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

For the Quarterly Period Ended ~~September 30, 2017~~

March 31, 2020

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~~

CORPORATION

(Exact name of Registrant as specified in its Charter)

~~Delaware~~ ~~Delaware~~		~~20-1764048~~ ~~23-2872718~~

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

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA17055

(Address of Principal Executive Offices and Zip code)

~~(717)~~

(717) 972-1100

(~~Registrants’~~Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SEM	New York Stock Exchange
		(NYSE)

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

☐

Indicate by check mark whether the ~~Registrants have~~Registrant has 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~~Registrant was required to submit ~~and post~~ such files). Yesx ☒ 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 filerx	☒	Accelerated filero	☐

Non-accelerated filero	☐	Smaller reporting companyo	☐
~~(Do not check if a smaller reporting company)~~		Emerging Growth Companyo	☐

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~~shell 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 x

☒

As of ~~October 31, 2017,~~April 30, 2020, Select Medical Holdings Corporation had outstanding ~~133,824,559~~133,977,064 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.~~subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and ~~Concentra Group Holdings and its subsidiaries.~~

Concentra.

~~Table of Contents~~

TABLE OF CONTENTS

~~PART I~~			~~FINANCIAL INFORMATION~~	3

PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6 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	31 18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52 39

ITEM 4.	CONTROLS AND PROCEDURES	52 39

PART II	OTHER INFORMATION	53 40

ITEM 1.	LEGAL PROCEEDINGS	53 40

ITEM 1A.	RISK FACTORS	55 41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57 45

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57 45

ITEM 4.	MINE SAFETY DISCLOSURES	57 45

ITEM 5.	OTHER INFORMATION	57 45

ITEM 6.	EXHIBITS	57 46

SIGNATURES

~~Table of Contents~~

PART II: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

December 31,

September 30,

December 31,

September 30,

2016

2017

2016

2017

ASSETS

Current Assets:

Cash and cash equivalents

$
99,029

$
107,300

$
99,029

$
107,300

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively

573,752

716,426

573,752

716,426

Prepaid income taxes

12,423

—

12,423

—

Other current assets

77,699

80,324

77,699

80,324

Total Current Assets

762,903

904,050

762,903

904,050

Property and equipment, net

892,217

946,063

892,217

946,063

Goodwill

2,751,000

2,767,896

2,751,000

2,767,896

Identifiable intangible assets, net

340,562

331,036

340,562

331,036

Other assets

173,944

174,762

173,944

174,762

Total Assets

$
4,920,626

$
5,123,807

$
4,920,626

$
5,123,807

LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts

$
39,362

$
18,923

$
39,362

$
18,923

Current portion of long-term debt and notes payable

13,656

37,560

13,656

37,560

Accounts payable

126,558

133,321

126,558

133,321

Accrued payroll

146,397

139,402

146,397

139,402

Accrued vacation

83,261

89,171

83,261

89,171

Accrued interest

22,325

30,998

22,325

30,998

Accrued other

140,076

143,443

140,076

143,443

Income taxes payable

—

6,718

—

6,718

Total Current Liabilities

571,635

599,536

571,635

599,536

Long-term debt, net of current portion

2,685,333

2,752,742

2,685,333

2,752,742

Non-current deferred tax liability

199,078

191,441

199,078

191,441

Other non-current liabilities

136,520

138,118

136,520

138,118

Total Liabilities

3,592,566

3,681,837

3,592,566

3,681,837

Commitments and contingencies (Note 8)

Redeemable non-controlling interests

422,159

621,515

422,159

621,515

Stockholders’ Equity:

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 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

459,004

925,111

942,142

Retained earnings (accumulated deficit)

371,685

262,505

(109,386
)
(220,500
)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

815,725

721,642

815,725

721,642

Non-controlling interests

90,176

98,813

90,176

98,813

Total Equity

905,901

820,455

905,901

820,455

Total Liabilities and Equity

$
4,920,626

$
5,123,807

$
4,920,626

$
5,123,807

December 31, 2019 March 31, 2020
ASSETS

Current Assets:

Cash and cash equivalents $ 335,882
$ 73,163

Accounts receivable 762,677
816,405

Prepaid income taxes 18,585
12,634

Other current assets 95,848
95,828

Total Current Assets 1,212,992
998,030

Operating lease right-of-use assets 1,003,986
1,014,969

Property and equipment, net 998,406
978,547

Goodwill 3,391,955
3,391,078

Identifiable intangible assets, net 409,068
405,374

Other assets 323,881
327,569

Total Assets $ 7,340,288
$ 7,115,567

LIABILITIES AND EQUITY

Current Liabilities:

Current operating lease liabilities $ 207,950
$ 212,884

Current portion of long-term debt and notes payable 25,167
17,161

Accounts payable 145,731
131,601

Accrued payroll 183,754
140,009

Accrued vacation 124,111
128,705

Accrued interest 33,853
11,339

Accrued other 191,076
194,165

Income taxes payable 2,638
8,090

Total Current Liabilities 914,280
843,954

Non-current operating lease liabilities 852,897
860,796

Long-term debt, net of current portion 3,419,943
3,553,056

Non-current deferred tax liability 148,258
158,782

Other non-current liabilities 101,334
103,783

Total Liabilities 5,436,712
5,520,371

Commitments and contingencies (Note 11)

Redeemable non-controlling interests 974,541
620,377

Stockholders’ Equity:

Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,823,713 shares issued and outstanding at 2019 and 2020, respectively 134
134

Capital in excess of par 491,038
491,824

Retained earnings 279,800
316,680

Total Stockholders’ Equity 770,972
808,638

Non-controlling interests 158,063
166,181

Total Equity 929,035
974,819

Total Liabilities and Equity $ 7,340,288
$ 7,115,567

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

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

Select Medical Holdings Corporation

Select Medical Corporation

For the Three Months Ended September 30,

For the Three Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

$
1,053,795

$
1,097,166

$
1,053,795

$
1,097,166

Costs and expenses:

Cost of services

915,703

938,910

915,703

938,910

General and administrative

27,088

27,065

27,088

27,065

Bad debt expense

17,677

20,321

17,677

20,321

Depreciation and amortization

37,165

38,772

37,165

38,772

Total costs and expenses

997,633

1,025,068

997,633

1,025,068

Income from operations

56,162

72,098

56,162

72,098

Other income and expense:

Loss on early retirement of debt

(10,853
)
—

(10,853
)
—

Equity in earnings of unconsolidated subsidiaries

5,268

4,431

5,268

4,431

Non-operating loss

(1,028
)
—

(1,028
)
—

Interest expense

(44,482
)
(37,688
)
(44,482
)
(37,688
)

Income before income taxes

5,067

38,841

5,067

38,841

Income tax expense

1,075

14,017

1,075

14,017

Net income

3,992

24,824

3,992

24,824

Less: Net income (loss) attributable to non-controlling interests

(2,479
)
6,362

(2,479
)
6,362

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

$
6,471

$
18,462

$
6,471

$
18,462

Income per common share:

Basic

$
0.05

$
0.14

Diluted

$
0.05

$
0.14

Weighted average shares outstanding:

Basic

127,848

129,142

Diluted

127,989

129,322

For the Three Months Ended March 31,
2019 2020
Net operating revenues $ 1,324,631
$ 1,414,632

Costs and expenses:

Cost of services, exclusive of depreciation and amortization 1,132,092
1,200,371

General and administrative 28,677
33,831

Depreciation and amortization 52,138
51,752

Total costs and expenses 1,212,907
1,285,954

Income from operations 111,724
128,678

Other income and expense:

Equity in earnings of unconsolidated subsidiaries 4,366
2,588

Gain on sale of businesses 6,532
7,201

Interest expense (50,811 ) (46,107 )
Income before income taxes 71,811
92,360

Income tax expense 18,467
21,912

Net income 53,344
70,448

Less: Net income attributable to non-controlling interests 12,510
17,323

Net income attributable to Select Medical Holdings Corporation $ 40,834
$ 53,125

Earnings per common share (Note 10):

Basic $ 0.30
$ 0.40

Diluted $ 0.30
$ 0.40

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

Select Medical Holdings Corporation

Condensed Consolidated Statements of ~~Operations~~

Changes in Equity and Income

(unaudited)

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

Select Medical Holdings Corporation

Select Medical Corporation

For the Nine Months Ended September 30,

For the Nine Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

$
3,239,756

$
3,329,202

$
3,239,756

$
3,329,202

Costs and expenses:

Cost of services

2,754,950

2,787,497

2,754,950

2,787,497

General and administrative

81,226

83,415

81,226

83,415

Bad debt expense

51,591

59,120

51,591

59,120

Depreciation and amortization

107,887

119,644

107,887

119,644

Total costs and expenses

2,995,654

3,049,676

2,995,654

3,049,676

Income from operations

244,102

279,526

244,102

279,526

Other income and expense:

Loss on early retirement of debt

(11,626
)
(19,719
)
(11,626
)
(19,719
)
Equity in earnings of unconsolidated subsidiaries

14,466

15,618

14,466

15,618

Non-operating gain (loss)

37,094

(49
)
37,094

(49
)
Interest expense

(127,662
)
(116,196
)
(127,662
)
(116,196
)

Income before income taxes

156,374

159,180

156,374

159,180

Income tax expense

51,585

59,593

51,585

59,593

Net income

104,789

99,587

104,789

99,587

Less: Net income attributable to non-controlling interests

9,550

23,200

9,550

23,200

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

$
95,239

$
76,387

$
95,239

$
76,387

Income per common share:

Basic

$
0.72

$
0.57

Diluted

$
0.72

$
0.57

Weighted average shares outstanding:

Basic

127,659

128,745

Diluted

127,804

128,916

thousands)

For the Three Months Ended March 31, 2020

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2019 134,328
$ 134
$ 491,038
$ 279,800
$ 770,972
$ 158,063
$ 929,035
Net income attributable to Select Medical Holdings Corporation

53,125
53,125

53,125
Net income attributable to non-controlling interests

—
10,067
10,067
Issuance of restricted stock 2
0
0

—

—
Forfeitures of unvested restricted stock (15 ) 0
0
—
—
Vesting of restricted stock 6,136
6,136
6,136
Repurchase of common shares (492 ) 0
(5,350 ) (3,341 ) (8,691 ) (8,691 )
Issuance of non-controlling interests —
1,679
1,679
Distributions to and purchases of non-controlling interests

(2,726 ) (2,726 ) (4,048 ) (6,774 )
Redemption adjustment on non-controlling interests

(10,123 ) (10,123 )

(10,123 )
Other

(55 ) (55 ) 420
365
Balance at March 31, 2020 133,823
$ 134
$ 491,824
$ 316,680
$ 808,638
$ 166,181
$ 974,819

For the Three Months Ended March 31, 2019

Total Stockholders’ Equity

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par

Retained
Earnings
Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2018 135,266
$ 135
$ 482,556
$ 320,351
$ 803,042
$ 113,198
$ 916,240
Net income attributable to Select Medical Holdings Corporation 40,834
40,834
40,834
Net income attributable to non-controlling interests —
4,810
4,810
Issuance of restricted stock 21
0
0
—
—
Forfeitures of unvested restricted stock (24 ) 0
0
—
—
Vesting of restricted stock 5,488
5,488
5,488
Issuance of non-controlling interests —
6,837
6,837
Distributions to and purchases of non-controlling interests 259
259
(2,739 ) (2,480 )
Redemption adjustment on non-controlling interests (47,470 ) (47,470 ) (47,470 )
Other (122 ) (122 ) 413
291
Balance at March 31, 2019 135,263
$ 135
$ 488,303
$ 313,593
$ 802,031
$ 122,519
$ 924,550

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

Select Medical Holdings Corporation

Condensed Consolidated Statements of ~~Changes in Equity and Income~~

Cash Flows

(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

76,387

76,387

76,387

Net income attributable to non-controlling interests

18,519

—

4,681

4,681

Issuance and vesting of restricted stock

1,323

1

13,445

13,446

13,446

Repurchase of common shares

(220
)
0

(1,934
)
(1,669
)
(3,603
)

(3,603
)
Exercise of stock options

185

0

1,634

1,634

1,634

Issuance of non-controlling interests

1,951

1,951

8,944

10,895

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(4,003
)

—

(5,153
)
(5,153
)
Redemption adjustment on non-controlling interests

184,294

(184,294
)
(184,294
)

