799

909

1,335

1,746

Depreciation and amortization

36,205

38,333

70,722

80,872

Physiotherapy acquisition costs

—

—

3,236

—

Adjusted EBITDA

$
141,457

$
158,680

$
270,072

$
297,570

EBITDA:

Three Months Ended June 30, Six Months Ended June 30,
2017 2018 2017 2018
(in thousands)
Net income $ 51,300
$ 60,559
$ 74,763
$ 104,541
Income tax expense 32,374
21,106
45,576
33,400
Interest expense 37,655
50,159
78,508
97,322
Non-operating loss (gain) —
(6,478 ) 49
(6,877 )
Equity in earnings of unconsolidated subsidiaries (5,666 ) (4,785 ) (11,187 ) (9,482 )
Loss on early retirement of debt —
—
19,719
10,255
Income from operations 115,663
120,561
207,428
229,159
Stock compensation expense:

Included in general and administrative 3,775
4,047
7,524
8,037
Included in cost of services 909
1,937
1,746
2,874
Depreciation and amortization 38,333
51,724
80,872
98,495
U.S. HealthWorks acquisition costs —
(41 ) —
2,895
Adjusted EBITDA $ 158,680
$ 178,228
$ 297,570
$ 341,460

Summary Financial Results

Three Months Ended June 30, ~~2017~~2018

For the three months ended June 30, ~~2017,~~2018, our net operating revenues increased ~~2.1%~~17.6% to ~~$1,120.7~~$1,296.2 million, compared to ~~$1,097.6~~$1,102.5 million for the three months ended June 30, ~~2016.~~2017. Income from operations increased ~~14.5%~~4.2% to $120.6 million for the three months ended June 30, 2018, compared to $115.7 million for the three months ended June 30, ~~2017, compared~~2017.

Net income increased 18.0% to ~~$101.1~~$60.6 million for the three months ended June 30, ~~2016. Net income increased 25.6%~~2018, compared to $51.3 million for the three months ended June 30, ~~2017, compared to $40.9 million for the three months ended June 30, 2016.~~2017. Net income for the three months ended June 30, ~~2016~~2018 included ~~a pre-tax~~ non-operating ~~gain~~gains of ~~$13.0~~$6.5 million. ~~Our~~

Adjusted EBITDA increased ~~12.2%~~12.3% to $178.2 million for the three months ended June 30, 2018, compared to $158.7 million for the three months ended June 30, ~~2017, compared to $141.5 million~~2017. Our Adjusted EBITDA margin was 13.7% for the three months ended June 30, ~~2016. Our Adjusted EBITDA margin was 14.2%~~2018, compared to 14.4% for the three months ended June 30, ~~2017, compared~~2017.

The following tables reconcile our segment performance measures to ~~12.9%~~our consolidated operating results:



	Three Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	442,452		$	173,769		$	267,183		$	412,823		$	(17	)	$	1,296,210
Operating expenses	381,727			145,574			225,236			341,352			30,036			1,123,925
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724
Income (loss) from operations	$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724
Stock compensation expense	—			—			—			1,138			4,846			5,984
U.S. HealthWorks acquisition costs	—			—			—			(41		)	—			(41		)
Adjusted EBITDA	$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)	$	178,228
Adjusted EBITDA margin	13.7		%	16.2		%	15.7		%	17.6		%	N/M			13.7		%



	Three Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	439,194		$	151,378		$	254,984		$	256,887		$	22		$	1,102,465
Operating expenses	364,151			128,249			213,058			214,090			28,921			948,469
Depreciation and amortization	10,917			4,537			5,878			15,429			1,572			38,333
Income (loss) from operations	$	64,126		$	18,592		$	36,048		$	27,368		$	(30,471	)	$	115,663
Depreciation and amortization	10,917			4,537			5,878			15,429			1,572			38,333
Stock compensation expense	—			—			—			264			4,420			4,684
Adjusted EBITDA	$	75,043		$	23,129		$	41,926		$	43,061		$	(24,479	)	$	158,680
Adjusted EBITDA margin	17.1		%	15.3		%	16.4		%	16.8		%	N/M			14.4		%

The following table summarizes changes in segment performance measures for the three months ended June 30, ~~2016.~~2018, compared to the three months ended June 30, 2017:



	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	0.7	%	14.8	%	4.8	%	60.7	%	N/M		17.6	%
Change in income from operations	(23.9	)%	19.3	%	(2.2	)%	70.9	%	(6.4	)%	4.2	%
Change in Adjusted EBITDA	(19.1	)%	21.9	%	0.1	%	68.5	%	(3.0	)%	12.3	%

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

N/M — Not meaningful.

Six Months Ended June 30, ~~2017~~2018

For the six months ended June 30, ~~2017,~~2018, our net operating revenues increased ~~2.1%~~16.2% to ~~$2,232.0~~$2,549.2 million, compared to $~~2,186.0~~$2,194.0 million for the six months ended June 30, ~~2016.~~2017. Income from operations increased ~~10.4%~~10.5% to $229.2 million for the six months ended June 30, 2018, compared to $207.4 million for the six months ended June 30, ~~2017, compared~~2017.

Net income increased 39.8% to ~~$187.9~~$104.5 million for the six months ended June 30, ~~2016. Net income was~~2018, compared to $74.8 million for the six months ended June 30, ~~2017, which includes pre-tax losses on early retirement of debt of $19.7 million.~~2017. Net income ~~was $100.8 million~~ for the six months ended June 30, ~~2016, which~~2018 included ~~a pre-tax non-operating gain of $38.1 million and~~ a pre-tax loss on early retirement of debt of ~~$0.8~~$10.3 million and pre-tax non-operating gains of $6.9 million. ~~Our~~ Net income for the six months ended June 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million.

Adjusted EBITDA increased ~~10.2%~~14.7% to $341.5 million for the six months ended June 30, 2018, compared to $297.6 million for the six months ended June 30, ~~2017, compared to $270.1 million~~2017. Our Adjusted EBITDA margin was 13.4% for the six months ended June 30, ~~2016. Our Adjusted EBITDA margin was 13.3%~~2018, compared to 13.6% for the six months ended June 30, ~~2017, compared~~2017.

The following tables reconcile our segment performance measures to ~~12.4%~~our consolidated operating results:



	Six Months Ended June 30, 2018
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	907,128		$	348,543		$	524,564		$	768,939		$	—		$	2,549,174
Operating expenses	773,431			293,572			452,092			642,818			59,607			2,221,520
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495
Income (loss) from operations	$	110,687		$	43,234		$	59,131		$	80,277		$	(64,170	)	$	229,159
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495
Stock compensation expense	—			—			—			1,349			9,562			10,911
U.S. HealthWorks acquisition costs	—			—			—			2,895			—			2,895
Adjusted EBITDA	$	133,697		$	54,971		$	72,472		$	130,365		$	(50,045	)	$	341,460
Adjusted EBITDA margin	14.7		%	15.8		%	13.8		%	17.0		%	N/M			13.4		%



	Six Months Ended June 30, 2017
	Critical Illness Recovery Hospital⁽¹⁾			Rehabilitation Hospital⁽¹⁾			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	884,317		$	296,203		$	505,355		$	507,476		$	631		$	2,193,982
Operating expenses	736,937			256,746			432,078			422,393			57,528			1,905,682
Depreciation and amortization	23,959			9,995			12,218			31,552			3,148			80,872
Income (loss) from operations	$	123,421		$	29,462		$	61,059		$	53,531		$	(60,045	)	$	207,428
Depreciation and amortization	23,959			9,995			12,218			31,552			3,148			80,872
Stock compensation expense	—			—			—			570			8,700			9,270
Adjusted EBITDA	$	147,380		$	39,457		$	73,277		$	85,653		$	(48,197	)	$	297,570
Adjusted EBITDA margin	16.7		%	13.3		%	14.5		%	16.9		%	N/M			13.6		%

The following table summarizes changes in segment performance measures for the six months ended June 30, ~~2016.~~

~~Implementation of Patient Criteria~~

~~As discussed below under “~~~~Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria~~~~,” our LTCHs transitioned~~2018, compared to the new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, beginning October 1, 2015. Since completing our transition to the new LTCH Medicare patient criteria regulations during the third quarter of 2016, we have experienced an increase in admissions of patients eligible for the full LTCH-PPS standard reimbursement rate.

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

2015

2016

2017

Occupancy
Percentage

Case Mix
Index(1)

Occupancy
Percentage

Case Mix
Index(1)

Occupancy
Percentage

Case Mix
Index(1)

Three months ended:

March 31

71
%
1.22

71
%
1.24

68
%
1.28

June 30

70
%
1.21

67
%
1.27

66
%
1.28

September 30

70
%
1.18

61
%
1.26

December 31

70
%
1.21

63
%
1.26

~~(1)~~ Case mix index, which is calculated as the sum of all diagnostic-related group weights for the period divided by the sum of discharges for the same period, is reflective of the level of patient-acuity in our LTCHs.

Our case mix index has increased, which is reflective of the higher-acuity patients we are now admitting under patient criteria. This has resulted in increases in our net revenue per patient day due to higher reimbursement rates for these cases. Our LTCH occupancy percentage reached its lowest level during the third quarter of 2016, which is the first quarter in which all of our LTCHs operated under the new Medicare payment rules. Our LTCHs which operated under the new Medicare payment rules during both the threesix months ended June 30, ~~2017~~2017:



	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	2.6	%	17.7	%	3.8	%	51.5	%	N/M		16.2	%
Change in income from operations	(10.3	)%	46.7	%	(3.2	)%	50.0	%	(6.9	)%	10.5	%
Change in Adjusted EBITDA	(9.3	)%	39.3	%	(1.1	)%	52.2	%	(3.8	)%	14.7	%


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

N/M — Not meaningful.

Significant Events

Acquisition of U.S. HealthWorks

On February 1, 2018, Concentra acquired all of the issued and ~~2016 experienced improved occupancy during~~outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care provider, pursuant to the ~~three months ended June 30, 2017. These LTCHs had an occupancy percentage~~terms of ~~70%~~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 ~~three months ended June 30, 2017, compared to 69% for~~closing of the ~~three months ended June 30, 2016.~~

~~Significant Events~~

~~Refinancing~~

~~On March 6, 2017, Select entered into a new senior secured~~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, ~~provides for $1.6 billion in senior secured~~along with the existing tranche B term loans under the Concentra first lien credit ~~facilities comprising~~agreement, have a ~~$1.15 billion, seven-year term loan~~maturity date of June 1, 2022 and ~~a $450.0~~(ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility ~~including a $75.0 million sublimit for the issuance of standby letters of credit. Select used borrowings~~ under the ~~new Select~~terms of the existing Concentra first lien credit ~~facilities to: (i) repay the series E~~agreement. The tranche B term loans ~~due June 1, 2018,~~bear interest at a rate equal to the ~~series F~~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 ~~due~~created under the Concentra first lien credit agreement.