(184,294
)
Other

673

389

389

165

554

Balance at September 30, 2017

$
621,515

133,885

$
133

$
459,004

$
262,505

$
721,642

$
98,813

$
820,455

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

76,387

76,387

76,387

Net income attributable to non-controlling interests

18,519

—

4,681

4,681

Additional investment by Holdings

1,634

1,634

1,634

Dividends declared and paid to Holdings

(3,603
)
(3,603
)

(3,603
)
Contribution related to restricted stock awards and stock option issuances by Holdings

13,446

13,446

13,446

Issuance of non-controlling interests

1,951

1,951

8,944

10,895

Purchase of non-controlling interests

(127
)

7

7

7

Distributions to non-controlling interests

(4,003
)

—

(5,153
)
(5,153
)
Redemption adjustment on non-controlling interests

184,294

(184,294
)
(184,294
)

(184,294
)
Other

673

389

389

165

554

Balance at September 30, 2017

$
621,515

0

$
0

$
942,142

$
(220,500
)
$
721,642

$
98,813

$
820,455

For the Three Months Ended March 31,
2019 2020
Operating activities

Net income $ 53,344
$ 70,448

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

Distributions from unconsolidated subsidiaries 7,872
8,479

Depreciation and amortization 52,138
51,752

Provision for expected credit losses 1,567
199

Equity in earnings of unconsolidated subsidiaries (4,366 ) (2,588 )
Gain on sale of assets and businesses (6,233 ) (7,339 )
Stock compensation expense 6,255
6,903

Amortization of debt discount, premium and issuance costs 3,231
553

Deferred income taxes (81 ) 9,364

Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable (74,752 ) (53,928 )
Other current assets (7,523 ) 27

Other assets 57,319
2,248

Accounts payable 4,324
(8,992 )
Accrued expenses (69,163 ) (44,455 )
Income taxes 17,830
11,413

Net cash provided by operating activities 41,762
44,084

Investing activities

Business combinations, net of cash acquired (6,120 ) (6,833 )
Purchases of property and equipment (49,073 ) (39,208 )
Investment in businesses (27,608 ) (9,848 )
Proceeds from sale of assets and businesses 2
11,230

Net cash used in investing activities (82,799 ) (44,659 )
Financing activities

Borrowings on revolving facilities 360,000
460,000

Payments on revolving facilities (220,000 ) (295,000 )
Payments on term loans (132,685 ) (39,843 )
Borrowings of other debt 8,290
6,487

Principal payments on other debt (6,155 ) (8,099 )
Repurchase of common stock —
(8,691 )
Increase in overdrafts 6,050
—

Proceeds from issuance of non-controlling interests 3,425
1,679

Distributions to and purchases of non-controlling interests (5,251 ) (12,474 )
Purchase of membership interests of Concentra Group Holdings Parent (Note 4) —
(366,203 )
Net cash provided by (used in) financing activities 13,674
(262,144 )
Net decrease in cash and cash equivalents (27,363 ) (262,719 )
Cash and cash equivalents at beginning of period 175,178
335,882

Cash and cash equivalents at end of period $ 147,815
$ 73,163

Supplemental Information

Cash paid for interest $ 37,199
$ 67,885

Cash paid for taxes 718
1,135

Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019 24,176
67,894

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 Nine Months Ended September 30,

For the Nine Months Ended September 30,

2016

2017

2016

2017

Operating activities

Net income

$
104,789

$
99,587

$
104,789

$
99,587

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

Distributions from unconsolidated subsidiaries

16,145

14,542

16,145

14,542

Depreciation and amortization

107,887

119,644

107,887

119,644

Provision for bad debts

51,591

59,120

51,591

59,120

Equity in earnings of unconsolidated subsidiaries

(14,466
)
(15,618
)
(14,466
)
(15,618
)
Loss on extinguishment of debt

11,626

6,527

11,626

6,527

Gain on sale or disposal of assets and businesses

(41,910
)
(9,499
)
(41,910
)
(9,499
)
Gain on sale of equity investment

(241
)
—

(241
)
—

Impairment of equity investment

5,339

—

5,339

—

Stock compensation expense

12,924

14,227

12,924

14,227

Amortization of debt discount, premium and issuance costs

11,845

8,546

11,845

8,546

Deferred income taxes

(13,088
)
(6,126
)
(13,088
)
(6,126
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

(40,776
)
(201,514
)
(40,776
)
(201,514
)
Other current assets

12,094

(2,677
)
12,094

(2,677
)
Other assets

5,146

1,407

5,146

1,407

Accounts payable

(17,752
)
3,913

(17,752
)
3,913

Accrued expenses

52,996

18,752

52,996

18,752

Due to third party payors

11,065

—

11,065

—

Income taxes

5,547

19,141

5,547

19,141

Net cash provided by operating activities

280,761

129,972

280,761

129,972

Investing activities

Business combinations, net of cash acquired

(414,231
)
(19,371
)
(414,231
)
(19,371
)
Purchases of property and equipment

(118,260
)
(173,800
)
(118,260
)
(173,800
)
Investment in businesses

(3,140
)
(11,374
)
(3,140
)
(11,374
)
Proceeds from sale of assets, businesses, and equity investment

72,629

34,555

72,629

34,555

Net cash used in investing activities

(463,002
)
(169,990
)
(463,002
)
(169,990
)

Financing activities

Borrowings on revolving facilities

420,000

805,000

420,000

805,000

Payments on revolving facilities

(545,000
)
(705,000
)
(545,000
)
(705,000
)
Proceeds from term loans

795,344

1,139,487

795,344

1,139,487

Payments on term loans

(434,842
)
(1,176,567
)
(434,842
)
(1,176,567
)
Revolving facility debt issuance costs

—

(4,392
)
—

(4,392
)
Borrowings of other debt

23,801

27,571

23,801

27,571

Principal payments on other debt

(15,477
)
(15,112
)
(15,477
)
(15,112
)
Repurchase of common stock

(1,939
)
(3,603
)
—

—

Dividends paid to Holdings

—

—

(1,939
)
(3,603
)
Proceeds from exercise of stock options

1,488

1,634

—

—

Equity investment by Holdings

—

—

1,488

1,634

Repayments of overdrafts

(8,464
)
(20,439
)
(8,464
)
(20,439
)
Proceeds from issuance of non-controlling interests

11,846

8,986

11,846

8,986

Purchase of non-controlling interests

(1,530
)
(120
)
(1,530
)
(120
)
Distributions to non-controlling interests

(9,198
)
(9,156
)
(9,198
)
(9,156
)
Net cash provided by financing activities

236,029

48,289

236,029

48,289

Net increase in cash and cash equivalents

53,788

8,271

53,788

8,271

Cash and cash equivalents at beginning of period

14,435

99,029

14,435

99,029

Cash and cash equivalents at end of period

$
68,223

$
107,300

$
68,223

$
107,300

Supplemental Information

Cash paid for interest

$
92,928

$
101,341

$
92,928

$
101,341

Cash paid for taxes

$
59,937

$
46,553

$
59,937

$
46,553

~~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~~


1.	Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of ~~September 30, 2017,~~March 31, 2020, and for the three ~~and nine~~ month periods ended ~~September 30, 2016~~March 31, 2019 and ~~2017,~~2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2017.~~2020. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2016~~2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~23, 2017.~~

2.~~Accounting Policies~~

20, 2020.


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~~

Recently Adopted Accounting Pronouncements

Financial Instruments

On January ~~2017,~~1, 2020, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company adopted Accounting Standards Update (“ASU”) ~~2017-01,~~ ~~Business Combinations~~2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic ~~805),~~ ~~Clarifying the Definition of a Business~~326), which ~~clarifies~~replaced the ~~definition~~incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of ~~a business with the objective~~incurred credit losses, assessments 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 activitiescurrent conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be ~~considered a business and narrows~~applied using the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 will be applied prospectively and 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~~with a ~~cumulative effect~~cumulative-effect adjustment to retained earnings, asif any, upon adoption.

The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of ~~the effective date.~~material defaults is low. The Company ~~is currently evaluating~~experienced credit losses of $1.1 million for the ~~standard to determine~~year ended December 31, 2017, credit loss recoveries of $0.1 million for the ~~impact it will have on its consolidated financial statements.~~

~~In February 2016,~~year ended December 31, 2018, and credit losses of $3.0 million for the ~~FASB issued ASU 2016-02,~~ ~~Leases~~. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term 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 will take effect for public companies for fiscal years beginning after~~year ended 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,~~31, 2019. The Company’s ~~implementation efforts~~historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are ~~focused~~typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, 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,~~ ~~Revenue from Contracts with Customers~~~~, ASU 2016-08,~~ ~~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~~behalf of the ~~current revenue recognition requirements.~~patient. The ~~core principle~~Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the 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 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~~Company’s accounts receivable at January 1, ~~2018 using~~2020.

In estimating 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 is notCompany’s expected to materially change 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~~credit losses under Topic 326, the Company ~~experiences are amounts~~considers its incurred loss experience and adjusts 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 revenueknown and ~~will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016~~expected events and ~~September 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~~

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes~~, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted 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.~~

~~3. Acquisitions~~

~~Physiotherapy Acquisition~~

On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for $406.3 million, net of $12.3 million of cash acquired.

For the Physiotherapy acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, ~~Business Combinations~~~~. During the quarter ended March 31, 2017, the Company finalized the purchase price allocation.~~

~~The following table reconciles the allocation of the consideration given for identifiable net assets and goodwill acquired to the net cash paid 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 of $343.2 million has been recognized in 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 future earnings potential and its assembled workforce. Goodwill has been assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However, prior to its acquisitionother circumstances, identified using periodic assessments implemented by the Company, ~~Physiotherapy completed certain acquisitions that resulted~~which management believes are relevant in ~~tax deductible goodwill with an estimated value~~assessing the collectability of ~~$8.8 million, which~~its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company ~~will deduct~~ through ~~2030.~~

~~Due to the integration~~an allowance for credit losses and related credit loss expense.

As of ~~Physiotherapy into our outpatient rehabilitation operations, it is not practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.~~

~~The following pro forma unaudited results of operations have been prepared assuming the acquisition of Physiotherapy occurred on~~ January 1, ~~2015. These results are not necessarily indicative of results of future operations nor of~~2020, the ~~results that would have actually occurred had the acquisition been consummated on the aforementioned date.~~Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s ~~results~~estimate of operations for the three months ended September 30, 2016 and for the three and nine months ended September 30, 2017 include Physiotherapy for the entire period. There were no pro forma adjustments during these periods; therefore, no pro forma information is presented.

Nine Months Ended
September 30, 2016

(in thousands, except per
share amounts)

Net revenue

$
3,293,286

Net income attributable to Holdings

93,418

Income per common share:

Basic

$
0.71

Diluted

$
0.71

~~The net income tax impact was calculated at a statutory rate, as if Physiotherapy had been a subsidiary of the Company~~expected credit losses as of January 1, ~~2015. Pro forma results~~2020, resulted in 0 adjustments to the allowance for credit losses and 0 cumulative-effect adjustment to retained earnings on the ~~nine months ended September 30, 2016 were~~adoption date of the standard.


3.	Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, insurance coverage is verified or an authorization is received from the patient’s employer prior to the patient’s visit.

Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15% and 18% of the Company’s accounts receivable is from Medicare at December 31, 2019, and March 31, 2020, respectively.


4.	Redeemable Non-Controlling Interests

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

On January 1, 2020, Select acquired approximately ~~$3.2 million~~17.2% of ~~Physiotherapy acquisition costs.~~

~~Other Acquisitions~~

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

The ~~Company completed acquisitions within our specialty hospitals, outpatient rehabilitation,~~changes in redeemable non-controlling interests are as follows (in thousands):



	Three Months Ended March 31,
	2019			2020
Balance as of January 1	$	780,488		$	974,541
Net income attributable to redeemable non-controlling interests	7,700			7,256
Distributions to and purchases of redeemable non-controlling interests	(2,771		)	(5,687		)
Purchase of membership interests of Concentra Group Holdings Parent	—			(366,203		)
Redemption adjustment on redeemable non-controlling interests	47,470			10,123
Other	354			347
Balance as of March 31	$	833,241		$	620,377


5.	Variable Interest Entities

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

The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra ~~segments during~~receives a management fee for these services, which is based, in part, on the ~~nine months ended September 30, 2017.~~ performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.

The ~~Company provided~~ total ~~consideration~~assets of ~~$21.7 million, consisting principally of $19.4 million of cash and the issuance of non-controlling interests. The assets received in these acquisitions consisted~~Concentra’s variable interest entities, which are comprised principally of accounts receivable, ~~property and equipment, identifiable intangible assets, and goodwill, of which $0.8 million, $1.8~~were $178.4 million and ~~$14.5~~$173.7 million at December 31, 2019, and March 31, 2020, respectively. The total liabilities of ~~goodwill was recognized in our specialty hospitals, outpatient rehabilitation,~~Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and ~~Concentra reporting units,~~obligations payable for services received under the aforementioned management agreements, were $176.7 million and $172.1 million at December 31, 2019, and March 31, 2020, respectively.

4.~~Intangible Assets and Liabilities~~


6.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the ~~nine~~three months ended ~~September 30, 2017:~~

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

797

1,768

14,505

17,070

Measurement period adjustment

(342
)
168

—

(174
)
Balance as of September 30, 2017

$
1,447,861

$
645,493

$
674,542

$
2,767,896

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

March 31, 2020:

Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Total
(in thousands)
Balance as of December 31, 2019 $ 1,078,804
$ 430,900
$ 649,763
$ 1,232,488
$ 3,391,955
Acquired —
—
610
4,567
5,177
Sold —
—
(6,034 ) —
(6,034 )
Measurement period adjustment —
—
—
(20 ) (20 )
Balance as of March 31, 2020 $ 1,078,804
$ 430,900
$ 644,339
$ 1,237,035
$ 3,391,078

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

September 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

19,166

—

19,166

Accreditations

2,235

—

2,235

1,965

—

1,965

Finite-lived assets:

Customer relationships

142,198

(23,185
)
119,013

143,953

(34,482
)
109,471

Favorable leasehold interests

13,089

(2,317
)
10,772

13,295

(3,745
)
9,550

Non-compete agreements

26,655

(1,837
)
24,818

27,555

(3,369
)
24,186

Total identifiable intangible assets

$
367,901

$
(27,339
)
$
340,562

$
372,632

$
(41,596
)
$
331,036

Finite-lived liabilities:

Unfavorable leasehold interests

$
5,139

$
(1,410
)
$
3,729

$
5,343

$
(2,529
)
$
2,814

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $4.1 million and $4.4 million for the three months ended September 30, 2016 and 2017, respectively. Amortization expense was $12.2 million and $13.1 million for the nine months ended September 30, 2016 and 2017, respectively.

The Company’s favorable and unfavorable leasehold interests 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.

assets:



	December 31, 2019							March 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	17,157		—			17,157		18,348		—			18,348
Accreditations	1,874		—			1,874		1,874		—			1,874
Finite-lived intangible assets:
Trademarks	5,000		(5,000		)	—		5,000		(5,000		)	—
Customer relationships	287,373		(87,346		)	200,027		288,963		(93,814		)	195,149
Non-compete agreements	32,114		(8,802		)	23,312		32,845		(9,540		)	23,305
Total identifiable intangible assets	$	510,216	$	(101,148	)	$	409,068	$	513,728	$	(108,354	)	$	405,374

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At ~~September 30, 2017,~~March 31, 2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~2.1~~6.9 years, respectively.

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.1 million and $6.9 million for the three months ended March 31, 2019 and 2020, respectively.

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

~~For purposes~~


7.	Long-Term Debt and Notes Payable

As of ~~this indebtedness footnote, references to Select exclude Concentra because~~March 31, 2020, the ~~Concentra credit facilities are non-recourse to Holdings and Select.~~

~~The~~ Company’s long-term debt and notes payable ~~as of September 30, 2017 are~~were as follows (in thousands):

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value

Select:

6.375% senior notes

$
710,000

$
835

$
(7,032
)
$
703,803

$
731,300

Credit facilities:

Revolving facility

320,000

—

—

320,000

294,400

Term loan

1,144,250

(12,962
)
(13,019
)
1,118,269

1,158,553

Other

35,184

—

—

35,184

35,184

Total Select debt

2,209,434

(12,127
)
(20,051
)
2,177,256

2,219,437

Concentra:

Credit facilities:

Term loan

619,175

(2,385
)
(11,268
)
605,522

620,917

Other

7,524

—

—

7,524

7,524

Total Concentra debt

626,699

(2,385
)
(11,268
)
613,046

628,441

Total debt

$
2,836,133

$
(14,512
)
$
(31,319
)
$
2,790,302

$
2,847,878



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select 6.250% senior notes	$	1,225,000	$	38,437		$	(19,200	)	$	1,244,237	$	1,222,673
Select credit facilities:
Select revolving facility	165,000		—			—			165,000		164,381
Select term loan	2,103,437		(9,905		)	(10,796		)	2,082,736		1,987,748
Other debt, including finance leases	78,617		—			(373		)	78,244		78,244
Total debt	$	3,572,054	$	28,532		$	(30,369	)	$	3,570,217	$	3,453,046

Principal maturities of the Company’s long-term debt and notes payable ~~are~~were 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

—

—

—

—

—

320,000

320,000

Term loan

2,875

11,500

11,500

11,500

11,500

1,095,375

1,144,250

Other

17,828

5,437

11,827

68

14

10

35,184

Total Select debt

20,703

16,937

23,327

11,568

721,514

1,415,385

2,209,434

Concentra:

Credit facilities:

Term loan

—

—

—

3,016

6,520

609,639

619,175

Other

657

2,843

144

161

160

3,559

7,524

Total Concentra debt

657

2,843

144

3,177

6,680

613,198

626,699

Total debt

$
21,360

$
19,780

$
23,471

$
14,745

$
728,194

$
2,028,583

$
2,836,133

~~The~~



	2020		2021		2022		2023		2024		Thereafter		Total
Select 6.250% senior notes	$	—	$	—	$	—	$	—	$	—	$	1,225,000	$	1,225,000
Select credit facilities:
Select revolving facility	—		—		—		—		165,000		—		165,000
Select term loan	—		—		—		4,757		11,150		2,087,530		2,103,437
Other debt, including finance leases	14,318		8,130		17,215		3,364		23,550		12,040		78,617
Total debt	$	14,318	$	8,130	$	17,215	$	8,121	$	199,700	$	3,324,570	$	3,572,054

As of December 31, 2019, the Company’s long-term debt and notes payable ~~as of December 31, 2016 are~~were 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

~~Select Credit Facilities~~

On March 6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Select used borrowings under the Select credit facilities to: (i) repay in full 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, which resulted in $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case 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 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, the maturity date for the Select 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 will be required 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 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 (iii) 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 September 30, 2017, Select’s leverage ratio was 5.82 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.

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select 6.250% senior notes $ 1,225,000
$ 39,988
$ (19,944 ) $ 1,245,044
$ 1,322,020
Select credit facilities:

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

Excess Cash Flow Payment

~~On March 1, 2017, Concentra~~

In February 2020, Select made a principal prepayment of ~~$23.1~~approximately $39.8 million associated with ~~the Concentra first lien~~its term loans in accordance with the provision in its senior secured credit agreement, dated March 6, 2017 (together with any borrowings thereunder, the ~~Concentra~~“Select credit ~~facilities~~facilities”) that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the ~~Concentra~~Select credit facilities.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for ~~Select’s 6.375%~~its 6.250% senior notes due August 15, 2026 (the “senior notes”) and ~~for its~~the Select credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

The fair ~~values~~value of the Select credit facilities ~~and the Concentra credit facilities were~~was based on quoted market prices for this debt in the syndicated loan market. The fair value of ~~Select’s 6.375%~~the 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~~


8.	Segment Information

The Company’s reportable segments ~~consist of: specialty hospitals,~~include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and ~~Concentra.~~Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and ~~certain other~~employee leasing services with non-consolidating ~~joint ventures and minority investments in other healthcare related businesses.~~ subsidiaries.

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, non-operating~~ gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries.

The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

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



		Three Months Ended March 31,
		2019			2020
	(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital		$	457,534		$	500,521
Rehabilitation hospital		154,558			182,019
Outpatient rehabilitation		246,905			255,249
Concentra		396,321			398,535
Other		69,313			78,308
Total Company		$	1,324,631		$	1,414,632
Adjusted EBITDA:
Critical illness recovery hospital		$	72,998		$	88,570
Rehabilitation hospital		25,797			38,569
Outpatient rehabilitation		28,991			27,122
Concentra		66,258			61,466
Other		(23,927		)	(28,394		)
Total Company		$	170,117		$	187,333
Total assets:
Critical illness recovery hospital		$	2,062,659		$	2,148,779
Rehabilitation hospital		1,089,391			1,127,267
Outpatient rehabilitation		1,250,015			1,285,449
Concentra		2,464,317			2,354,169
Other		155,110			199,903
Total Company		$	7,021,492		$	7,115,567
Purchases of property and equipment:
Critical illness recovery hospital		$	10,160		$	8,965
Rehabilitation hospital		13,183			3,325
Outpatient rehabilitation		9,040			8,384
Concentra		15,698			15,586
Other		992			2,948
Total Company		$	49,073		$	39,208

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

(in thousands)

Net operating revenues:

Specialty hospitals

$
544,491

$
585,288

$
1,729,261

$
1,785,035

Outpatient rehabilitation(1)

250,710

250,527

745,720

764,450

Concentra

258,507

261,295

764,252

779,030

Other

87

56

523

687

Total Company

$
1,053,795

$
1,097,166

$
3,239,756

$
3,329,202

Adjusted EBITDA:

Specialty hospitals

$
48,264

$
69,454

$
217,759

$
256,291

Outpatient rehabilitation(1)

31,995

29,298

99,006

102,575

Concentra

40,888

40,003

118,080

125,656

Other

(23,070
)
(22,928
)
(66,696
)
(71,125
)
Total Company

$
98,077

$
115,827

$
368,149

$
413,397

Total assets:(2)

Specialty hospitals

$
2,469,060

$
2,748,761

$
2,469,060

$
2,748,761

Outpatient rehabilitation

955,359

945,765

955,359

945,765

Concentra

1,318,866

1,332,012

1,318,866

1,332,012

Other

73,992

97,269

73,992

97,269

Total Company

$
4,817,277

$
5,123,807

$
4,817,277

$
5,123,807

Purchases of property and equipment, net:

Specialty hospitals

$
24,378

$
37,376

$
79,366

$
106,424

Outpatient rehabilitation(1)

6,234

6,496

15,032

19,370

Concentra

2,720

5,369

10,647

21,656

Other

4,670

19,257

13,215

26,350

Total Company

$
38,002

$
68,498

$
118,260

$
173,800

(1) Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.