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

Amendment to the Select Credit Facilities

On March ~~31, 2021,~~22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility ~~maturing~~from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March ~~1, 2018 under Select’s 2011 senior secured~~6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select 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 27% of our net operating revenues for the six months ended June 30, 2018, and 30% of our net operating revenues for ~~both the six months ended June 30, 2017 and~~ the year ended December 31, ~~2016.~~

2017.

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

There have been significant regulatory changes affecting ~~LTCHs~~our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”), that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our ~~LTCHs~~critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to ~~LTCHs~~LTCH-PPS 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~~LTCH-PPS which have affected our ~~financial performance in~~results of operations, as well as the ~~periods covered by this report or may affect our financial performance and financial condition in the future.~~

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

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 August 2,14, 2017, CMS ~~released an advanced copy of~~published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule were corrected in a final rule published October 4, 2017. The standard federal rate was set at ~~$41,431,~~$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 ~~includes~~included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. ~~As noted below, the~~The update to the standard federal rate 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%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at ~~$27,382,~~$27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at ~~$26,601,~~$26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

~~Patient Criteria~~Fiscal Year 2019

~~The BBA of 2013, enacted December 26, 2013, establishes a dual-rate~~. On May 7, 2018, CMS published 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. 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 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 with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs are exempt from the 25 Percent Rule regulations.

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule. As a result, the 25 Percent Rule ~~applies to~~does not apply until discharges occurring on or after October 1, 2018. After the expiration of the regulatory moratorium, our LTCHs (whether freestanding, HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes ~~will~~ have 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, 2018.

For fiscal year 2019, CMS is proposing to eliminate the 25 Percent Rule in a budget neutral manner. CMS proposes 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 would be adjusted downward by a factor of 0.990535 to maintain aggregate LTCH-PPS payments at the estimated levels they would be in the 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 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 adopted changes to the SSO policy such that all SSO cases discharged on or after October 1, 2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital ~~IPPS.~~IPPS (i.e., the fourth option under the prior policy). Under this policy, as the length of stay of a SSO case increases, the percentage of the per diem payment amounts based on the full MS-LTCH-DRG standard federal payment rate increases and the percentage of the payment based on the IPPS comparable amount decreases.

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

~~Current law imposes a moratorium on~~ In addition, the establishment and classification of new LTCHs or LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities through September 30, 2017. There are three exceptions to the moratorium for projects that were under development when the moratorium began on April 1, 2014. Only one exception needs to exist for the moratorium not to apply.

very short stay outlier category was eliminated.

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

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

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

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

operations.

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

Fiscal Year 2018. On ~~July 31,~~August 3, 2017, CMS ~~released an advanced copy of~~published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 ~~includes~~included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. ~~As noted below, the~~The standard payment conversion factor for fiscal year 2018 iswas impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.

~~Medicare Market Basket Adjustments~~Fiscal Year 2019

. On July 31, 2018, CMS released an advanced copy of the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The ~~ACA instituted~~standard payment conversion factor for discharges for fiscal year 2019 is set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 includes 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 to result in less than a 0% payment update and payment rates that are less than~~CMS increased 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 revised the 60% rule’s presumptive methodology by (i) including certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes for patients with traumatic brain injury and hip fracture conditions; and (ii) revising the presumptive methodology list for major multiple trauma by counting IRF cases that contain two or more of the ICD-10-CM codes2019 to $9,402 from ~~three major multiple trauma lists~~$8,679 established in the ~~specified combinations.~~

final rule for fiscal year 2018.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

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

Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements a provider’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019 through 2024 professionals who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. MIPS and APM applies to physicians and other practitioners included within the definition of “eligible clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the Medicare Physician Fee Schedule proposed rule for calendar year 2019, CMS proposes to include physical therapists and occupational therapists as “eligible clinicians” which, if the proposed rule is adopted, would require physical therapists and occupational therapists to participate in these programs beginning in 2021. CMS requested public comment on requiring speech-language pathologists to participate in these programs beginning in 2021. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, ~~will be~~remain 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.

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

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

Critical Accounting Matters

Revenue Adjustments

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

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

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

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 June 30,

Six Months Ended June 30,

2016

2017

2016

2017

Specialty hospitals data:(1)

Number of hospitals owned—start of period

118

114

118

115

Number of hospitals acquired

3

1

3

1

Number of hospital start-ups

1

—

1

—

Number of hospitals closed/sold

(6
)
(1
)
(6
)
(2
)
Number of hospitals owned—end of period

116

114

116

114

Number of hospitals managed—end of period

8

9

8

9

Total number of hospitals (all)—end of period

124

123

124

123

Long term acute care hospitals

106

102

106

102

Rehabilitation hospitals

18

21

18

21

Available licensed beds(2)

5,154

5,155

5,154

5,155

Admissions(2)

13,094

13,691

26,955

27,586

Patient days(2)

317,119

316,884

655,090

634,249

Average length of stay (days)(2)

24

23

24

23

Net revenue per patient day(2)(3)

$
1,680

$
1,731

$
1,655

$
1,723

Occupancy rate(2)

68
%
68
%
70
%
68
%
Percent patient days—Medicare(2)

55
%
54
%
56
%
54
%

Outpatient rehabilitation data:

Number of clinics owned—start of period

1,441

1,445

896

1,445

Number of clinics acquired

—

—

543

1

Number of clinic start-ups

7

6

13

14

Number of clinics closed/sold

(13
)
(10
)
(17
)
(19
)
Number of clinics owned—end of period

1,435

1,441

1,435

1,441

Number of clinics managed—end of period

165

167

165

167

Total number of clinics (all)—end of period

1,600

1,608

1,600

1,608

Number of visits(2)

2,122,330

2,106,760

3,698,884

4,182,550

Net revenue per visit(2)(4)

$
102

$
103

$
102

$
102

Concentra data:

Number of centers owned—start of period

301

308

300

300

Number of centers acquired

—

5

2

11

Number of center start-ups

—

2

—

4

Number of centers closed/sold

—

—

(1
)
—

Number of centers owned—end of period

301

315

301

315

Number of visits(5)

1,890,348

1,982,255

3,736,063

3,869,070

Net revenue per visit(5)(6)

$
118

$
116

$
118

$
117



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2018			2017			2018
Critical illness recovery hospital data:⁽¹⁾
Number of hospitals owned—start of period	101			99			102			99
Number of hospitals acquired	1			—			1			—
Number of hospital start-ups	—			—			—			1
Number of hospitals closed/sold	(1		)	(1		)	(2		)	(2		)
Number of hospitals owned—end of period	101			98			101			98
Number of hospitals managed—end of period	1			—			1			—
Total number of hospitals (all)—end of period	102			98			102			98
Available licensed beds⁽²⁾	4,172			4,124			4,172			4,124
Admissions⁽²⁾	8,901			9,121			18,210			18,954
Patient days⁽²⁾	251,302			256,132			506,399			521,972
Average length of stay (days)⁽²⁾	28			28			28			28
Net revenue per patient day^(2)(3)(5)	$	1,733		$	1,710		$	1,732		$	1,721
Occupancy rate⁽²⁾	66		%	68		%	67		%	69		%
Percent patient days—Medicare⁽²⁾	54		%	53		%	54		%	53		%
Rehabilitation hospital data:⁽¹⁾
Number of facilities owned—start of period	13			16			13			16
Number of facilities acquired	—			—			—			—
Number of facilities start-ups	—			1			—			1
Number of facilities closed/sold	—			—			—			—
Number of facilities owned—end of period	13			17			13			17
Number of facilities managed—end of period	8			9			8			9
Total number of facilities (all)—end of period	21			26			21			26
Available licensed beds⁽²⁾	983			1,189			983			1,189
Admissions⁽²⁾	4,570			5,455			8,946			10,849
Patient days⁽²⁾	65,582			77,415			127,850			154,305
Average length of stay (days)⁽²⁾	14			14			14			14
Net revenue per patient day^(2)(3)(5)	$	1,569		$	1,608		$	1,544		$	1,615
Occupancy rate⁽²⁾	73		%	73		%	72		%	74		%
Percent patient days—Medicare⁽²⁾	54		%	54		%	54		%	54		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,445			1,449			1,445			1,447
Number of clinics acquired	—			11			1			14
Number of clinic start-ups	6			10			14			18
Number of clinics closed/sold	(10		)	(35		)	(19		)	(44		)
Number of clinics owned—end of period	1,441			1,435			1,441			1,435
Number of clinics managed—end of period	167			203			167			203
Total number of clinics (all)—end of period	1,608			1,638			1,608			1,638
Number of visits⁽²⁾	2,106,760			2,144,655			4,182,550			4,212,120
Net revenue per visit^(2)(4)(5)	$	101		$	103		$	100		$	103



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2018			2017		2018
Concentra data:
Number of centers owned—start of period	308		531			300		312
Number of centers acquired	5		—			11		219
Number of clinic start-ups	2		—			4		—
Number of centers closed/sold	—		(4		)	—		(4		)
Number of centers owned—end of period	315		527			315		527
Number of visits⁽²⁾	1,982,255		3,024,121			3,869,070		5,620,180
Net revenue per visit^(2)(4)(5)	$	114	$	125		$	115	$	125

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


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


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


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


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

Results of Operations

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

Three Months Ended June 30,

Six Months Ended June 30,

2016

2017

2016

2017

Net operating revenues

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

83.5

82.1

84.1

82.8

General and administrative

2.4

2.5

2.5

2.5

Bad debt expense

1.6

1.6

1.6

1.7

Depreciation and amortization

3.3

3.5

3.2

3.7

Income from operations

9.2

10.3

8.6

9.3

Loss on early retirement of debt

—

—

0.0

(0.9
)
Equity in earnings of unconsolidated subsidiaries

0.4

0.5

0.4

0.5

Non-operating gain (loss)