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

Three Months Ended September 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
48,264

$
31,995

$
40,888

$
(23,070
)

Depreciation and amortization

(14,317
)
(6,159
)
(15,278
)
(1,411
)

Stock compensation expense

—

—

(193
)
(4,557
)

Income (loss) from operations

$
33,947

$
25,836

$
25,417

$
(29,038
)
$
56,162

Loss on early retirement of debt

(10,853
)
Equity in earnings of unconsolidated subsidiaries

5,268

Non-operating loss

(1,028
)
Interest expense

(44,482
)
Income before income taxes

$
5,067

Three Months Ended September 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
69,454

$
29,298

$
40,003

$
(22,928
)

Depreciation and amortization

(15,437
)
(5,964
)
(15,014
)
(2,357
)

Stock compensation expense

—

—

(212
)
(4,745
)

Income (loss) from operations

$
54,017

$
23,334

$
24,777

$
(30,030
)
$
72,098

Equity in earnings of unconsolidated subsidiaries

4,431

Interest expense

(37,688
)
Income before income taxes

$
38,841

Nine Months Ended September 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(1)

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
217,759

$
99,006

$
118,080

$
(66,696
)

Depreciation and amortization

(42,022
)
(16,397
)
(45,570
)
(3,898
)

Stock compensation expense

—

—

(577
)
(12,347
)

Physiotherapy acquisition costs

—

—

—

(3,236
)

Income (loss) from operations

$
175,737

$
82,609

$
71,933

$
(86,177
)
$
244,102

Loss on early retirement of debt

(11,626
)
Equity in earnings of unconsolidated subsidiaries

14,466

Non-operating gain

37,094

Interest expense

(127,662
)
Income before income taxes

$
156,374

Nine Months Ended September 30, 2017

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
256,291

$
102,575

$
125,656

$
(71,125
)

Depreciation and amortization

(49,391
)
(18,182
)
(46,566
)
(5,505
)

Stock compensation expense

—

—

(782
)
(13,445
)

Income (loss) from operations

$
206,900

$
84,393

$
78,308

$
(90,075
)
$
279,526

Loss on early retirement of debt

(19,719
)
Equity in earnings of unconsolidated subsidiaries

15,618

Non-operating loss

(49
)
Interest expense

(116,196
)
Income before income taxes

$
159,180

~~(1)~~



	Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)
Depreciation and amortization	(11,451		)	(6,402		)	(7,032		)	(24,904		)	(2,349		)
Stock compensation expense	—			—			—			(767		)	(5,488		)
Income (loss) from operations	$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Equity in earnings of unconsolidated subsidiaries																4,366
Gain on sale of businesses																6,532
Interest expense																(50,811		)
Income before income taxes																$	71,811



	Three Months Ended March 31, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	88,570		$	38,569		$	27,122		$	61,466		$	(28,394	)
Depreciation and amortization	(12,336		)	(6,887		)	(7,218		)	(22,887		)	(2,424		)
Stock compensation expense	—			—			—			(767		)	(6,136		)
Income (loss) from operations	$	76,234		$	31,682		$	19,904		$	37,812		$	(36,954	)	$	128,678
Equity in earnings of unconsolidated subsidiaries																2,588
Gain on sale of businesses																7,201
Interest expense																(46,107		)
Income before income taxes																$	92,360


9.	Revenue from Contracts with Customers

Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The ~~outpatient rehabilitation segment includes the operating results of~~following tables disaggregate the Company’s ~~contract therapy businesses through~~net operating revenues for the three months ended March 31, ~~2016~~2019 and ~~Physiotherapy beginning March 4, 2016.~~2020:



	Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	238,169	$	74,579	$	40,278	$	555	$	—	$	353,581
Non-Medicare	216,959		70,642		187,914		393,236		—		868,751
Total patient services revenues	455,128		145,221		228,192		393,791		—		1,222,332
Other revenues⁽¹⁾	2,406		9,337		18,713		2,530		69,313		102,299
Total net operating revenues	$	457,534	$	154,558	$	246,905	$	396,321	$	69,313	$	1,324,631



	Three Months Ended March 31, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	241,509	$	90,752	$	40,832	$	472	$	—	$	373,565
Non-Medicare	255,947		81,436		196,890		395,033		—		929,306
Total patient services revenues	497,456		172,188		237,722		395,505		—		1,302,871
Other revenues	3,065		9,831		17,527		3,030		78,308		111,761
Total net operating revenues	$	500,521	$	182,019	$	255,249	$	398,535	$	78,308	$	1,414,632

~~(2)~~ ~~Reflects~~
(1) Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.


10.	Earnings per Share

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the ~~retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of September 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $28.1 million.~~

~~7. Income per Common Share~~

~~Holdings~~Company applies the two-class method ~~for calculating and presenting income per~~because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common ~~share. The~~stock in undistributed earnings. Application of the Company’s two-class method is ~~an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.~~

as follows:


(i)	Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were 0 dividends declared or contractual dividends paid for the three months ended March 31, 2019 and 2020.


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


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

The following table sets forth the ~~calculation of~~net income ~~per share in Holdings’ condensed consolidated statements of operations and~~attributable to the ~~differences between basic weighted average~~Company, its common shares outstanding, and ~~diluted~~its participating securities outstanding.



	Basic EPS				Diluted EPS
	Three Months Ended March 31,				Three Months Ended March 31,
	2019		2020		2019		2020
	(in thousands)
Net income	$	53,344	$	70,448	$	53,344	$	70,448
Less: net income attributable to non-controlling interests	12,510		17,323		12,510		17,323
Net income attributable to the Company	40,834		53,125		40,834		53,125
Less: net income attributable to participating securities	1,343		1,818		1,343		1,818
Net income attributable to common shares	$	39,491	$	51,307	$	39,491	$	51,307



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



	Three Months Ended March 31, 2020
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	51,307	129,638	$	0.40	$	51,307	129,638	$	0.40
Participating securities	1,818		4,594	$	0.40	1,818		4,594	$	0.40
Total Company	$	53,125				$	53,125

_______________________________________________________________________________

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016

2017

2016

2017

(in thousands, except per share amounts)

Numerator:

Net income attributable to Select Medical Holdings Corporation

$
6,471

$
18,462

$
95,239

$
76,387

Less: Earnings allocated to unvested restricted stockholders

209

608

2,852

2,464

Net income available to common stockholders

$
6,262

$
17,854

$
92,387

$
73,923

Denominator:

Weighted average shares—basic

127,848

129,142

127,659

128,745

Effect of dilutive securities:

Stock options

141

180

145

171

Weighted average shares—diluted

127,989

129,322

127,804

128,916

Basic income per common share:

$
0.05

$
0.14

$
0.72

$
0.57

Diluted income per common share:

$
0.05

$
0.14

$
0.72

$
0.57

~~8. Commitments and Contingencies~~

during the period.


11.	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~~coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of ~~$2.0~~the specific joint venture. The annual aggregate limit under these programs ranges from $6.0 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~~

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

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

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

~~Knoxville Litigation~~

On July 13, 2015, the United States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015.

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The case has been fully briefed and argued in the Court of Appeals. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Wilmington ~~Litigation~~

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

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

~~Northern District~~


12.	Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of ~~Alabama Investigation~~

interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million during the three months ended March 31, 2020.


13.	Subsequent Events

Title VIII in Division B of the CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $100.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities, and Medicare- and Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the coronavirus disease 2019 (“COVID-19”) pandemic, such as forgone revenues from canceled procedures, and to provide support for related healthcare expenses, such as constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. On ~~October 30, 2017,~~April 10, 2020, the U.S. Department of Health & Human Services began making payments to healthcare providers from the $100.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid. The Company received approximately $93.7 million of payments as part of the Cares Act Provider Relief Fund. The Company concluded that the receipt of these payments would be accounted for in periods subsequent to March 31, 2020, as the Company was ~~contacted~~not able to determine eligibility for the assistance or the amounts that would be distributed until April 2020.

Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. The Company applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, the Company has received $316.1 million under this program. Because these payments are made on behalf of patients before services are provided, the Company will record these payments as a contract liability until all performance obligations have been met. These advanced payments will be recouped by CMS through future Medicare claims billed by the ~~U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain~~Company, beginning 121 days after receipt of the ~~Company’s Physiotherapy outpatient rehabilitation clinics.~~advanced payment. After 120 days, any new Medicare claim billed by the Company will reduce the liability owed to CMS. The Company ~~intends~~is required to ~~cooperate with this investigation. At this time,~~repay any advanced payments not recouped by CMS within 210 days from the date the Company originally received the payment. Failure to repay the advanced payments when due will result in interest charges on the outstanding balance owed.

In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is ~~unable~~able to ~~predict the timing and outcome~~defer half of ~~this matter.~~

~~9. Subsequent Event~~

On October 23, 2017, Select announced that Concentra Group Holdings entered into an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) dated October 22, 2017 with Concentra, Concentra Group Holdings Parent, LLC (“Group Holdings Parent”), U.S. HealthWorks, Inc. (“U.S. HealthWorks”), and Dignity Health Holdings Company (“DHHC”). Pursuant to the termsits share of ~~the Purchase Agreement, Concentra will acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.~~

~~In connection~~payroll taxes owed until December 31, 2021, with the closing of the transaction, it is expected that Concentra Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Concentra Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above will be exchanged for membership interests in Group Holdings Parent.

The transaction values U.S. HealthWorks at $753.0 million, subject to certain customary adjustments for working capital, cash, debt, transaction expenses and other items in accordance with the terms of the Purchase Agreement. DHHC, a subsidiary of Dignity Health, will be issued a 20% equity interest in Group Holdings Parent, which is valued at $238.0 million. The remainder of the purchase price will be paid in cash. Select will retain a majority voting interest in Group Holdings Parent following the closing of the transaction.

Concentra expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility, for which JP Morgan Chase, N.A. has provided Concentra with a debt commitment letter.

The transaction, which is expected to close in the first quarter of 2018, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

~~10. Condensed Consolidating Financial Information~~

~~Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations,~~remaining half due 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 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 September 30, 2017 and for the three and nine months ended September 30, 2016 and 2017.~~

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

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

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~September 30, 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

$
6,359

$
4,548

$
96,320

$
—

$
107,300

Accounts receivable, net

—

468,370

120,463

127,593

—

716,426

Intercompany receivables

—

1,488,527

36,784

—

(1,525,311
)(a)
—

Prepaid income taxes

2,882

—

—

—

(2,882
)(f)
—

Other current assets

10,937

30,142

16,814

22,431

—

80,324

Total Current Assets

13,892

1,993,398

178,609

246,344

(1,528,193
)
904,050

Property and equipment, net

50,736

646,672

75,315

173,340

—

946,063

Investment in affiliates

4,421,777

116,370

—

—

(4,538,147
)(b)(c)
—

Goodwill

—

2,093,354

—

674,542

—

2,767,896

Identifiable intangible assets, net

—

104,570

4,824

221,642

—

331,036

Other assets

42,852

101,285

36,285

16,144

(21,804
)(e)
174,762

Total Assets

$
4,529,257

$
5,055,649

$
295,033

$
1,332,012

$
(6,088,144
)
$
5,123,807

Liabilities and Equity

Current Liabilities:

Overdrafts

$
18,923

$
—

$
—

$
—

$
—

$
18,923

Current portion of long-term debt and notes payable

30,838

773

2,483

3,466

—

37,560

Accounts payable

13,066

82,662

24,196

13,397

—

133,321

Intercompany payables

1,488,527

36,784

—

—

(1,525,311
)(a)
—

Accrued payroll

11,186

86,257

3,931

38,028

—

139,402

Accrued vacation

3,848

55,949

12,040

17,334

—

89,171

Accrued interest

28,763

7

—

2,228

—

30,998

Accrued other

40,075

59,088

12,183

32,097

—

143,443

Income taxes payable

—

—

—

9,600

(2,882
)(f)
6,718

Total Current Liabilities

1,635,226

321,520

54,833

116,150

(1,528,193
)
599,536

Long-term debt, net of current portion

2,133,355

243

9,564

609,580

—

2,752,742

Non-current deferred tax liability

—

131,902

767

80,576

(21,804
)(e)
191,441

Other non-current liabilities

39,034

55,572

8,039

35,473

—

138,118

Total Liabilities

3,807,615

509,237

73,203

841,779

(1,549,997
)
3,681,837

Redeemable non-controlling interests

—

—

—

14,641

606,874
(d)
621,515

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

942,142

—

—

—

—

942,142

Retained earnings (accumulated deficit)

(220,500
)
1,328,453

(40,068
)
34,338

(1,322,723
)(c)(d)
(220,500
)
Subsidiary investment

—

3,217,959

261,898

437,568

(3,917,425
)(b)(d)
—

Total Select Medical Corporation Stockholder’s Equity

721,642

4,546,412

221,830

471,906

(5,240,148
)
721,642

Non-controlling interests

—

—

—

3,686

95,127
(d)
98,813

Total Equity

721,642

4,546,412

221,830

475,592

(5,145,021
)
820,455

Total Liabilities and Equity

$
4,529,257

$
5,055,649

$
295,033

$
1,332,012

$
(6,088,144
)
$
5,123,807

2022.