1.2

—

1.7

(0.0
)
Interest expense

(4.0
)
(3.3
)
(3.8
)
(3.5
)
Income before income taxes

6.8

7.5

6.9

5.4

Income tax expense

3.1

2.9

2.3

2.0

Net income

3.7

4.6

4.6

3.4

Net income attributable to non-controlling interests

0.6

0.8

0.5

0.8

Net income attributable to Holdings and Select

3.1
%
3.8
%
4.1
%
2.6
%



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services⁽¹⁾	83.5		84.5		84.3		84.8
General and administrative	2.6		2.3		2.6		2.4
Depreciation and amortization	3.4		3.9		3.6		3.8
Income from operations	10.5		9.3		9.5		9.0
Loss on early retirement of debt	—		—		(0.9	)	(0.4	)
Equity in earnings of unconsolidated subsidiaries	0.5		0.4		0.5		0.4
Non-operating gain (loss)	—		0.5		(0.0	)	0.2
Interest expense	(3.4	)	(3.9	)	(3.6	)	(3.8	)
Income before income taxes	7.6		6.3		5.5		5.4
Income tax expense	2.9		1.6		2.1		1.3
Net income	4.7		4.7		3.4		4.1
Net income attributable to non-controlling interests	0.9		1.1		0.8		1.0
Net income attributable to Holdings and Select	3.8	%	3.6	%	2.6	%	3.1	%

~~(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 June 30,

Six Months Ended June 30,

2016

2017

%
Change

2016

2017

%
Change

(in thousands)

Net operating revenues:

Specialty hospitals

$
585,816

$
600,960

2.6
%
$
1,184,770

$
1,199,747

1.3
%
Outpatient rehabilitation(1)

256,928

258,106

0.5

495,010

513,923

3.8

Concentra

254,868

261,586

2.6

505,745

517,735

2.4

Other(2)

19

23

N/M

436

631

N/M

Total Company

$
1,097,631

$
1,120,675

2.1
%
$
2,185,961

$
2,232,036

2.1
%
Income (loss) from operations:

Specialty hospitals

$
68,927

$
82,718

20.0
%
$
141,790

$
152,883

7.8
%
Outpatient rehabilitation(1)

31,930

36,048

12.9

56,773

61,059

7.5

Concentra

27,931

27,368

(2.0
)
46,516

53,531

15.1

Other(2)

(27,734
)
(30,471
)
(9.9
)
(57,139
)
(60,045
)
(5.1
)
Total Company

$
101,054

$
115,663

14.5
%
$
187,940

$
207,428

10.4
%
Adjusted EBITDA:

Specialty hospitals

$
82,739

$
98,172

18.7
%
$
169,495

$
186,837

10.2
%
Outpatient rehabilitation(1)

38,132

41,926

9.9

67,011

73,277

9.4

Concentra

43,039

43,061

0.1

77,192

85,653

11.0

Other(2)

(22,453
)
(24,479
)
(9.0
)
(43,626
)
(48,197
)
(10.5
)
Total Company

$
141,457

$
158,680

12.2
%
$
270,072

$
297,570

10.2
%
Adjusted EBITDA margins:

Specialty hospitals

14.1
%
16.3
%

14.3
%
15.6
%

Outpatient rehabilitation(1)

14.8

16.2

13.5

14.3

Concentra

16.9

16.5

15.3

16.5

Other(2)

N/M

N/M

N/M

N/M

Total Company

12.9
%
14.2
%

12.4
%
13.3
%

Total assets:(3)

Specialty hospitals

$
2,457,948

$
2,655,617

$
2,457,948

$
2,655,617

Outpatient rehabilitation

959,748

982,811

959,748

982,811

Concentra

1,328,243

1,310,483

1,328,243

1,310,483

Other(2)

73,950

105,300

73,950

105,300

Total Company

$
4,819,889

$
5,054,211

$
4,819,889

$
5,054,211

Purchases of property and equipment, net:

Specialty hospitals

$
21,313

$
36,691

$
54,988

$
69,048

Outpatient rehabilitation(1)

3,825

6,201

8,798

12,874

Concentra

4,716

7,601

7,927

16,287

Other(2)

3,636

4,156

8,545

7,093

Total Company

$
33,490

$
54,649

$
80,258

$
105,302



	Three Months Ended June 30,								Six Months Ended June 30,
	2017			2018			% Change		2017			2018			% Change
	(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital⁽²⁾	$	439,194		$	442,452		0.7	%	$	884,317		$	907,128		2.6	%
Rehabilitation hospital⁽²⁾	151,378			173,769			14.8	%	296,203			348,543			17.7	%
Outpatient rehabilitation	254,984			267,183			4.8	%	505,355			524,564			3.8	%
Concentra	256,887			412,823			60.7	%	507,476			768,939			51.5	%
Other⁽³⁾	22			(17		)	N/M		631			—			N/M
Total Company	$	1,102,465		$	1,296,210		17.6	%	$	2,193,982		$	2,549,174		16.2	%
Income (loss) from operations:
Critical illness recovery hospital⁽²⁾	$	64,126		$	48,773		(23.9	)%	$	123,421		$	110,687		(10.3	)%
Rehabilitation hospital⁽²⁾	18,592			22,180			19.3	%	29,462			43,234			46.7	%
Outpatient rehabilitation	36,048			35,243			(2.2	)%	61,059			59,131			(3.2	)%
Concentra	27,368			46,774			70.9	%	53,531			80,277			50.0	%
Other⁽³⁾	(30,471		)	(32,409		)	(6.4	)%	(60,045		)	(64,170		)	(6.9	)%
Total Company	$	115,663		$	120,561		4.2	%	$	207,428		$	229,159		10.5	%
Adjusted EBITDA:
Critical illness recovery hospital⁽²⁾	$	75,043		$	60,725		(19.1	)%	$	147,380		$	133,697		(9.3	)%
Rehabilitation hospital⁽²⁾	23,129			28,195			21.9	%	39,457			54,971			39.3	%
Outpatient rehabilitation	41,926			41,947			0.1	%	73,277			72,472			(1.1	)%
Concentra	43,061			72,568			68.5	%	85,653			130,365			52.2	%
Other⁽³⁾	(24,479		)	(25,207		)	(3.0	)%	(48,197		)	(50,045		)	(3.8	)%
Total Company	$	158,680		$	178,228		12.3	%	$	297,570		$	341,460		14.7	%
Adjusted EBITDA margins:
Critical illness recovery hospital⁽²⁾	17.1		%	13.7		%			16.7		%	14.7		%
Rehabilitation hospital⁽²⁾	15.3			16.2					13.3			15.8
Outpatient rehabilitation	16.4			15.7					14.5			13.8
Concentra	16.8			17.6					16.9			17.0
Other⁽³⁾	N/M			N/M					N/M			N/M
Total Company	14.4		%	13.7		%			13.6		%	13.4		%
Total assets:
Critical illness recovery hospital⁽²⁾	$	1,989,618		$	1,828,038				$	1,989,618		$	1,828,038
Rehabilitation hospital⁽²⁾	665,999			867,175					665,999			867,175
Outpatient rehabilitation	982,811			979,678					982,811			979,678
Concentra	1,310,483			2,174,931					1,310,483			2,174,931
Other⁽³⁾	105,300			114,978					105,300			114,978
Total Company	$	5,054,211		$	5,964,800				$	5,054,211		$	5,964,800
Purchases of property and equipment, net:
Critical illness recovery hospital⁽²⁾	$	9,771		$	12,849				$	20,714		$	23,321
Rehabilitation hospital⁽²⁾	26,920			8,080					48,334			20,997
Outpatient rehabilitation	6,201			8,018					12,874			15,356
Concentra	7,601			10,121					16,287			16,742
Other⁽³⁾	4,156			2,963					7,093			5,232
Total Company	$	54,649		$	42,031				$	105,302		$	81,648


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


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


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

N/M—M — Not ~~Meaningful.~~

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

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

~~(3)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of June 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $18.5 million.~~

meaningful.

Three Months Ended June 30, ~~2017~~2018, Compared to Three Months Ended June 30, ~~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, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~2.1%~~17.6% to ~~$1,120.7~~$1,296.2 million for the three months ended June 30, ~~2017,~~2018, compared to $~~1,097.6~~$1,102.5 million for the three months ended June 30, ~~2016.~~

2017.

~~Specialty Hospitals~~Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~2.6%~~ to ~~$601.0~~$442.5 million for the three months ended June 30, ~~2017,~~2018, compared to ~~$585.8~~$439.2 million for the three months ended June 30, ~~2016 for our specialty hospitals segment. The increase in net operating revenues is principally due~~2017. Our patient days increased 1.9% to ~~several new inpatient rehabilitation facilities which recently commenced operations. The average net revenue per patient day for all of our specialty hospitals increased 3.0% to $1,731~~256,132 days for the three months ended June 30, ~~2017,~~2018, compared to ~~$1,680 for the three months ended June 30, 2016. We had 316,884 patient~~251,302 days for the three months ended June 30, 2017, which was the principal cause of the increase in net operating revenues during the three months ended June 30, 2018. Additionally, our occupancy increased to 68% for the three months ended June 30, 2018, compared to ~~317,119~~66% for the three months ended June 30, 2017. Our net revenue per patient day was $1,710 for the three months ended June 30, 2018, compared to $1,733 for the three months ended June 30, 2017. The decrease principally resulted from changes we experienced in both our Medicare and non-Medicare net revenue per patient day during the three months ended June 30, 2018.

Rehabilitation Hospital Segment. Net operating revenues increased 14.8% to $173.8 million for the three months ended June 30, 2018, compared to $151.4 million for the three months ended June 30, 2017. The increase in net operating revenues was principally attributable to an increase in patient volumes during the three months ended June 30, 2018. Our patient days increased 18.0% to 77,415 days for the three months ended June 30, ~~2016.~~2018, compared to 65,582 days for the three months ended June 30, 2017. The ~~decrease~~increase in patient days iswas principally due to ~~closed specialty hospitals.~~

the maturation of our rehabilitation hospitals which commenced operations during 2016 and 2017. Our net revenue per patient day increased 2.5% to $1,608 for the three months ended June 30, 2018, compared to $1,569 for the three months ended June 30, 2017. This increase was principally attributable to an increase in our non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 4.8% to ~~$258.1~~$267.2 million for the three months ended June 30, 2018, compared to $255.0 million for the three months ended June 30, 2017. The increase in net operating revenues was attributable to an increase in our net revenue per visit, which increased 2.0% to $103 for the three months ended June 30, 2018, compared to $101 for the three months ended June 30, 2017, and an increase in visits. Our net revenue per visit benefited from improved contracted rates with some of our payors. Visits increased 1.8% to 2,144,655 for the three months ended June 30, 2018, compared to 2,106,760 visits for the three months ended June 30, 2017. The increase in visits resulted principally from both start-up and newly acquired outpatient rehabilitation clinics and growth within our existing clinics.

Concentra Segment. Net operating revenues increased 60.7% to $412.8 million for the three months ended June 30, 2018, compared to $256.9 million for the three months ended June 30, ~~2016 for our outpatient rehabilitation segment.~~2017. The increase in net operating revenues was principally due to ~~an increase~~the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $139.4 million of net operating revenues during the quarter. Visits in our ~~net revenue per visit, offset in part by a decline in visits. Net revenue per visit was $103~~centers increased 52.6% to 3,024,121 for the three months ended June 30, ~~2017,~~2018, compared to ~~$102 for the three months ended June 30, 2016. We had 2,106,760 visits in our clinics for the three months ended June 30, 2017, compared to 2,122,330~~1,982,255 visits for the three months ended June 30, ~~2016. The decline in visits occurred within some of our Physiotherapy markets.~~

~~Concentra Segment.~~2017. Net ~~operating revenues~~revenue per visit increased ~~2.6%~~9.6% to ~~$261.6 million~~$125 for the three months ended June 30, ~~2017,~~2018, compared to ~~$254.9 million~~$114 for the three months ended June 30, ~~2016 for our Concentra segment.~~2017. The increase in net operating revenues was due to an increase in visits principally from newly acquired and developed medical centers. We had 1,982,255 visits in our centers for the three months ended June 30, 2017, compared to 1,890,348 visits for the three months ended June 30, 2016. The increase in visits principally related to our employer services. Net revenue per visit was $116 for the three months ended June 30, 2017, compared to $118 for the three months ended June 30, 2016. The decrease in net revenue per visit iswas driven principally ~~due to an increased proportion of employer service~~by U.S. HealthWorks visits, which yield ~~lower~~higher per visit ~~rates.~~

rates, as well as an increase in workers’ compensation reimbursement rates in our 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 were ~~$966.7~~$1,123.9 million, or ~~86.2%~~86.8% of net operating revenues, for the three months ended June 30, ~~2017,~~2018, compared to ~~$960.4~~$948.5 million, or ~~87.5%~~86.1% of net operating revenues, for the three months ended June 30, ~~2016.~~2017. Our cost of services, a major component of which is labor expense, was ~~$920.2~~$1,094.7 million, or ~~82.1%~~84.5% of net operating revenues, for the three months ended June 30, ~~2017,~~2018, compared to ~~$917.0~~$920.2 million, or 83.5% of net operating revenues, for the three months ended June 30, ~~2016.~~2017. The ~~decrease~~increase in our operating expenses relative to our net operating revenues iswas principally ~~due~~attributable to our critical illness recovery hospital segment, which experienced relative increases in wages, benefits, and other operating costs during the three months ended June 30, 2018, as compared to the ~~improved operating performance of our start-up specialty hospitals, specialty hospital closures, and a decline in operating expenses in our outpatient rehabilitation segment.~~three months ended June 30, 2017. Facility rent expense, a component of cost of services, was $67.7 million for the three months ended June 30, 2018, compared to $57.2 million for the three months ended June 30, ~~2017,~~2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and administrative expenses were $29.2 million, or 2.3% of net operating revenues, for the three months ended June 30, 2018, compared to ~~$57.0~~$28.3 million, or 2.6% of net operating revenues, for the three months ended June 30, 2017.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA was $60.7 million for the three months ended June 30, ~~2016. General and administrative expenses were $28.3~~2018, compared to $75.0 million for the three months ended June 30, ~~2017,~~2017. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 13.7% for the three months ended June 30, 2018, compared to ~~$25.9~~17.1% for the three months ended June 30, 2017. Our Adjusted EBITDA and Adjusted EBITDA margin decreased as a result of a decline in net revenue per patient day, as discussed above under “Net Operating Revenues,” and an increase in labor expenses and other operating expenses relative to net operating revenues, as discussed above under “Operating Expenses.”

Rehabilitation Hospital Segment. Adjusted EBITDA increased 21.9% to $28.2 million for the three months ended June 30, ~~2016. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended June 30, 2017,~~2018, compared to ~~2.4% for the three months ended June 30, 2016. Our bad debt expense was $18.2~~$23.1 million for the three months ended June 30, ~~2017,~~2017. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 16.2% for the three months ended June 30, 2018, compared to $~~17.5~~15.3% for the three months ended June 30, 2017. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven by increases in patient volume within our rehabilitation hospitals that commenced operations during 2016 and 2017, which allowed our facilities to operate at lower relative costs compared to the prior period. Adjusted EBITDA losses in our start-up hospitals were $2.1 million for the three months ended June 30, ~~2016. Bad debt expense as a percentage of net operating revenues~~2018, compared to $1.2 million or the three months ended June 30, 2017.

Outpatient Rehabilitation Segment. Adjusted EBITDA was ~~1.6%~~$41.9 million for both the three months ended June 30, ~~2017~~2018 and ~~2016.~~

~~Adjusted EBITDA~~

~~Specialty Hospitals Segment.~~ Adjusted EBITDA increased 18.7% to $98.2 million for the three months ended June 30, 2017, compared to $82.7 million for the three months ended June 30, 2016 for our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 16.3% for the three months ended June 30, 2017, compared to 14.1% for the three months ended June 30, 2016. The increase in Adjusted EBITDA for our specialty hospitals segment was primarily driven by the improved operating performance of our LTCHs, reductions in Adjusted EBITDA losses in our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses during the three months ended June 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were $1.2 million for the three months ended June 30, 2017, compared to $6.6 million for the three months ended June 30, 2016.

~~Outpatient Rehabilitation Segment.~~ Adjusted EBITDA increased 9.9% to $41.9 million for the three months ended June 30, 2017, compared to $38.1 million for the three months ended June 30, 2016 for our outpatient rehabilitation segment.2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~16.2%~~15.7% for the three months ended June 30, ~~2017,~~2018, compared to ~~14.8%~~16.4% for the three months ended June 30, ~~2016. The increase in~~2017. For the three months ended June 30, 2018, our Adjusted EBITDA ~~for our outpatient rehabilitation segment was due to improved operating performance as a result of lower cost of services~~and Adjusted EBITDA margin were impacted by certain markets which experienced higher relative labor costs during the three months ended June 30, 2018, as compared to the three months ended June 30, 2017.

Concentra Segment. Adjusted EBITDA ~~was~~increased 68.5% to $72.6 million for the three months ended June 30, 2018, compared to $43.1 million for the three months ended June 30, ~~2017, compared~~2017. The increase in Adjusted EBITDA was principally due to ~~$43.0 million for~~ the ~~three months ended June 30, 2016 for our Concentra segment.~~operating results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was ~~16.5%~~17.6% for the three months ended June 30, ~~2017,~~2018, compared to ~~16.9%~~16.8% for the three months ended June 30, ~~2016.~~2017. The ~~decline~~increase in ~~our~~ Adjusted EBITDA margin ~~for~~resulted from achieving lower relative operating costs across our combined Concentra ~~segment was the result of higher operating expenses, principally related to increased labor costs, relative to our net operating revenues.~~

and U.S. HealthWorks businesses.

Other. The Adjusted EBITDA loss was $25.2 million for the three months ended June 30, 2018, compared to an Adjusted EBITDA loss of $24.5 million for the three months ended June 30, ~~2017, compared to an Adjusted EBITDA loss of $22.5 million for the three months ended June 30, 2016.~~2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was $51.7 million for the three months ended June 30, 2018, compared to $38.3 million for the three months ended June 30, ~~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 June 30, 2018, we had income from operations of $120.6 million, compared to ~~$36.2~~$115.7 million for the three months ended June 30, ~~2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment.~~

~~Income from Operations~~

~~For the three months ended June 30, 2017, we had income from operations of $115.7 million, compared to $101.1 million for the three months ended June 30, 2016.~~2017. The increase in income from operations resulted principally from the improved ~~operating~~ performance of our ~~specialty hospitals segment.~~

rehabilitation hospital and Concentra segments, as discussed above.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended June 30, ~~2017,~~2018, we had equity in earnings of unconsolidated subsidiaries of ~~$5.7~~$4.8 million, compared to ~~$4.5~~$5.7 million for the three months ended June 30, 2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from improved performance of the inpatient rehabilitation businesses in which we have a minority interest.

2017.

Non-Operating Gain

We recognized a non-operating gain of ~~$13.0~~$6.5 million during the three months ended June 30, ~~2016.~~2018. The non-operating gain was principally ~~due~~attributable to the sale of ~~nine~~ outpatient rehabilitation clinics ~~and the sale of five specialty hospitals in an exchange transaction.~~

to a non-consolidating subsidiary.

Interest Expense

Interest expense was $50.2 million for the three months ended June 30, 2018, compared to $37.7 million for the three months ended June 30, ~~2017, compared~~2017. The increase in interest expense was principally due to ~~$44.3~~an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.

Income Taxes

We recorded income tax expense of $21.1 million for the three months ended June 30, ~~2016. The decrease in interest expense was principally the result~~2018, which represented an effective tax rate of ~~decreases in our interest rates associated with the refinancing of the Select credit facilities during the first quarter of 2017 and the Concentra credit facilities during the third quarter of 2016.~~

~~Income Taxes~~

25.8%. We recorded income tax expense of $32.4 million for the three months ended June 30, 2017, which represented an effective tax rate of 38.7%. ~~We recorded~~The lower effective tax rate for the three months ended June 30, 2018 resulted primarily from the effects of the federal tax reform legislation enacted on December 22, 2017.

Net Income Attributable to Non-Controlling Interests

Net income ~~tax expense of $33.5~~attributable to non-controlling interests was $14.0 million for the three months ended June 30, ~~2016, which represented an effective tax rate of 45.0%.~~

During the three months ended June 30, 2016, we exchanged five specialty hospitals. For tax purposes, the exchange was treated as a discrete tax event during the three months ended June 30, 2016. Our tax basis in the five specialty hospitals was less than our book basis, resulting in a tax gain exceeding our book gain. The additional tax expense resulting from this gain was the principal cause of the higher effective tax rate during this period.

~~Net Income Attributable~~2018, compared to ~~Non-Controlling Interests~~

~~Net income attributable to non-controlling interests was~~ $9.2 million for the three months ended June 30, ~~2017, compared to $6.9 million for the three months ended June 30, 2016.~~2017. The increase iswas principally due to the ~~minority interest owners’ share~~improved operating performance of ~~income from~~our Concentra segment and ~~new inpatient~~several of our joint venture rehabilitation ~~facilities operating within our specialty hospitals segment.~~

hospitals.

Six Months Ended June 30, ~~2017~~2018, Compared to Six Months Ended June 30, ~~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 (loss), interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~2.1%~~16.2% to ~~$2,232.0~~$2,549.2 million for the six months ended June 30, ~~2017,~~2018, compared to $~~2,186.0~~$2,194.0 million for the six months ended June 30, ~~2016.~~

2017.