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

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

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

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

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

~~(f)~~ ~~Reclassification of prepaid income taxes to report net income taxes payable in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
56

$
661,676

$
174,139

$
261,295

$
—

$
1,097,166

Costs and expenses:

Cost of services

667

570,564

151,609

216,070

—

938,910

General and administrative

27,028

37

—

—

—

27,065

Bad debt expense

—

10,879

4,008

5,434

—

20,321

Depreciation and amortization

2,355

17,982

3,421

15,014

—

38,772

Total costs and expenses

30,050

599,462

159,038

236,518

—

1,025,068

Income (loss) from operations

(29,994
)
62,214

15,101

24,777

—

72,098

Other income and expense:

Intercompany interest and royalty fees

7,864

(4,194
)
(3,670
)
—

—

—

Intercompany management fees

51,241

(41,048
)
(10,193
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

4,416

15

—

—

4,431

Interest income (expense)

(30,239
)
270

(20
)
(7,699
)
—

(37,688
)

Income (loss) before income taxes

(1,128
)
21,658

1,233

17,078

—

38,841

Income tax expense (benefit)

(1,032
)
8,377

330

6,342

—

14,017

Equity in earnings of consolidated subsidiaries

18,558

399

—

—

(18,957
)(a)
—

Net income

18,462

13,680

903

10,736

(18,957
)
24,824

Less: Net income attributable to non-controlling interests

—

—

383

5,979

—

6,362

Net income attributable to Select Medical Corporation

$
18,462

$
13,680

$
520

$
4,757

$
(18,957
)
$
18,462

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Nine Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
687

$
2,038,955

$
510,530

$
779,030

$
—

$
3,329,202

Costs and expenses:

Cost of services

1,843

1,713,091

434,130

638,433

—

2,787,497

General and administrative

83,291

124

—

—

—

83,415

Bad debt expense

—

32,456

10,941

15,723

—

59,120

Depreciation and amortization

5,503

57,471

10,104

46,566

—

119,644

Total costs and expenses

90,637

1,803,142

455,175

700,722

—

3,049,676

Income (loss) from operations

(89,950
)
235,813

55,355

78,308

—

279,526

Other income and expense:

Intercompany interest and royalty fees

24,760

(13,586
)
(11,174
)
—

—

—

Intercompany management fees

176,443

(147,117
)
(29,326
)
—

—

—

Loss on early retirement of debt

(19,719
)
—

—

—

—

(19,719
)
Equity in earnings of unconsolidated subsidiaries

—

15,555

63

—

—

15,618

Non-operating loss

—

(49
)
—

—

—

(49
)
Interest income (expense)

(93,725
)
269

(104
)
(22,636
)
—

(116,196
)

Income (loss) before income taxes

(2,191
)
90,885

14,814

55,672

—

159,180

Income tax expense (benefit)

(3,230
)
41,620

943

20,260

—

59,593

Equity in earnings of consolidated subsidiaries

75,348

10,174

—

—

(85,522
)(a)
—

Net income

76,387

59,439

13,871

35,412

(85,522
)
99,587

Less: Net income attributable to non-controlling interests

—

—

3,627

19,573

—

23,200

Net income attributable to Select Medical Corporation

$
76,387

$
59,439

$
10,244

$
15,839

$
(85,522
)
$
76,387

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Nine Months Ended September 30, 2017~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
76,387

$
59,439

$
13,871

$
35,412

$
(85,522
)(a)
$
99,587

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

Distributions from unconsolidated subsidiaries

—

14,493

49

—

—

14,542

Depreciation and amortization

5,503

57,471

10,104

46,566

—

119,644

Provision for bad debts

—

32,456

10,941

15,723

—

59,120

Equity in earnings of unconsolidated subsidiaries

—

(15,555
)
(63
)
—

—

(15,618
)
Equity in earnings of consolidated subsidiaries

(75,348
)
(10,174
)
—

—

85,522
(a)
—

Loss on extinguishment of debt

6,527

—

—

—

—

6,527

Loss (gain) on sale or disposal of assets and businesses

(8
)
(4,824
)
(4,687
)
20

—

(9,499
)
Stock compensation expense

13,445

—

—

782

—

14,227

Amortization of debt discount, premium and issuance costs

6,113

—

—

2,433

—

8,546

Deferred income taxes

5,014

—

—

(11,140
)
—

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

Accounts receivable

—

(137,255
)
(33,634
)
(30,625
)
—

(201,514
)
Other current assets

1,016

3,816

(6,731
)
(778
)
—

(2,677
)
Other assets

1,633

(3,709
)
3,044

439

—

1,407

Accounts payable

2,375

(616
)
1,373

781

—

3,913

Accrued expenses

164

(2,075
)
11,181

9,482

—

18,752

Income taxes

3,776

—

—

15,365

—

19,141

Net cash provided by (used in) operating activities

46,597

(6,533
)
5,448

84,460

—

129,972

Investing activities

Business combinations, net of cash acquired

—

(3,356
)
(295
)
(15,720
)
—

(19,371
)
Purchases of property and equipment

(26,350
)
(102,150
)
(23,644
)
(21,656
)
—

(173,800
)
Investment in businesses

—

(11,374
)
—

—

—

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

8

15,007

19,537

3

—

34,555

Net cash used in investing activities

(26,342
)
(101,873
)
(4,402
)
(37,373
)
—

(169,990
)

Financing activities

Borrowings on revolving facilities

805,000

—

—

—

—

805,000

Payments on revolving facilities

(705,000
)
—

—

—

—

(705,000
)
Proceeds from term loans

1,139,487

—

—

—

—

1,139,487

Payments on term loans

(1,153,502
)
—

—

(23,065
)
—

(1,176,567
)
Revolving facility debt issuance costs

(4,392
)
—

—

—

—

(4,392
)
Borrowings of other debt

21,572

—

3,232

2,767

—

27,571

Principal payments on other debt

(10,122
)
(306
)
(2,150
)
(2,534
)
—

(15,112
)
Dividends paid to Holdings

(3,603
)
—

—

—

—

(3,603
)
Equity investment by Holdings

1,634

—

—

—

—

1,634

Intercompany

(101,888
)
108,724

(6,836
)
—

—

—

Proceeds from issuance of non-controlling interests

—

—

8,986

—

—

8,986

Repayments of overdrafts

(20,439
)
—

—

—

—

(20,439
)
Purchase of non-controlling interests

—

(120
)
—

—

—

(120
)
Distributions to non-controlling interests

—

—

(4,786
)
(4,370
)
—

(9,156
)
Net cash provided by (used in) financing activities

(31,253
)
108,298

(1,554
)
(27,202
)
—

48,289

Net increase (decrease) in cash and cash equivalents

(10,998
)
(108
)
(508
)
19,885

—

8,271

Cash and cash equivalents at beginning of period

11,071

6,467

5,056

76,435

—

99,029

Cash and cash equivalents at end of period

$
73

$
6,359

$
4,548

$
96,320

$
—

$
107,300

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

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~December 31, 2016~~

~~(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

$
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

25,578

—

(1,599,538
)(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

138,673

216,231

(1,599,538
)
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

—

106,439

2,693

231,430

—

340,562

Other assets

45,636

84,803

53,954

16,235

(26,684
)(e)
173,944

Total Assets

$
4,617,699

$
4,952,756

$
246,189

$
1,313,176

$
(6,209,194
)
$
4,920,626

Liabilities and Equity

Current Liabilities:

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

25,578

—

—

(1,599,538
)(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

314,717

43,274

102,186

(1,599,538
)
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
)(e)
199,078

Other non-current liabilities

42,824

53,537

5,727

34,432

—

136,520

Total Liabilities

3,801,974

502,707

59,282

854,825

(1,626,222
)
3,592,566

Redeemable non-controlling interests

—

—

—

15,493

406,666
(d)
422,159

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

925,111

—

—

—

—

925,111

Retained earnings (accumulated deficit)

(109,386
)
1,269,009

(32,826
)
2,723

(1,238,906
)(c)(d)
(109,386
)
Subsidiary investment

—

3,181,040

219,733

436,786

(3,837,559
)(b)(d)
—

Total Select Medical Corporation Stockholder’s Equity

815,725

4,450,049

186,907

439,509

(5,076,465
)
815,725

Non-controlling interests

—

—

—

3,349

86,827
(d)
90,176

Total Equity

815,725

4,450,049

186,907

442,858

(4,989,638
)
905,901

Total Liabilities and Equity

$
4,617,699

$
4,952,756

$
246,189

$
1,313,176

$
(6,209,194
)
$
4,920,626

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

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

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

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

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended September 30, 2016~~

~~(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

$
85

$
655,663

$
139,540

$
258,507

$
—

$
1,053,795

Costs and expenses:

Cost of services

626

569,167

133,480

212,430

—

915,703

General and administrative

26,967

121

—

—

—

27,088

Bad debt expense

—

9,662

2,633

5,382

—

17,677

Depreciation and amortization

1,411

17,335

3,141

15,278

—

37,165

Total costs and expenses

29,004

596,285

139,254

233,090

—

997,633

Income (loss) from operations

(28,919
)
59,378

286

25,417

—

56,162

Other income and expense:

Intercompany interest and royalty fees

8,458

(4,884
)
(3,574
)
—

—

—

Intercompany management fees

33,693

(25,880
)
(7,813
)
—

—

—

Loss on early retirement of debt

—

—

—

(10,853
)
—

(10,853
)
Equity in earnings of unconsolidated subsidiaries

—

5,238

30

—

—

5,268

Non-operating gain (loss)

(6,963
)
5,935

—

—

—

(1,028
)
Interest income (expense)

(34,424
)
137

(31
)
(10,164
)
—

(44,482
)

Income (loss) before income taxes

(28,155
)
39,924

(11,102
)
4,400

—

5,067

Income tax expense (benefit)

5,701

(7,284
)
1,484

1,174

—

1,075

Equity in earnings (losses) of consolidated subsidiaries

40,327

(7,877
)
—

—

(32,450
)(a)
—

Net income (loss)

6,471

39,331

(12,586
)
3,226

(32,450
)
3,992

Less: Net income (loss) attributable to non-controlling interests

—

(6
)
(4,804
)
2,331

—

(2,479
)

Net income (loss) attributable to Select Medical Corporation

$
6,471

$
39,337

$
(7,782
)
$
895

$
(32,450
)
$
6,471

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Nine Months Ended September 30, 2016~~

~~(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

$
522

$
2,095,102

$
379,880

$
764,252

$
—

$
3,239,756

Costs and expenses:

Cost of services

1,576

1,780,606

340,254

632,514

—

2,754,950

General and administrative

81,198

28

—

—

—

81,226

Bad debt expense

—

30,665

6,691

14,235

—

51,591

Depreciation and amortization

3,898

49,983

8,436

45,570

—

107,887

Total costs and expenses

86,672

1,861,282

355,381

692,319

—

2,995,654

Income (loss) from operations

(86,150
)
233,820

24,499

71,933

—

244,102

Other income and expense:

Intercompany interest and royalty fees

22,793

(12,314
)
(10,479
)
—

—

—

Intercompany management fees

127,832

(108,007
)
(19,825
)
—

—

—

Loss on early retirement of debt

(773
)
—

—

(10,853
)
—

(11,626
)
Equity in earnings of unconsolidated subsidiaries

—

14,384

82

—

—

14,466

Non-operating gain

33,932

3,162

—

—

—

37,094

Interest income (expense)

(97,239
)
293

(71
)
(30,645
)
—

(127,662
)

Income (loss) before income taxes

395

131,338

(5,794
)
30,435

—

156,374

Income tax expense

13,840

24,701

2,091

10,953

—

51,585

Equity in earnings (losses) of consolidated subsidiaries

108,684

(6,004
)
—

—

(102,680
)(a)
—

Net income (loss)

95,239

100,633

(7,885
)
19,482

(102,680
)
104,789

Less: Net income (loss) attributable to non-controlling interests

—

27

(2,109
)
11,632

—

9,550

Net income (loss) attributable to Select Medical Corporation

$
95,239

$
100,606

$
(5,776
)
$
7,850

$
(102,680
)
$
95,239

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

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Nine Months Ended September 30, 2016~~

~~(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

$
95,239

$
100,633

$
(7,885
)
$
19,482

$
(102,680
)(a)
$
104,789

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

Distributions from unconsolidated subsidiaries

—

16,075

70

—

—

16,145

Depreciation and amortization

3,898

49,983

8,436

45,570

—

107,887

Provision for bad debts

—

30,665

6,691

14,235

—

51,591

Equity in earnings of unconsolidated subsidiaries

—

(14,384
)
(82
)
—

—

(14,466
)
Equity in earnings of consolidated subsidiaries

(108,684
)
6,004

—

—

102,680
(a)
—

Loss on extinguishment of debt

773

—

—

10,853

—

11,626

Loss (gain) on sale or disposal of assets and businesses

(33,707
)
(8,367
)
185

(21
)
—

(41,910
)
Gain on sale of equity investment

—

(241
)
—

—

—

(241
)
Impairment of equity investment

—

5,339

—

—

—

5,339

Stock compensation expense

12,347

—

—

577

—

12,924

Amortization of debt discount, premium and issuance costs

9,289

—

—

2,556

—

11,845

Deferred income taxes

(902
)
—

—

(12,186
)
—

(13,088
)
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable

—

6,288

(27,966
)
(19,098
)
—

(40,776
)
Other current assets

(1,153
)
9,745

(6,113
)
9,615

—

12,094

Other assets

(3,881
)
53,100

(53,961
)
9,888

—

5,146

Accounts payable

(239
)
(22,529
)
487

4,529

—

(17,752
)
Accrued expenses

19,692

36,051

(214
)
(2,533
)
—

52,996

Due to third party payors

—

15,019

(3,954
)
—

—

11,065

Income taxes

3,230

—

—

2,317

—

5,547

Net cash provided by (used in) operating activities

(4,098
)
283,381

(84,306
)
85,784

—

280,761

Investing activities

Business combinations, net of cash acquired

(406,305
)
(3,523
)
—

(4,403
)
—

(414,231
)
Purchases of property and equipment

(13,315
)
(68,609
)
(25,689
)
(10,647
)
—

(118,260
)
Investment in businesses

—

(3,140
)
—

—

—

(3,140
)
Proceeds from sale of assets, businesses, and equity investment

63,418

9,205

6

—

—

72,629

Net cash used in investing activities

(356,202
)
(66,067
)
(25,683
)
(15,050
)
—

(463,002
)

Financing activities

Borrowings on revolving facilities

420,000

—

—

—

—

420,000

Payments on revolving facilities

(540,000
)
—

—

(5,000
)
—

(545,000
)
Proceeds from term loans

600,127

—

—

195,217

—

795,344

Payments on term loans

(228,962
)
—

—

(205,880
)
—

(434,842
)
Borrowings of other debt

8,748

—

12,237

2,816

—

23,801

Principal payments on other debt

(10,971
)
(528
)
(1,813
)
(2,165
)
—

(15,477
)
Dividends paid to Holdings

(1,939
)
—

—

—

—

(1,939
)
Equity investment by Holdings

1,488

—

—

—

—

1,488

Intercompany

116,274

(214,053
)
97,779

—

—

—

Proceeds from issuance of non-controlling interests

—

—

11,846

—

—

11,846

Repayments of overdrafts

(8,464
)
—

—

—

—

(8,464
)
Purchase of non-controlling interests

—

(1,530
)
—

—

—

(1,530
)
Distributions to non-controlling interests

—

(217
)
(6,545
)
(2,436
)
—

(9,198
)
Net cash provided by (used in) financing activities

356,301

(216,328
)
113,504

(17,448
)
—

236,029

Net increase (decrease) in cash and cash equivalents

(3,999
)
986

3,515

53,286

—

53,788

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

$
71

$
4,692

$
4,140

$
59,320

$
—

$
68,223

~~(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, including the potential impact of the COVID-19 pandemic on those financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.

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

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

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

· the impact of the Bipartisan Budget Act of 2013 (the “BBA of 2013”), which established payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and 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 facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;~~


•	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 pending acquisition of U.S. HealthWorks~~our acquisitions and our ability to realize anticipated synergies;

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

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

shortages in qualified nurses, therapists, physicians, or other licensed providers, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, could increase our operating costs significantly or limit our ability to staff our facilities;

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

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

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

a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and

· reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and

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,~~2019, as such risk factors may be updated from time to time in our periodic filings with the ~~SEC.~~

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

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

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

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of ~~specialty~~critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational ~~medicine~~health centers in the United States. As of ~~September 30, 2017,~~March 31, 2020, we had operations in 4647 states and the District of Columbia. ~~As of September 30, 2017, we~~We operated ~~123 specialty~~101 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and ~~1,604~~1,753 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, ~~which is operated through~~ a joint venture subsidiary, operated ~~312 medical~~523 occupational health centers in 3841 states as of ~~September 30, 2017.~~March 31, 2020. 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,~~(“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and ~~Concentra.~~the Concentra segment. We had net operating revenues of ~~$3,329.2~~$1,414.6 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2020. Of this total, we earned approximately ~~54%~~35% of our net operating revenues from our ~~specialty hospitals~~critical illness recovery hospital segment, approximately ~~23%~~13% from our rehabilitation hospital segment, approximately 18% from our outpatient rehabilitation segment, and approximately ~~23%~~28% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our ~~specialty~~critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. ~~These patients have specialized needs, with serious and often complex medical conditions.~~ Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of ~~medical~~occupational health centers that provide workers’ compensation injury care, physical therapy, and ~~contract~~consumer health services ~~provided~~as well as onsite clinics located at employer worksites ~~and~~that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs ~~CBOCs that deliver occupational medicine, physical therapy, veteran’s healthcare,~~CBOCs.

During the quarter ended June 30, 2019, we began reporting the net operating revenues and ~~consumer health services.~~

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

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under ~~accounting principles generally accepted in the United States of America (“GAAP”).~~GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying ~~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, non-operating~~ gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

(in thousands)

Net income

$
3,992

$
24,824

$
104,789

$
99,587

Income tax expense

1,075

14,017

51,585

59,593

Interest expense

44,482

37,688

127,662

116,196

Non-operating loss (gain)

1,028

—

(37,094
)
49

Equity in earnings of unconsolidated subsidiaries

(5,268
)
(4,431
)
(14,466
)
(15,618
)
Loss on early retirement of debt

10,853

—

11,626

19,719

Income from operations

56,162

72,098

244,102

279,526

Stock compensation expense:

Included in general and administrative

3,932

4,079

10,771

11,603

Included in cost of services

818

878

2,153

2,624

Depreciation and amortization

37,165

38,772

107,887

119,644

Physiotherapy acquisition costs

—

—

3,236

—

Adjusted EBITDA

$
98,077

$
115,827

$
368,149

$
413,397

EBITDA:

Three Months Ended March 31,
2019 2020
(in thousands)
Net income $ 53,344
$ 70,448

Income tax expense 18,467
21,912

Interest expense 50,811
46,107

Gain on sale of businesses (6,532 ) (7,201 )
Equity in earnings of unconsolidated subsidiaries (4,366 ) (2,588 )
Income from operations 111,724
128,678

Stock compensation expense:

Included in general and administrative 4,748
5,437

Included in cost of services 1,507
1,466

Depreciation and amortization 52,138
51,752

Adjusted EBITDA $ 170,117
$ 187,333

Effects of the COVID-19 Pandemic on our Results of Operations

The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We are a healthcare service provider that provides patient care services in both inpatient and outpatient settings. We have provided certain additional performance metrics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the one month ended March 31, 2020, including our (i) net operating revenues and Adjusted EBITDA for the two months ended February 29, 2020 and February 28, 2019, (ii) net operating revenues and Adjusted EBITDA for the one month ended March 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the three months ended March 31, 2020 and 2019, and (iv) certain operating statistics for each of the aforementioned periods. Please refer to our risk factors discussed in Item 1A “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion.

Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key part of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which impact our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor.

Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. Additionally, elective surgeries at hospitals and other facilities have been suspended which is reducing the need for inpatient rehabilitation services.

Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. These actions continued to expand throughout March and by the end of March, most states implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits combined with recommendations of social distancing and the other items noted above have had significant effects on our patient visit volumes. As a result, we have temporarily consolidated the operations of some of our clinics by transferring staff and patients.

Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. These actions continued to expand throughout March. By the end of March, most states implemented significant restrictions on businesses. These actions have had significant effects on our patient visit volumes as employers have furloughed workforces and temporarily ceased operations or have significantly reduced their operations. As a result, we have temporarily consolidated the operations of some of our centers by transferring staff and patients.

We provided below certain performance measures and operating statistics used by management to help illustrate the impact of the COVID-19 pandemic on our operating results. For the quarter ended March 31, 2020, we defined the pre-COVID-19 outbreak period as the two months ended February 29, 2020, and the post-COVID-19 outbreak period as the one month ended March 31, 2020. We provided prior year comparative data for the pre-COVID-19 and post-COVID-19 outbreak periods presented. The following performance measures and operating statistics should be considered in conjunction with the operating results for the full quarter ended March 31, 2020. The performance measures and operating statistics presented for the two months ended February 29, 2020 and the one month ended March 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter ended March 31, 2020. The same is true for the prior year comparative data.

Two Months Ended February One Month Ended March Three Months Ended March
2019 2020
%
Change
2019 2020
%
Change
2019 2020
Selected financial data:
Net operating revenues:

Critical illness recovery hospital $ 295,385
$ 328,613
11.2 % $ 162,149
$ 171,908
6.0 % $ 457,534
$ 500,521
Rehabilitation hospital 98,695
122,363
24.0
55,863
59,656
6.8
154,558
182,019
Outpatient rehabilitation 161,758
179,163
10.8
85,147
76,086
(10.6 ) 246,905
255,249
Concentra 259,816
274,926
5.8
136,505
123,609
(9.4 ) 396,321
398,535
Other⁽¹⁾
38,532
54,283
40.9
30,781
24,025
(21.9 ) 69,313
78,308
Total Company $ 854,186
$ 959,348
12.3 % $ 470,445
$ 455,284
(3.2 )% $ 1,324,631
$ 1,414,632
Income (loss) from operations:
Critical illness recovery hospital $ 36,355
$ 48,395
33.1 % $ 25,192
$ 27,839
10.5 % $ 61,547
$ 76,234
Rehabilitation hospital 11,605
22,855
96.9
7,790
8,827
13.3
19,395
31,682
Outpatient rehabilitation 12,623
18,289
44.9
9,336
1,615
(82.7 ) 21,959
19,904
Concentra 23,373
29,624
26.7
17,214
8,188
(52.4 ) 40,587
37,812
Other⁽¹⁾
(22,432 ) (24,868 ) (10.9 ) (9,332 ) (12,086 ) (29.5 ) (31,764 ) (36,954 )
Total Company $ 61,524
$ 94,295
53.3 % $ 50,200
$ 34,383
(31.5 )% $ 111,724
$ 128,678
Adjusted EBITDA:
Critical illness recovery hospital $ 44,035
$ 56,648
28.6 % $ 28,963
$ 31,922
10.2 % $ 72,998
$ 88,570
Rehabilitation hospital 15,908
27,448
72.5
9,889
11,121
12.5
25,797
38,569
Outpatient rehabilitation 17,265
23,062
33.6
11,726
4,060
(65.4 ) 28,991
27,122
Concentra 40,785
45,537
11.7
25,473
15,929
(37.5 ) 66,258
61,466
Other⁽¹⁾
(17,278 ) (19,281 ) (11.6 ) (6,649 ) (9,113 ) (37.1 ) (23,927 ) (28,394 )
Total Company $ 100,715
$ 133,414
32.5 % $ 69,402
$ 53,919
(22.3 )% $ 170,117
$ 187,333
Adjusted EBITDA margins:
Critical illness recovery hospital 14.9 % 17.2 % 17.9 % 18.6 % 16.0 % 17.7 %
Rehabilitation hospital 16.1
22.4
17.7
18.6
16.7
21.2
Outpatient rehabilitation 10.7
12.9
13.8
5.3
11.7
10.6
Concentra 15.7
16.6
18.7
12.9
16.7
15.4
Other⁽¹⁾
N/M
N/M
N/M
N/M
N/M
N/M
Total Company 11.8 % 13.9 % 14.8 % 11.8 % 12.8 % 13.2 %

Two Months Ended February One Month Ended March Three Months Ended March
2019 2020
%
Change
2019 2020
%
Change
2019 2020
Operating statistics:
Critical illness recovery hospital:
Admissions 6,303
6,427
2.0 % 3,153
3,106
(1.5 )% 9,456
9,533
Patient days 167,044
178,627
6.9 % 91,085
91,831
0.8 % 258,129
270,458
Occupancy rate 70 % 70 % 73 % 70 % 71 % 70 %
Rehabilitation hospital:
Admissions 3,758
4,412
17.4 % 2,078
1,921
(7.6 )% 5,836
6,333
Patient days 52,876
63,924
20.9 % 29,940
30,644
2.4 % 82,816
94,568
Occupancy rate 75 % 81 % 78 % 76 % 76 % 79 %
Outpatient rehabilitation:
Number of visits 1,345,617
1,496,232
11.2 % 708,866
626,433
(11.6 )% 2,054,483
2,122,665
Concentra:
Number of visits 1,904,663
1,997,810
4.9 % 1,006,944
879,585
(12.6 )% 2,911,607
2,877,395

_______________________________________________________________________________


N/M —	Not meaningful.