~~Specialty Hospitals~~Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~1.3%~~2.6% to ~~$1,199.7~~$907.1 million for the six months ended June 30, ~~2017,~~2018, compared to ~~$1,184.8~~$884.3 million for the six months ended June 30, ~~2016~~2017. Our patient days increased 3.1% to 521,972 days for ~~our specialty hospitals segment. The increase in net operating revenues is principally due~~the six months ended June 30, 2018, compared to ~~several new inpatient rehabilitation facilities which recently commenced operations. The average net revenue per patient day for our specialty hospitals increased 4.1% to $1,723~~506,399 days for the six months ended June 30, 2017, ~~compared~~which was the principal cause of the increase in net operating revenues during the six months ended June 30, 2018. Additionally, our occupancy increased to ~~$1,655~~69% for the six months ended June 30, ~~2016. For~~2018, compared to 67% for the six months ended June 30, ~~2017,~~2017. Our net revenue per patient day was $1,721 for the six months ended June 30, 2018, compared to $1,732 for the six months ended June 30, 2017. The decrease principally resulted from changes we ~~had 634,249~~experienced in both our Medicare and non-Medicare net revenue per patient day during the six months ended June 30, 2018.

Rehabilitation Hospital Segment. Net operating revenues increased 17.7% to $348.5 million for the six months ended June 30, 2018, compared to $296.2 million for the six months ended June 30, 2017. The increase in net operating revenues was principally attributable to an increase in patient volumes during the six months ended June 30, 2018. Our patient days ~~compared~~increased 20.7% to ~~655,090~~154,305 days for the six months ended June 30, ~~2016.~~2018, compared to 127,850 days for the six months ended June 30, 2017. The ~~decrease~~increase in patient days iswas principally ~~due~~attributable to ~~closed specialty hospitals.~~

our rehabilitation hospitals which commenced operations during 2016 and 2017. Our net revenue per patient day increased 4.6% to $1,615 for the six months ended June 30, 2018, compared to $1,544 for the six months ended June 30, 2017. This increase was principally attributable to an increase in our non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 3.8% to ~~$513.9~~$524.6 million for the six months ended June 30, ~~2017,~~2018, compared to ~~$495.0~~$505.4 million for the six months ended June 30, ~~2016~~2017. The increase in net operating revenues was principally attributable to an increase in our net revenue per visit, which increased 3.0% to $103 for the six months ended June 30, 2018, compared to $100 for the six months ended June 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. Visits increased to 4,212,120 for the six months ended June 30, 2018, compared to 4,182,550 visits for the six months ended June 30, 2017. The increase in visits resulted principally from start-up and newly acquired outpatient rehabilitation ~~segment.~~clinics.

Concentra Segment. Net operating revenues increased 51.5% to $768.9 million for the six months ended June 30, 2018, compared to $507.5 million for the six months ended June 30, 2017. The increase in net operating revenues was principally due to the acquisition of ~~Physiotherapy~~U.S. HealthWorks on ~~March 4, 2016,~~February 1, 2018, which contributed ~~to the overall growth in our visits. The increase in~~$229.4 million of net operating revenues ~~was offset~~during the period. Visits in ~~part by the sale of~~ our ~~contract therapy businesses on March 31, 2016. Visits~~centers increased ~~13.1%~~45.3% to ~~4,182,550~~5,620,180 for the six months ended June 30, ~~2017,~~2018, compared to ~~3,698,884~~3,869,070 visits for the six months ended June 30, ~~2016.~~2017. Net revenue per visit ~~was $102 for both the six months ended June 30, 2017 and 2016.~~

~~Concentra Segment.~~ ~~Net operating revenues~~ increased ~~2.4%~~8.7% to ~~$517.7 million~~$125 for the six months ended June 30, ~~2017,~~2018, compared to ~~$505.7 million~~$115 for the six months ended June 30, ~~2016 for our Concentra segment.~~2017. The increase in net operating revenues was due to an increase in visits principally from newly acquired and developed medical centers. Visits in our centers increased 3.6% to 3,869,070 for the six months ended June 30, 2017, compared to 3,736,063 visits for the six months ended June 30, 2016. The increase in visits principally related to our employer services. Net revenue per visit was $117 for the six months ended June 30, 2017, compared to $118 for the six months ended June 30, 2016. The decrease in net revenue per visit iswas driven principally ~~due to an increased proportion of employer service~~by U.S. HealthWorks visits, which yield ~~lower~~higher per visit ~~rates.~~

rates, as well as an increase in workers’ compensation reimbursement rates in our 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 were ~~$1,943.7~~$2,221.5 million, or ~~87.0%~~87.2% of net operating revenues, for the six months ended June 30, ~~2017,~~2018, compared to ~~$1,927.3~~$1,905.7 million, or ~~88.2%~~86.9% of net operating revenues, for the six months ended June 30, ~~2016.~~2017. Our cost of services, a major component of which is labor expense, was ~~$1,848.6~~$2,160.5 million, or ~~82.8%~~84.8% of net operating revenues, for the six months ended June 30, ~~2017,~~2018, compared to ~~$1,839.2~~$1,849.3 million, or ~~84.1%~~84.3% of net operating revenues, for the six months ended June 30, ~~2016.~~2017. The ~~decrease~~increase in our operating expenses relative to our net operating revenues iswas principally ~~due~~attributable to our critical illness recovery hospital segment, which experienced relative increases in wages, benefits, and other operating costs during the six months ended June 30, 2018, as compared to the ~~improved operating performance of our start-up specialty hospitals, specialty hospitals closures, and cost reductions achieved by Concentra.~~six months ended June 30, 2017. Facility rent expense, a component of cost of services, was $132.1 million for the six months ended June 30, 2018, compared to $113.8 million for the six months ended June 30, ~~2017, compared~~2017. The increase in our facility rent expense was primarily attributable to ~~$109.0 million for~~ the ~~six months ended June 30, 2016.~~acquisition of U.S. HealthWorks. General and administrative expenses were $56.4 million for the six months ended June 30, 2017, compared to $54.1 million for the six months ended June 30, 2016, which includes $3.2 million of Physiotherapy acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both the six months ended June 30, 2017 and 2016. Our bad debt expense was $38.8$61.0 million, or ~~1.7%~~2.4% of net operating revenues, for the six months ended June 30, ~~2017, compared to $33.9~~2018, which included $2.9 million of U.S. HealthWorks acquisition costs. General and administrative expenses were $56.4 million, or ~~1.6%~~2.6% of net operating revenues, for the six months ended June 30, ~~2016. The increase was principally the result of increases in bad debt expense in our specialty hospitals and Concentra segments.~~

2017.

Adjusted EBITDA

~~Specialty Hospitals~~Critical Illness Recovery Hospital Segment. Adjusted EBITDA ~~increased 10.2% to $186.8~~was $133.7 million for the six months ended June 30, ~~2017,~~2018, compared to ~~$169.5~~$147.4 million for the six months ended June 30, ~~2016 for our specialty hospitals segment.~~2017. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~15.6%~~14.7% for the six months ended June 30, ~~2017,~~2018, compared to ~~14.3%~~16.7% for the six months ended June 30, ~~2016. The~~2017. Our Adjusted EBITDA and Adjusted EBITDA margin decreased as a result of a decline in net revenue per patient day, as discussed above under “Net Operating Revenues,” and an increase in labor expenses and other operating expenses relative to net operating revenues, as discussed above under “Operating Expenses.”

Rehabilitation Hospital Segment.Adjusted EBITDA for our specialty hospitals segment was primarily driven by the improved operating performance of our LTCHs, reductions in Adjusted EBITDA losses in our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses during the six months ended June 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were $3.2increased 39.3% to $55.0 million for the six months ended June 30, ~~2017,~~2018, compared to ~~$10.5~~$39.5 million for the six months ended June 30, ~~2016.~~

2017. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 15.8% for the six months ended June 30, 2018, compared to 13.3% for the six months ended June 30, 2017. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven by our rehabilitation hospitals which commenced operations during 2016 and 2017. These hospitals have experienced increases in occupancy during the six months ended June 30, 2018, allowing our facilities to operate at lower relative costs compared to the prior period. The increases in Adjusted EBITDA and Adjusted EBITDA margin were also attributable to an increase in net revenue per patient day, as discussed above under “Net Operating Revenues.” Adjusted EBITDA losses in our start-up hospitals were $3.0 million for the six months ended June 30, 2018, compared to $3.2 million or the six months ended June 30, 2017.

Outpatient Rehabilitation Segment. Adjusted EBITDA ~~increased 9.4%~~was $72.5 million for the six months ended June 30, 2018, compared to $73.3 million for the six months ended June 30, 2017, compared to $67.0 million for the six months ended June 30, 2016 for our outpatient rehabilitation segment. The increase in Adjusted EBITDA was principally due to growth in visits, as discussed above under “~~Net Operating Revenues~~.”2017. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~14.3%~~13.8% for the six months ended June 30, ~~2017,~~2018, compared to ~~13.5%~~14.5% for the six months ended June 30, ~~2016. The increase was principally due to~~2017. For the ~~sale of~~six months ended June 30, 2018, our ~~contract therapy businesses on March 31, 2016, which operated at lower~~Adjusted EBITDA and Adjusted EBITDA margins ~~than~~declined as a result of increased labor costs relative to our ~~outpatient rehabilitation clinics.~~

net operating revenues as well as a decline in patient visits, without a corresponding reduction in operating costs, in regions impacted by severe winter weather conditions during the first quarter of 2018.

Concentra Segment. Adjusted EBITDA increased ~~11.0%~~52.2% to $130.4 million for the six months ended June 30, 2018, compared to $85.7 million for the six months ended June 30, ~~2017, compared to $77.2 million for the six months ended June 30, 2016 for our Concentra segment.~~2017. Our Adjusted EBITDA margin for the Concentra segment was ~~16.5%~~17.0% for the six months ended June 30, ~~2017,~~2018, compared to ~~15.3%~~16.9% for the six months ended June 30, ~~2016.~~2017. The increase in Adjusted EBITDA ~~for our Concentra segment~~ was principally due to the ~~result~~operating results of ~~cost reductions~~U.S. HealthWorks, which we ~~have achieved.~~

acquired on February 1, 2018.

Other. The Adjusted EBITDA loss was $50.0 million for the six months ended June 30, 2018, compared to an Adjusted EBITDA loss of $48.2 million for the six months ended June 30, ~~2017, compared to an~~2017. The increase in our Adjusted EBITDA loss ~~of $43.6~~was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was $98.5 million for the six months ended June 30, ~~2016.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense was~~2018, compared to $80.9 million for the six months ended June 30, ~~2017,~~2017. The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.

Income from Operations

For the six months ended June 30, 2018, we had income from operations of $229.2 million, compared to ~~$70.7~~$207.4 million for the six months ended June 30, ~~2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment.~~

~~Income from Operations~~

~~For the six months ended June 30, 2017, we had income from operations of $207.4 million, compared to $187.9 million for the six months ended June 30, 2016.~~2017. The increase in income from operations resulted principally from the improved ~~operating~~ performance of our ~~specialty hospitals~~rehabilitation hospital segment and the growth of our Concentra ~~segments.~~

segment, as discussed above.

Loss on Early Retirement of Debt

During the six months ended June 30, 2018, we amended both Select and Concentra’s credit facilities, as discussed above under “

~~On March 6,~~Significant Events,” which resulted in losses on early retirement of debt of $10.3 million during the six months ended June 30, 2018.

During the six months ended June 30, 2017, we refinanced Select’s senior secured credit facilities which resulted in ~~losses~~a loss on early retirement of debt of $19.7 million during the six months ended June 30, 2017.

On March 4, 2016, we refinanced a portion of our term loans under Select’s 2011 senior secured credit facility which resulted in a loss on early retirement of debt of $0.8 million during the six months ended June 30, 2016.

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 six months ended June 30, ~~2017,~~2018, we had equity in earnings of unconsolidated subsidiaries of ~~$11.2~~$9.5 million, compared to ~~$9.2~~$11.2 million for the six months ended June 30, 2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from improved performance of the inpatient rehabilitation businesses in which we have a minority interest.

2017.

Non-Operating Gain

We recognized a non-operating gain of ~~$38.1~~$6.9 million during the six months ended June 30, ~~2016.~~2018. The non-operating gain was principally ~~due~~attributable to the sale of ~~our contract therapy businesses during the quarter ended March 31, 2016, as well as the sale of nine~~ outpatient rehabilitation clinics ~~and~~to a non-consolidating subsidiary.

Interest Expense

Interest expense was $97.3 million for the ~~sale of five specialty hospitals in an exchange transaction during the quarter~~six months ended June 30, ~~2016.~~

~~Interest Expense~~

~~Interest expense was~~2018, compared to $78.5 million for the six months ended June 30, ~~2017, compared~~2017. The increase in interest expense was principally due to ~~$83.2~~an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.

Income Taxes

We recorded income tax expense of $33.4 million for the six months ended June 30, ~~2016. The decrease in interest expense was principally the result~~2018, which represented an effective tax rate of ~~decreases in our interest rates associated with the refinancing of the Select credit facilities during the first quarter of 2017 and the Concentra credit facilities during the third quarter of 2016.~~

~~Income Taxes~~

24.2%. We recorded income tax expense of $45.6 million for the six months ended June 30, 2017, which represented an effective tax rate of 37.9% ~~We recorded income tax expense of~~ ~~$50.5 million for the six months ended June 30, 2016, which represented an effective tax rate of 33.4%~~.

Our effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate. On March 31, 2016, we sold our contract therapy businesses. Our tax basis in our contract therapy businesses exceeded our selling price. As a result, we had no tax expense from the sale. Additionally, during the three months ended June 30, 2016, we exchanged five specialty hospitals. Our tax basis in the five specialty hospitals was less than our book basis, resulting in a tax gain exceeding our book gain. The lower effective tax rate for the six months ended June 30, ~~2016~~2018 resulted primarily from the ~~net~~ effects of the ~~two~~federal tax reform legislation enacted on December 22, 2017 and the discrete tax ~~events discussed above.~~

benefits realized from certain equity interests redeemed as part of the closing of the U.S. HealthWorks transaction during the first quarter of 2018.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was $24.3 million for the six months ended June 30, 2018, compared to $16.8 million for the six months ended June 30, ~~2017, compared to~~ ~~$12.0 million for the six months ended June 30, 2016.~~2017. The increase iswas principally due to the ~~minority interest owners’ share~~improved operating performance of ~~income from Concentra.~~

our Concentra segment and several of our joint venture rehabilitation hospitals.

Liquidity and Capital Resources

Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and Six Months Ended June 30, ~~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.

Six Months Ended June 30,

2016

2017

(in thousands)

Cash flows provided by operating activities

$
178,238

$
40,340

Cash flows used in investing activities

(432,001
)
(99,132
)
Cash flows provided by financing activities

317,748

33,562

Net increase (decrease) in cash and cash equivalents

63,985

(25,230
)
Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$
78,420

$
73,799



	Six Months Ended June 30,
	2017			2018
	(in thousands)
Cash flows provided by operating activities	$	40,340		$	216,950
Cash flows used in investing activities	(99,132		)	(595,971		)
Cash flows provided by financing activities	33,562			397,501
Net increase (decrease) in cash and cash equivalents	(25,230		)	18,480
Cash and cash equivalents at beginning of period	99,029			122,549
Cash and cash equivalents at end of period	$	73,799		$	141,029

Operating activities provided $217.0 million of cash flows for the six months ended June 30, 2018, compared to $40.3 million of cash flows for the six months ended June 30, 2017. The ~~decrease~~increase in operating cash flows for the six months ended June 30, ~~2017~~2018, compared to the six months ended June 30, ~~2016 is~~2017, was principally ~~due to increases~~driven by the change in our accounts ~~receivable.~~ receivable in their respective periods.Our days sales outstanding ~~was~~decreased from 58 days at December 31, 2017 to 54 days at June 30, ~~2017, compared to~~2018 while our days sales outstanding increased from 51 days at ~~both~~ December 31, 2016 ~~and~~to 59 days at June 30, ~~2016.~~2017. The decrease in days sales outstanding during the six months ended June 30, 2018 resulted from the recoupment of Medicare periodic interim underpayments from prior periods. The increase in days sales outstanding during the six months ended June 30, 2017 was caused by the significant underpayments we received through the Medicare periodic interim payment program in our critical illness recovery hospitals. Additionally, we received overpayments during 2016 which were repaid during the first quarter of 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. ~~The increase in our days sales outstanding and related decline in our operating~~

Investing activities used $596.0 million of cash flows ~~is primarily~~for the six months ended June 30, 2018. The principal uses of cash were $515.0 million 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 reconciledacquisition of U.S. HealthWorks and ~~reset by our fiscal intermediaries.~~

$81.6 million for purchases of property and equipment. Investing activities used $99.1 million of cash flows for the six months ended June 30, 2017. The principal ~~use~~uses of cash ~~was~~were $105.3 million for purchases of property and equipment and $18.5 million ~~for the acquisition~~ of ~~businesses,~~acquisition-related payments, offset in part by $34.6 million of proceeds from the sale of assets. ~~Investing~~

Financing activities ~~used $432.0~~provided $397.5 million of cash flows for the six months ended June 30, ~~2016, principally due~~2018. The principal source of cash was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 million. This was offset in part by $301.2 million of distributions to non-controlling interests, of which $294.9 million related to the ~~acquisition~~redemption and reorganization transactions executed under the Purchase Agreement, as described above under “Significant Events,” and $80.0 million of ~~Physiotherapy.~~

net repayments under the Select revolving facility.

Financing activities provided $33.6 million of cash flows for the six months ended June 30, 2017. The principal source of cash was ~~$80.0 million of~~ net borrowings under the Select revolving facility of $80.0 million, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $2.9 million of cash used for a term loan payment associated with the Select credit facilities, and ~~cash used for the payment of financing costs related to the refinancing of the Select credit facilities.~~

Financing activities provided $317.7 million of cash flows for the six months ended June 30, 2016. The principal source of cash was the issuance of $625.0 million of series F tranche B term loans, resulting in net proceeds of $600.1 million, offset by $215.7$9.2 million of cash used ~~to repay the series D tranche B term loans and $60.0 million of net repayments under the Select revolving facility.~~

for financing costs.

Capital Resources

Working capital. We had net working capital of ~~$302.4~~$392.0 million at June 30, ~~2017,~~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~~decreased 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 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) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or ~~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) extended 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) made 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 June 30, 2017, Select’s leverage ratio was 5.86 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 June 30, ~~2017,~~2018, Select had outstanding borrowings under the Select credit facilities consisting of ~~a $1,147.1~~$1,135.6 million in Select term ~~loan~~loans (excluding unamortized discounts and debt issuance costs of ~~$27.0~~$22.9 million) and borrowings of ~~$300.0~~$150.0 million (excluding letters of credit) under the Select revolving facility. At June 30, ~~2017,~~2018, Select had ~~$111.4~~$262.0 million of availability under the Select revolving facility after giving effect to ~~$38.6~~$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 provided for a $240.0 million Concentra second lien term loan with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

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 June 30, ~~2017,~~2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of ~~$619.2~~$1,414.2 million of ~~first lien~~ term loans (excluding unamortized discounts and debt issuance costs of ~~$14.4~~$25.0 million) ~~and no~~. Concentra did not have any borrowings under the Concentra revolving facility. At June 30, ~~2017,~~2018, Concentra had ~~$43.4~~$61.9 million of availability under its revolving facility after giving effect to ~~$6.6~~$13.1 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, 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 June 30, ~~2017.~~2018. Since the inception of the program through June 30, ~~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

Lease Accounting

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805),~~ ~~Clarifying the Definition of a Business~~, which clarifies the definition of a business with the objective of adding guidance 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 concentratedBeginning 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 plans to adopt the guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective date.

In February 2016, the ~~FASB~~Financial Accounting Standards Board (the “FASB”) issued ~~ASU 2016-02,~~ several Accounting Standards Updates (“ASU”) which established Topic 842, Leases (the “standard”). This ~~ASU~~standard includes a lessee accounting model that recognizes two types of ~~leases;~~leases: finance and operating. This ~~ASU~~standard requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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, and December 2016, the FASB issued ASU 2014-09,~~

Recently Adopted Accounting Pronouncements

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



	Three Months Ended June 30, 2017
	As Reported		As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,120,675	$	1,102,465		$	(18,210	)
Bad debt expense	18,174		(36		)	(18,210		)



	Six Months Ended June 30, 2017
	As Reported			As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	2,232,036		$	2,193,982		$	(38,054	)
Bad debt expense	38,799			745			(38,054		)

Condensed Consolidated Statements of Cash Flows
Provision for bad debts	38,799			745			$	(38,054	)
Changes in accounts receivable	(179,003		)	(140,949		)	38,054

_____________________________________________________________


(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 will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption~~in Note 7 of the ~~new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the~~Company’s condensed 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 is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of June 30, 2016 and June 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.

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

~~Recently Adopted Accounting Pronouncements~~

financial statements.