(1)	Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries.

Please refer to “Summary Financial Results

~~Three Months Ended September 30, 2017~~

” and “Results of Operations” for further discussion of our segment performance measures for the three months ended March 31, 2019 and 2020. Please refer to “Operating Statistics” for further discussion regarding the uses and calculations of the metrics provided above, as well as the operating statistics data for each segment for the three months ended March 31, 2019 and 2020.

The COVID-19 pandemic and its adverse effects have become more prevalent throughout April 2020, and we are experiencing more pronounced disruptions in our outpatient rehabilitation and Concentra operations. The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could materially adversely impact our business, results of operations, and overall financial performance in future periods. See “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

Other Significant Events

Purchase of Concentra Interest

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

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

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

Summary Financial Results

For the three months ended ~~September 30, 2017,~~March 31, 2020, our net operating revenues increased ~~4.1%~~6.8% to ~~$1,097.2~~$1,414.6 million, compared to ~~$1,053.8~~$1,324.6 million for the three months ended ~~September 30, 2016.~~March 31, 2019. Income from operations increased ~~28.4%~~15.2% to ~~$72.1~~$128.7 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$56.2~~$111.7 million for the three months ended ~~September 30, 2016.~~ March 31, 2019.

Net income increased 32.1% to ~~$24.8~~$70.4 million for the three months ended ~~September 30,~~ ~~2017,~~March 31, 2020, compared to ~~$4.0~~$53.3 million for the three months ended ~~September 30, 2016.~~March 31, 2019. Net income ~~for the three months ended September 30, 2016~~ included a pre-tax ~~loss~~gain on ~~early retirement~~sale of ~~debt~~businesses of ~~$10.9~~$7.2 million and ~~a pre-tax non-operating loss of $1.0 million. Our Adjusted EBITDA increased 18.1% to $115.8~~$6.5 million for the three months ended ~~September 30, 2017, compared~~March 31, 2020 and 2019, respectively.

Adjusted EBITDA increased 10.1% to ~~$98.1~~$187.3 million for the three months ended ~~September 30, 2016.~~March 31, 2020, compared to $170.1 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin was ~~10.6%~~13.2% for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~9.3%~~12.8% for the three months ended ~~September 30, 2016.~~

~~Nine Months Ended September 30, 2017~~

~~For~~March 31, 2019.

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



	Three Months Ended March 31, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	500,521		$	182,019		$	255,249		$	398,535		$	78,308		$	1,414,632
Operating expenses	411,951			143,450			228,127			337,836			112,838			1,234,202
Depreciation and amortization	12,336			6,887			7,218			22,887			2,424			51,752
Income (loss) from operations	$	76,234		$	31,682		$	19,904		$	37,812		$	(36,954	)	$	128,678
Depreciation and amortization	12,336			6,887			7,218			22,887			2,424			51,752
Stock compensation expense	—			—			—			767			6,136			6,903
Adjusted EBITDA	$	88,570		$	38,569		$	27,122		$	61,466		$	(28,394	)	$	187,333
Adjusted EBITDA margin	17.7		%	21.2		%	10.6		%	15.4		%	N/M			13.2		%



	Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues⁽¹⁾	$	457,534		$	154,558		$	246,905		$	396,321		$	69,313		$	1,324,631
Operating expenses⁽¹⁾	384,536			128,761			217,914			330,830			98,728			1,160,769
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138
Income (loss) from operations	$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138
Stock compensation expense	—			—			—			767			5,488			6,255
Adjusted EBITDA	$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)	$	170,117
Adjusted EBITDA margin	16.0		%	16.7		%	11.7		%	16.7		%	N/M			12.8		%

The following table summarizes changes in segment performance measures for the ~~nine~~three months ended ~~September 30, 2017, our net operating revenues increased 2.8% to $3,329.2 million,~~March 31, 2020, compared to $~~3,239.8 million for~~ the ~~nine~~three months ended September 30, 2016. Income from operations increased 14.5% to $279.5 million for the nine months ended September 30, 2017, compared to $244.1 million for the nine months ended September 30, 2016. Net income was $99.6 million for the nine months ended September 30, 2017, which includes pre-tax losses on early retirement of debt of $19.7 million. Net income was $104.8 million for the nine months ended September 30, 2016, which included pre-tax non-operating gains of $37.1 million and pre-tax losses on early retirement of debt of $11.6 million. Our Adjusted EBITDA increased 12.3% to $413.4 million for the nine months ended September 30, 2017, compared to $368.1 million for the nine months ended September 30, 2016. Our Adjusted EBITDA margin was 12.4% for the nine months ended September 30, 2017, compared to 11.4% for the nine months ended September 30, 2016.

~~Implementation of Patient Criteria~~

~~As discussed below under “~~~~Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria~~,” our LTCHs transitioned to new Medicare regulations, which established 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 trends 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

65
%
1.27

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.

From 2015 to 2017, 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.

~~Significant Events~~

~~Refinancing~~

On March 6, 2017, 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 under the new Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, ~~2021, and the revolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and (ii) pay fees and expenses in connection with the refinancing.~~

~~Pending Acquisition of U.S. HealthWorks~~

On October 23, 2017, Select announced that Concentra Group Holdings entered into a Purchase Agreement dated October 22, 2017 with Concentra, Group Holdings Parent, U.S. HealthWorks, and DHHC. Pursuant to the terms of the Purchase Agreement, Concentra will acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.

In connection with the closing of the transaction, it is expected that Concentra Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Concentra Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above will be exchanged for membership interests in Group Holdings Parent.

2019:

Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
Change in net operating revenues 9.4 % 17.8 % 3.4 % 0.6 % 13.0 % 6.8 %
Change in income from operations 23.9 % 63.4 % (9.4 )% (6.8 )% (16.3 )% 15.2 %
Change in Adjusted EBITDA 21.3 % 49.5 % (6.4 )% (7.2 )% (18.7 )% 10.1 %

_______________________________________________________________________________


N/M —	Not meaningful.


(1)	For the three months ended March 31, 2019, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, filed with the SEC on February ~~23, 2017,~~20, 2020, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately ~~30%~~26% of our net operating revenues for ~~both~~ the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020, and 26% of our net operating revenues for the year ended December 31, ~~2016.~~

2019.

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

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


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


ii.	Long-term care hospitals (“LTCHs”), and hospitals seeking LTCH classification, can exclude patient stays from the greater-than-25-day average length of stay requirement where the patient was admitted or discharged to meet the demands of the emergency.


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


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


v.	Hospitals can operate temporary expansion locations without meeting the provider-based entity requirements or the hospital CoPs that continue to apply during the emergency. This waiver also allows hospitals to change the status of their current provider-based department locations to meet patient needs as part of the state or local pandemic plan.


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


vii.	The HHS Office of the Inspector General (“OIG”) waived sanctions under the physician self-referral law (i.e., Stark law) for patient referrals and claims related to the emergency. The OIG will also exercise enforcement discretion to not impose administrative sanctions under the federal anti-kickback statute for many payments covered by the Stark law waivers.

CMS also approved 53 state Medicaid program emergency waivers, 39 state plan amendments, 16 COVID-19 pandemic related Medicaid Disaster Amendments and one CHIP Disaster Amendment. CMS will consider specific waiver requests from providers and suppliers. We have submitted one or more specific waiver requests to make it easier for our operators or referral partners to treat COVID-19 patients, and we may submit others in the future.

Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS has waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) can receive telehealth services, including in their homes, beginning on March 6, 2020. CMS issued additional waivers to permit more than 80 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.

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

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


ii.	Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers as loans to be repaid after 120 days.


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

iv.

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


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

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

Medicare Reimbursement of LTCH Services

~~There have been~~

The following is a summary of significant regulatory changes ~~affecting~~to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as LTCHs, ~~that~~which have affected our ~~net operating revenues~~results of operations, as well as the policies and ~~in some cases, caused us to change~~payment rates that may affect our ~~operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures~~future results of ~~CMS. All~~operations. 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 are generally published in April or May, finalized in August, and effective on October 1st of each year.~~

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

Fiscal Year ~~2016~~2019. On August 17, ~~2015,~~2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year ~~2016~~2019 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2015~~2018 through September 30, ~~2016)~~2019). Certain errors in the final rule were corrected in a document published October 3, 2018. The standard federal rate was set at ~~$41,763,~~$41,559, an increase from the standard federal rate applicable during fiscal year ~~2015~~2018 of ~~$41,044.~~$41,415. The update to the standard federal rate for fiscal year ~~2016~~2019 included a market basket increase of ~~2.4%~~2.9%, 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.

~~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%0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at ~~$21,943, an increase~~$27,121, a decrease from the fixed-loss amount in the ~~2016~~2018 fiscal year of ~~$16,423.~~$27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at ~~$23,573, an increase~~$25,743, a decrease from the fixed-loss amount in the ~~2016~~2018 fiscal year of ~~$22,538.~~

$26,537.

Fiscal Year ~~2018~~2020. On August ~~14, 2017,~~16, 2019, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year ~~2018~~2020 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2017~~2019 through September 30, ~~2018)~~2020). Certain errors in the final rule were corrected in a ~~final rule~~document published October ~~4, 2017.~~8, 2019. The standard federal rate was set at ~~$41,415, a decrease~~$42,678, an increase from the standard federal rate applicable during fiscal year ~~2017~~2019 of ~~$42,476.~~$41,559. The update to the standard federal rate for fiscal year ~~2018~~2020 included a market basket increase of ~~2.7%~~2.9%, less a productivity adjustment of ~~0.6%, and less a reduction of 0.75% mandated by the ACA. As noted below, the update to the~~0.4%. The standard federal rate ~~for fiscal year 2018 is impacted further by~~also included an area wage budget neutrality factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of 0.999858 in connection with the ~~Medicare Access and CHIP Reauthorization Act~~elimination of ~~2015, which limits~~ the ~~update for fiscal year 2018 to 1.0%.~~25 Percent Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at ~~$27,381, an increase~~$26,778, a decrease from the fixed-loss amount in the ~~2017~~2019 fiscal year of ~~$21,943.~~$27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at ~~$26,537,~~$26,552, an increase from the fixed-loss amount in the ~~2017~~2019 fiscal year of ~~$23,573.~~

~~Patient Criteria~~

~~The BBA of 2013, enacted December 26, 2013, establishes a dual-rate LTCH-PPS for Medicare patients discharged from an LTCH. Specifically, for Medicare patients discharged~~$25,743. For LTCH discharges occurring in cost reporting periods beginning ~~on or after October 1, 2015, LTCHs will be reimbursed at the LTCH-PPS standard federal~~in FY 2020, site neutral payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged 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,~~will begin to be paid atfully on the ~~LTCH-PPS standard federal~~site neutral payment rate, rather than the ~~patient’s discharge from~~transitional blended rate. However, the ~~LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria,~~CARES Act waives 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~~site neutral payment rate for ~~those~~ patients ~~not paid at the LTCH-PPS standard federal payment rate. During the transition~~admitted during such coronavirus emergency 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 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 a market basket payment adjustment to LTCHs. In fiscal years 2018 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 payment 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 the prior year.

~~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. 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, 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 within hospitals (“HIHs”) 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 HIHs 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 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 an adverse financial impact on the net operating revenues and profitability of many of these hospitals for discharges on or after October 1, 2018.

~~Short Stay Outlier Policy~~

CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” SSO cases are 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.

~~For fiscal year 2018, CMS adopted changes~~response 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. Under this policy,public health emergency, 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 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.

discussed above.

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

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

Fiscal Year ~~2016~~2019. On August 6, ~~2015,~~2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year ~~2016~~2019 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2015~~2018 through September 30, ~~2016)~~2019). The standard payment conversion factor for discharges for fiscal year ~~2016~~2019 was set at ~~$15,478,~~$16,021, an increase from the standard payment conversion factor applicable during fiscal year ~~2015~~2018 of ~~$15,198.~~$15,838. The update to the standard payment conversion factor for fiscal year ~~2016~~2019 included a market basket increase of ~~2.4%~~2.9%, less a productivity adjustment of ~~0.5%~~0.8%, and less a reduction of ~~0.2%~~0.75% mandated by the ACA. CMS ~~decreased~~increased the outlier threshold amount for fiscal year ~~2016~~2019 to ~~$8,658~~$9,402 from ~~$8,848~~$8,679 established in the final rule for fiscal year ~~2015.~~

2018.