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 June 30, ~~2017,~~2018, Select had ~~a $1,147.1 million term loan (excluding unamortized discounts and debt issuance costs of $27.0 million)~~ outstanding ~~and $300.0 million in revolving~~ borrowings ~~outstanding~~ under the Select credit facilities ~~which bear interest at variable rates.~~

Asconsisting of ~~June 30, 2017, Concentra had $619.2~~$1,135.6 million of ~~first lien~~Select term loans (excluding unamortized discounts and debt issuance costs of ~~$14.4~~$22.9 million) and borrowings of $150.0 million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates.

At June 30, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,414.2 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $25.0 million), which bear interest at variable rates. Concentra did not have any ~~outstanding~~borrowings under the Concentra revolving ~~borrowings at June 30, 2017.~~

~~At June 30, 2017, the 3-month LIBOR rate was 1.30%. Consequently, each~~facility.

Each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra’s variable rate debt by ~~$5.2~~$6.7 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 June 30, 2018, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective ~~as of June 30, 2017~~ to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

U.S. HealthWorks Acquisition

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

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the second quarter ended June 30, ~~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.

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.

the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018.

Wilmington ~~Litigation~~Litigation.

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

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

Contract Therapy ~~Subpoena~~Subpoena.

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, 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 June 30, ~~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 June 30, ~~2017. The~~2018. As set forth below, the shares repurchased during the three months ended June 30, ~~2017~~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

April 1 - April 30, 2017

3,209

$
13.75

—

$
185,249,408

May 1 - May 31, 2017

29,165

13.70

—

185,249,408

June 1 - June 30, 2017

—

—

—

185,249,408

Total

32,374

$
13.70

—

$
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
April 1 - April 30, 2018	42,517	$	18.05	—	$	185,249,408
May 1 - May 31, 2018	—	—		—	185,249,408
June 1 - June 30, 2018	—	—		—	185,249,408
Total	42,517	$	18.05	—	$	185,249,408

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

In light of the results of the advisory vote on the frequency of Say-On-Pay votes at our annual meeting of stockholders on May 2, 2017, our Board of Directors determined that the Company will continue to hold an advisory Say-on-Pay vote annually. Our Board of Directors will re-evaluate this determination no later than the next stockholder vote on the frequency of Say-on-Pay votes.

None.

ITEM 6.EXHIBITS

~~The exhibits to this report are listed in the Exhibit Index appearing on page 56 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
31.1	~~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: August 3, 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: August 3, 2017~~

~~EXHIBIT INDEX~~

~~Number~~		~~Description~~

~~10.1~~		~~Second Amendment to Lease Agreement, dated as of May 30, 2017, between Old Gettysburg Associates and Select Medical Corporation (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 June 30, ~~2017~~2018 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2016~~2017 and ~~2017,~~2018, (ii) Condensed Consolidated Balance Sheets as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, (iii) Condensed Consolidated Statements of Cash Flows for the ~~three and~~ six months ended June 30, ~~2016~~2017 and ~~2017,~~2018, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the six months ended June 30, ~~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: August 2, 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: August 2, 2018



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4 3

	Condensed consolidated statements of changes in equity and income	6 5

	Condensed consolidated statements of cash flows	7 6

	Notes to condensed consolidated financial statements	8 7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30 33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50 57

ITEM 4.	CONTROLS AND PROCEDURES	50 58

PART II	OTHER INFORMATION	51 59

ITEM 1.	LEGAL PROCEEDINGS	51 59

ITEM 1A.	RISK FACTORS	53 61

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53 62

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	54 62

ITEM 4.	MINE SAFETY DISCLOSURES	54 62

ITEM 5.	OTHER INFORMATION	54 62

ITEM 6.	EXHIBITS	54 63

SIGNATURES

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

ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	73,799	$	99,029		$	73,799
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,769 at 2016 and 2017, respectively	573,752		714,236		573,752			714,236
Prepaid income taxes	12,423		—		12,423			—
Other current assets	77,699		83,211		77,699			83,211
Total Current Assets	762,903		871,246		762,903			871,246

Property and equipment, net	892,217		911,532		892,217			911,532
Goodwill	2,751,000		2,766,296		2,751,000			2,766,296
Identifiable intangible assets, net	340,562		335,704		340,562			335,704
Other assets	173,944		169,433		173,944			169,433

Total Assets	$	4,920,626	$	5,054,211	$	4,920,626		$	5,054,211

LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	39,362	$	34,134	$	39,362		$	34,134
Current portion of long-term debt and notes payable	13,656		26,577		13,656			26,577
Accounts payable	126,558		123,631		126,558			123,631
Accrued payroll	146,397		119,187		146,397			119,187
Accrued vacation	83,261		92,250		83,261			92,250
Accrued interest	22,325		19,277		22,325			19,277
Accrued other	140,076		146,853		140,076			146,853
Income taxes payable	—		6,976		—			6,976
Total Current Liabilities	571,635		568,885		571,635			568,885

Long-term debt, net of current portion	2,685,333		2,734,132		2,685,333			2,734,132
Non-current deferred tax liability	199,078		197,411		199,078			197,411
Other non-current liabilities	136,520		141,279		136,520			141,279

Total Liabilities	3,592,566		3,641,707		3,592,566			3,641,707

Commitments and contingencies (Note 8)

Redeemable non-controlling interests	422,159		468,850		422,159			468,850

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,929,545 shares issued and outstanding at 2016 and 2017, respectively	132		133		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	443,908		454,892		925,111			936,428
Retained earnings (accumulated deficit)	371,685		393,294		(109,386		)	(88,109		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		848,319		815,725			848,319
Non-controlling interest	90,176		95,335		90,176			95,335
Total Equity	905,901		943,654		905,901			943,654

Total Liabilities and Equity	$	4,920,626	$	5,054,211	$	4,920,626		$	5,054,211

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

Net operating revenues	$	1,097,631		$	1,120,675		$	1,097,631		$	1,120,675

Costs and expenses:
Cost of services	916,985			920,230			916,985			920,230
General and administrative	25,870			28,275			25,870			28,275
Bad debt expense	17,517			18,174			17,517			18,174
Depreciation and amortization	36,205			38,333			36,205			38,333
Total costs and expenses	996,577			1,005,012			996,577			1,005,012

Income from operations	101,054			115,663			101,054			115,663

Other income and expense:
Equity in earnings of unconsolidated subsidiaries	4,546			5,666			4,546			5,666
Non-operating gain	13,035			—			13,035			—
Interest expense	(44,332		)	(37,655		)	(44,332		)	(37,655		)

Income before income taxes	74,303			83,674			74,303			83,674

Income tax expense	33,450			32,374			33,450			32,374
Net income	40,853			51,300			40,853			51,300

Less: Net income attributable to non-controlling interests	6,918			9,245			6,918			9,245

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	33,935		$	42,055		$	33,935		$	42,055

Basic	$	0.26		$	0.32
Diluted	$	0.26		$	0.32

Weighted average shares outstanding:
Basic	127,626			128,624
Diluted	127,820			128,777



	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended June 30,						For the Three Months Ended June 30,
	2017			2018			2017			2018
Net operating revenues	$	1,102,465		$	1,296,210		$	1,102,465		$	1,296,210
Costs and expenses:
Cost of services	920,194			1,094,731			920,194			1,094,731
General and administrative	28,275			29,194			28,275			29,194
Depreciation and amortization	38,333			51,724			38,333			51,724
Total costs and expenses	986,802			1,175,649			986,802			1,175,649
Income from operations	115,663			120,561			115,663			120,561
Other income and expense:
Equity in earnings of unconsolidated subsidiaries	5,666			4,785			5,666			4,785
Non-operating gain	—			6,478			—			6,478
Interest expense	(37,655		)	(50,159		)	(37,655		)	(50,159		)
Income before income taxes	83,674			81,665			83,674			81,665
Income tax expense	32,374			21,106			32,374			21,106
Net income	51,300			60,559			51,300			60,559
Less: Net income attributable to non-controlling interests	9,245			14,048			9,245			14,048
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	42,055		$	46,511		$	42,055		$	46,511
Income per common share:
Basic	$	0.32		$	0.35
Diluted	$	0.32		$	0.35
Weighted average shares outstanding:
Basic	128,624			129,830
Diluted	128,777			129,924

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2016			2017			2016			2017

Net operating revenues	$	2,185,961		$	2,232,036		$	2,185,961		$	2,232,036

Costs and expenses:
Cost of services	1,839,247			1,848,587			1,839,247			1,848,587
General and administrative	54,138			56,350			54,138			56,350
Bad debt expense	33,914			38,799			33,914			38,799
Depreciation and amortization	70,722			80,872			70,722			80,872
Total costs and expenses	1,998,021			2,024,608			1,998,021			2,024,608

Income from operations	187,940			207,428			187,940			207,428

Other income and expense:
Loss on early retirement of debt	(773		)	(19,719		)	(773		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	9,198			11,187			9,198			11,187
Non-operating gain (loss)	38,122			(49		)	38,122			(49		)
Interest expense	(83,180		)	(78,508		)	(83,180		)	(78,508		)

Income before income taxes	151,307			120,339			151,307			120,339

Income tax expense	50,510			45,576			50,510			45,576
Net income	100,797			74,763			100,797			74,763

Less: Net income attributable to non-controlling interests	12,029			16,838			12,029			16,838

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	88,768		$	57,925		$	88,768		$	57,925

Basic	$	0.68		$	0.44
Diluted	$	0.68		$	0.44

Weighted average shares outstanding:
Basic	127,563			128,544
Diluted	127,709			128,703



	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2017			2018			2017			2018

Net operating revenues	$	2,193,982		$	2,549,174		$	2,193,982		$	2,549,174
Costs and expenses:
Cost of services	1,849,332			2,160,544			1,849,332			2,160,544
General and administrative	56,350			60,976			56,350			60,976
Depreciation and amortization	80,872			98,495			80,872			98,495
Total costs and expenses	1,986,554			2,320,015			1,986,554			2,320,015
Income from operations	207,428			229,159			207,428			229,159
Other income and expense:
Loss on early retirement of debt	(19,719		)	(10,255		)	(19,719		)	(10,255		)
Equity in earnings of unconsolidated subsidiaries	11,187			9,482			11,187			9,482
Non-operating gain (loss)	(49		)	6,877			(49		)	6,877
Interest expense	(78,508		)	(97,322		)	(78,508		)	(97,322		)
Income before income taxes	120,339			137,941			120,339			137,941
Income tax expense	45,576			33,400			45,576			33,400
Net income	74,763			104,541			74,763			104,541
Less: Net income attributable to non-controlling interests	16,838			24,291			16,838			24,291
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	57,925		$	80,250		$	57,925		$	80,250
Income per common share:
Basic	$	0.44		$	0.60
Diluted	$	0.44		$	0.60
Weighted average shares outstanding:
Basic	128,544			129,761
Diluted	128,703			129,871

				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											57,925			57,925						57,925
Net income attributable to non-controlling interests	13,140													—			3,698			3,698
Issuance and vesting of restricted stock				268		1		8,700						8,701						8,701
Repurchase of common shares				(45	)	0		(332		)	(268		)	(600		)				(600		)
Exercise of stock options				109		0		963						963						963
Issuance of non-controlling interests								1,653						1,653			3,634			5,287
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(3,113		)											—			(2,303		)	(2,303		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	499										237			237			130			367
Balance at June 30, 2017	$	468,850		132,929		$	133	$	454,892		$	393,294		$	848,319		$	95,335		$	943,654

				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											57,925			57,925						57,925
Net income attributable to non-controlling interests	13,140													—			3,698			3,698
Additional investment by Holdings								963						963						963
Dividends declared and paid to Holdings											(600		)	(600		)				(600		)
Contribution related to restricted stock awards and stock option issuances by Holdings								8,701						8,701						8,701
Issuance of non-controlling interests								1,653						1,653			3,634			5,287
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(3,113		)											—			(2,303		)	(2,303		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	499										237			237			130			367
Balance at June 30, 2017	$	468,850		0		$	0	$	936,428		$	(88,109	)	$	848,319		$	95,335		$	943,654



				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										80,250			80,250						80,250
Net income attributable to non-controlling interests	16,652												—			7,639			7,639
Additional investment by Holdings							1,620						1,620						1,620
Dividends declared and paid to Holdings										(889		)	(889		)				(889		)
Contribution related to restricted stock award issuances by Holdings							9,562						9,562						9,562
Issuance and exchange of non-controlling interests	163,659						1,553			74,341			75,894			1,921			77,815
Distributions to and purchases of non-controlling interests	(215,084		)				(932		)	(83,617		)	(84,549		)	(3,052		)	(87,601		)
Redemption adjustment on non-controlling interests	9,551									(9,551		)	(9,551		)				(9,551		)
Other	636									(234		)	(234		)	712			478
Balance at June 30, 2018	$	616,232		0	$	0	$	959,173		$	(63,702	)	$	895,471		$	116,456		$	1,011,927

	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 Six Months Ended June 30, 2016
	(in thousands, except per share amounts)
Net revenue	$	2,239,491
Net income attributable to Holdings	86,948
Income per common share:
Basic	$	0.66
Diluted	$	0.66

	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	654			311		14,505		15,470
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of June 30, 2017	$	1,447,718		$	644,036	$	674,542	$	2,766,296

	December 31, 2016							June 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	17,026		—			17,026		19,207		—			19,207
Accreditations	2,235		—			2,235		2,074		—			2,074
Finite-lived assets:
Customer relationships	142,198		(23,185		)	119,013		143,953		(30,681		)	113,272
Favorable leasehold interests	13,089		(2,317		)	10,772		13,295		(3,255		)	10,040
Non-compete agreements	26,655		(1,837		)	24,818		27,267		(2,854		)	24,413
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	372,494	$	(36,790	)	$	335,704

Finite-lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(1,957	)	$	3,386

	2017		2018		2019		2020		2021		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	—	$	710,000	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		—		300,000		300,000
Term loan	5,750		11,500		11,500		11,500		11,500		1,095,375		1,147,125
Other	10,251		3,530		11,827		68		14		10		25,700
Total Select debt	$	16,001	$	15,030	$	23,327	$	11,568	$	721,514	$	1,395,385	$	2,182,825

Concentra:
Credit facilities:
Term loan	$	—	$	—	$	—	$	3,016	$	6,520	$	609,639	$	619,175
Other	1,309		1,394		144		161		160		3,559		6,727
Total Concentra debt	$	1,309	$	1,394	$	144	$	3,177	$	6,680	$	613,198	$	625,902

Total debt	$	17,310	$	16,424	$	23,471	$	14,745	$	728,194	$	2,008,583	$	2,808,727

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
	(in thousands)
Net operating revenues:
Specialty hospitals	$	585,816		$	600,960		$	1,184,770		$	1,199,747
Outpatient rehabilitation(1)	256,928			258,106			495,010			513,923
Concentra	254,868			261,586			505,745			517,735
Other	19			23			436			631
Total Company	$	1,097,631		$	1,120,675		$	2,185,961		$	2,232,036

Adjusted EBITDA:
Specialty hospitals	$	82,739		$	98,172		$	169,495		$	186,837
Outpatient rehabilitation(1)	38,132			41,926			67,011			73,277
Concentra	43,039			43,061			77,192			85,653
Other	(22,453		)	(24,479		)	(43,626		)	(48,197		)
Total Company	$	141,457		$	158,680		$	270,072		$	297,570

Total assets:(2)
Specialty hospitals	$	2,457,948		$	2,655,617		$	2,457,948		$	2,655,617
Outpatient rehabilitation	959,748			982,811			959,748			982,811
Concentra	1,328,243			1,310,483			1,328,243			1,310,483
Other	73,950			105,300			73,950			105,300
Total Company	$	4,819,889		$	5,054,211		$	4,819,889		$	5,054,211

Purchases of property and equipment, net:
Specialty hospitals	$	21,313		$	36,691		$	54,988		$	69,048
Outpatient rehabilitation(1)	3,825			6,201			8,798			12,874
Concentra	4,716			7,601			7,927			16,287
Other	3,636			4,156			8,545			7,093
Total Company	$	33,490		$	54,649		$	80,258		$	105,302

	Three Months Ended June 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	82,739		$	38,132		$	43,039		$	(22,453	)
Depreciation and amortization	(13,812		)	(6,202		)	(14,916		)	(1,275		)
Stock compensation expense	—			—			(192		)	(4,006		)
Income (loss) from operations	$	68,927		$	31,930		$	27,931		$	(27,734	)	$	101,054
Equity in earnings of unconsolidated subsidiaries													4,546
Non-operating gain													13,035
Interest expense													(44,332		)
Income before income taxes													$	74,303

	Three Months Ended June 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	98,172		$	41,926		$	43,061		$	(24,479	)
Depreciation and amortization	(15,454		)	(5,878		)	(15,429		)	(1,572		)
Stock compensation expense	—			—			(264		)	(4,420		)
Income (loss) from operations	$	82,718		$	36,048		$	27,368		$	(30,471	)	$	115,663
Equity in earnings of unconsolidated subsidiaries													5,666
Interest expense													(37,655		)
Income before income taxes													$	83,674

	Six Months Ended June 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	169,495		$	67,011		$	77,192		$	(43,626	)
Depreciation and amortization	(27,705		)	(10,238		)	(30,292		)	(2,487		)
Stock compensation expense	—			—			(384		)	(7,790		)
Physiotherapy acquisition costs	—			—			—			(3,236		)
Income (loss) from operations	$	141,790		$	56,773		$	46,516		$	(57,139	)	$	187,940
Loss on early retirement of debt													(773		)
Equity in earnings of unconsolidated subsidiaries													9,198
Non-operating gain													38,122
Interest expense													(83,180		)
Income before income taxes													$	151,307

	Six Months Ended June 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	186,837		$	73,277		$	85,653		$	(48,197	)
Depreciation and amortization	(33,954		)	(12,218		)	(31,552		)	(3,148		)
Stock compensation expense	—			—			(570		)	(8,700		)
Income (loss) from operations	$	152,883		$	61,059		$	53,531		$	(60,045	)	$	207,428
Loss on early retirement of debt													(19,719		)
Equity in earnings of unconsolidated subsidiaries													11,187
Non-operating loss													(49		)
Interest expense													(78,508		)
Income before income taxes													$	120,339

	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		$	5,533	$	4,946		$	63,248	$	—		$	73,799
Accounts receivable, net	—			467,412		120,272			126,552		—			714,236
Intercompany receivables	—			1,489,631		58,333			—		(1,547,964		) (a)	—
Other current assets	17,584			28,326		12,786			24,515		—			83,211
Total Current Assets	17,656			1,990,902		196,337			214,315		(1,547,964		)	871,246

Property and equipment, net	56,568			620,364		54,964			179,636		—			911,532
Investment in affiliates	4,523,727			118,248		—			—		(4,641,975		) (b) (c)	—
Goodwill	—			2,091,754		—			674,542		—			2,766,296
Identifiable intangible assets, net	—			109,913		—			225,791		—			335,704
Other assets	42,452			98,649		36,528			16,199		(24,395		) (d)	169,433

Total Assets	$	4,640,403		$	5,029,830	$	287,829		$	1,310,483	$	(6,214,334	)	$	5,054,211

Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	34,134		$	—	$	—		$	—	$	—		$	34,134
Current portion of long-term debt and notes payable	23,052			644		244			2,637		—			26,577
Accounts payable	10,362			75,105		22,387			15,777		—			123,631
Intercompany payables	1,489,631			58,333		—			—		(1,547,964		) (a)	—
Accrued payroll	7,526			80,245		3,545			27,871		—			119,187
Accrued vacation	3,927			58,895		12,214			17,214		—			92,250
Accrued interest	17,096			5		4			2,172		—			19,277
Accrued other	44,032			60,078		10,533			32,210		—			146,853
Income taxes payable	2,709			—		—			4,267		—			6,976
Total Current Liabilities	1,632,469			333,305		48,927			102,148		(1,547,964		)	568,885

Long-term debt, net of current portion	2,115,318			266		9,663			608,885		—			2,734,132
Non-current deferred tax liability	—			136,920		736			84,150		(24,395		) (d)	197,411
Other non-current liabilities	44,297			54,100		7,688			35,194		—			141,279

Total Liabilities	3,792,084			524,591		67,014			830,377		(1,572,359		)	3,641,707

Redeemable non-controlling interests	—			—		10,079			458,771		—			468,850

Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	936,428			—		—			—		—			936,428
Retained earnings (accumulated deficit)	(88,109		)	1,314,773		(37,110		)	12,447		(1,290,110		) (c)	(88,109		)
Subsidiary investment	—			3,190,466		156,262			5,137		(3,351,865		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	848,319			4,505,239		119,152			17,584		(4,641,975		)	848,319

Non-controlling interests	—			—		91,584			3,751		—			95,335
Total Equity	848,319			4,505,239		210,736			21,335		(4,641,975		)	943,654

Total Liabilities and Equity	$	4,640,403		$	5,029,830	$	287,829		$	1,310,483	$	(6,214,334	)	$	5,054,211

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

	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2017	3,209	$	13.75	—	$	185,249,408
May 1 - May 31, 2017	29,165	13.70		—	185,249,408
June 1 - June 30, 2017	—	—		—	185,249,408
Total	32,374	$	13.70	—	$	185,249,408