Fiscal Year ~~2017~~.2020. On August ~~5, 2016,~~8, 2019, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year ~~2017~~2020 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2016~~2019 through September 30, ~~2017)~~2020). The standard payment conversion factor for discharges for fiscal year ~~2017~~2020 was set at ~~$15,708,~~$16,489, an increase from the standard payment conversion factor applicable during fiscal year ~~2016~~2019 of ~~$15,478.~~$16,021. The update to the standard payment conversion factor for fiscal year ~~2017~~2020 included a market basket increase of ~~2.7%~~2.9%, less a productivity adjustment of ~~0.3%, and less a reduction of 0.75% mandated by the ACA.~~0.4%. CMS decreased the outlier threshold amount for fiscal year ~~2017~~2020 to ~~$7,984~~$9,300 from ~~$8,658~~$9,402 established in the final rule for fiscal year ~~2016.~~

2019.

Fiscal Year ~~2018~~.2021. On ~~August 3, 2017,~~April 16, 2020, CMS ~~published~~released an advanced copy of the ~~final rule updating~~proposed policies and payment rates for the IRF-PPS for fiscal year ~~2018~~2021 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2017~~2020 through September 30, ~~2018)~~2021). The standard payment conversion factor for discharges for fiscal year ~~2018 was~~2021 would be set at ~~$15,838,~~$16,847, an increase from the standard payment conversion factor applicable during fiscal year ~~2017~~2020 of ~~$15,708.~~$16,489. The update to the standard payment conversion factor for fiscal year ~~2018 included~~2021, if adopted, would include a market basket increase of ~~2.6%~~2.9%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. As noted below, the standard payment conversion factor for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%0.4%. CMS ~~increased~~proposed to decrease the outlier threshold amount for fiscal year ~~2018~~2021 to ~~$8,679~~$8,102 from ~~$7,984~~$9,300 established in the final rule for fiscal year ~~2017.~~

~~Medicare Market Basket Adjustments~~

The ACA instituted a market basket payment adjustment for IRFs. In fiscal years 2018 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 payment 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 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 services 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 codes from three major multiple trauma lists in the specified combinations.

2020.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

Outpatient rehabilitation providers enroll in Medicare as a rehabilitation agency, a clinic, or a public health agency. The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update ~~will be~~was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the ~~Merit-Based~~Merit‑Based Incentive Payment System (“MIPS”). In 2019, CMS added physical and occupational therapists to the list of MIPS eligible clinicians. For these therapists in private practice, payments under the fee schedule are subject to adjustment in a later year based on their performance in MIPS according to established performance standards. Calendar year 2021 is the first year that payments are adjusted, based upon the therapist’s performance under MIPS in 2019. Providers in facility-based outpatient therapy settings are excluded from MIPS eligibility and therefore not subject to this payment adjustment. For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years, eligible professionals participating in APMs ~~that~~who meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.

Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements a provider’s 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~~eligible clinicians who receive a significant share of their revenues through an advanced APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. ~~The specifics~~

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

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

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

PTA time of the service, allowing the separate reporting, on two different claim lines, of the number of units to which the new modifiers apply and the number of units to which the modifiers do not apply.

Operating Statistics

The following table sets forth operating statistics for each of our ~~operating~~ segments for ~~each of~~ the periods presented. The operating statistics reflect data for the period of time we managed these ~~operations:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

Specialty hospitals data:(1)

Number of hospitals owned—start of period

116

114

118

115

Number of hospitals acquired

1

—

4

1

Number of hospital start-ups

1

2

2

2

Number of hospitals closed/sold

(3
)
(2
)
(9
)
(4
)
Number of hospitals owned—end of period

115

114

115

114

Number of hospitals managed—end of period

8

9

8

9

Total number of hospitals (all)—end of period

123

123

123

123

Long term acute care hospitals

104

101

104

101

Rehabilitation hospitals

19

22

19

22

Available licensed beds(2)

5,208

5,189

5,208

5,189

Admissions(2)

12,586

13,728

39,541

41,314

Patient days(2)

296,202

316,170

951,292

950,419

Average length of stay (days)(2)

24

23

24

23

Net revenue per patient day(2)(3)

$
1,642

$
1,676

$
1,651

$
1,707

Occupancy rate(2)

62
%
66
%
67
%
67
%
Percent patient days—Medicare(2)

53
%
53
%
55
%
54
%

Outpatient rehabilitation data:

Number of clinics owned—start of period

1,435

1,441

896

1,445

Number of clinics acquired

3

4

546

5

Number of clinic start-ups

7

3

20

17

Number of clinics closed/sold

(8
)
(13
)
(25
)
(32
)
Number of clinics owned—end of period

1,437

1,435

1,437

1,435

Number of clinics managed—end of period

166

169

166

169

Total number of clinics (all)—end of period

1,603

1,604

1,603

1,604

Number of visits(2)

2,052,678

1,986,213

5,751,562

6,168,763

Net revenue per visit(2)(4)

$
102

$
104

$
102

$
103

Concentra data:

Number of centers owned—start of period

301

315

300

300

Number of centers acquired

1

—

3

11

Number of center start-ups

—

—

—

4

Number of centers closed/sold

(1
)
(3
)
(2
)
(3
)
Number of centers owned—end of period

301

312

301

312

Number of visits(5)

1,906,242

1,979,481

5,642,305

5,848,551

Net revenue per visit(5)(6)

$
119

$
116

$
118

$
117

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

~~(2)~~ ~~Data excludes specialty hospitals and outpatient clinics managed by~~operations. Our operating statistics include metrics we believe provide relevant insight about 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~~facilities we operate, volume of services we provide to our customers, and average payment rates for services we provide. These metrics are utilized by ~~dividing outpatient rehabilitation clinic direct patient service revenue by the total number~~management to monitor trends and performance in our businesses and therefore may be important to investors because management may assess our performance based in part on such metrics. Other healthcare providers may present similar statistics, and these statistics are susceptible to varying definitions. Our statistics as presented may not be comparable to other similarly titled statistics of ~~visits. For purposes of this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy revenue.~~other companies.



	Three Months Ended March 31,
	2019			2020
Critical illness recovery hospital data:
Number of hospitals owned—start of period	96			100
Number of hospitals acquired	—			—
Number of hospital start-ups	—			—
Number of hospitals closed/sold	—			—
Number of hospitals owned—end of period	96			100
Number of hospitals managed—end of period	1			1
Total number of hospitals (all)—end of period	97			101
Available licensed beds⁽¹⁾	4,071			4,286
Admissions⁽¹⁾⁽²⁾	9,456			9,533
Patient days⁽¹⁾⁽³⁾	258,129			270,458
Average length of stay (days)⁽¹⁾⁽⁴⁾	28			29
Net revenue per patient day⁽¹⁾⁽⁵⁾	$	1,759		$	1,839
Occupancy rate⁽¹⁾⁽⁶⁾	71		%	70		%
Percent patient days—Medicare⁽¹⁾⁽⁷⁾	53		%	49		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	17			19
Number of hospitals acquired	—			—
Number of hospital start-ups	1			—
Number of hospitals closed/sold	—			—
Number of hospitals owned—end of period	18			19
Number of hospitals managed—end of period	9			10
Total number of hospitals (all)—end of period	27			29
Available licensed beds⁽¹⁾	1,239			1,309
Admissions⁽¹⁾⁽²⁾	5,836			6,333
Patient days⁽¹⁾⁽³⁾	82,816			94,568
Average length of stay (days)⁽¹⁾⁽⁴⁾	14			15
Net revenue per patient day⁽¹⁾⁽⁵⁾	$	1,633		$	1,732
Occupancy rate⁽¹⁾⁽⁶⁾	76		%	79		%
Percent patient days—Medicare⁽¹⁾⁽⁷⁾	52		%	51		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,423			1,461
Number of clinics acquired	4			2
Number of clinic start-ups	11			12
Number of clinics closed/sold	(31		)	(4		)
Number of clinics owned—end of period	1,407			1,471
Number of clinics managed—end of period	277			282
Total number of clinics (all)—end of period	1,684			1,753
Number of visits⁽¹⁾⁽⁸⁾	2,054,483			2,122,665
Net revenue per visit⁽¹⁾⁽⁹⁾	$	103		$	104



	Three Months Ended March 31,
	2019		2020
Concentra data:
Number of centers owned—start of period	524		521
Number of centers acquired	1		4
Number of center start-ups	—		—
Number of centers closed/sold	—		(2		)
Number of centers owned—end of period	525		523
Number of onsite clinics operated—end of period	129		128
Number of CBOCs owned—end of period	31		33
Number of visits⁽¹⁾⁽⁸⁾	2,911,607		2,877,395
Net revenue per visit⁽¹⁾⁽⁹⁾	$	124	$	123

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

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

(1) Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded.
(2) Represents the number of patients admitted to our hospitals during the periods presented.
(3) Each patient day represents one patient occupying one bed for one day during the periods presented.
(4) Represents the average number of days in which patients were admitted to our hospitals. Average length of stay is calculated by dividing the number of patient days, as presented above, by the number of patients discharged from our hospitals during the periods presented.
(5) Represents the average amount of revenue recognized for each patient day. Net revenue per patient day is calculated by dividing patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.
(6) Represents the portion of our hospitals being utilized for patient care during the periods presented. Occupancy rate is calculated using the number of patient days, as presented above, divided by the total number of bed days available during the period. Bed days available is derived by adding the daily number of available licensed beds for each of the periods presented.
(7) Represents the portion of our patient days which are paid by Medicare. The Medicare patient day percentage is calculated by dividing the total number of patient days which are paid by Medicare by the total number of patient days, as presented above.
(8) Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics and Concentra centers during the periods presented.
(9) Represents the average amount of revenue recognized for each patient visit. Net revenue per visit is calculated by dividing patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits.

Results of Operations

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

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

Net operating revenues

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

86.9

85.6

85.0

83.7

General and administrative

2.6

2.5

2.5

2.5

Bad debt expense

1.7

1.9

1.6

1.8

Depreciation and amortization

3.5

3.4

3.4

3.6

Income from operations

5.3

6.6

7.5

8.4

Loss on early retirement of debt

(1.0
)
—

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

0.5

0.3

0.5

0.5

Non-operating gain (loss)

(0.1
)
—

1.1

(0.0
)
Interest expense

(4.2
)
(3.4
)
(3.9
)
(3.5
)
Income before income taxes

0.5

3.5

4.8

4.8

Income tax expense

0.1

1.2

1.6

1.8

Net income

0.4

2.3

3.2

3.0

Net income (loss) attributable to non-controlling interests

(0.2
)
0.6

0.3

0.7

Net income attributable to Holdings and Select

0.6
%
1.7
%
2.9
%
2.3
%



	Three Months Ended March 31,
	2019		2020
Net operating revenues	100.0	%	100.0	%
Cost of services, exclusive of depreciation and amortization⁽¹⁾	85.5		84.9
General and administrative	2.2		2.4
Depreciation and amortization	3.9		3.6
Income from operations	8.4		9.1
Equity in earnings of unconsolidated subsidiaries	0.3		0.2
Gain on sale of businesses	0.5		0.5
Interest expense	(3.8	)	(3.3	)
Income before income taxes	5.4		6.5
Income tax expense	1.4		1.5
Net income	4.0		5.0
Net income attributable to non-controlling interests	0.9		1.2
Net income attributable to Select Medical Holdings Corporation	3.1	%	3.8	%

~~(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 September 30,

Nine Months Ended September 30,

2016

2017

% Change

2016

2017

% Change

(in thousands)

Net operating revenues:

Specialty hospitals

$
544,491

$
585,288

7.5
%
$
1,729,261

$
1,785,035

3.2
%
Outpatient rehabilitation(1)

250,710

250,527

(0.1
)
745,720

764,450

2.5

Concentra

258,507

261,295

1.1

764,252

779,030

1.9

Other(2)

87

56

N/M

523

687

N/M

Total Company

$
1,053,795

$
1,097,166

4.1
%
$
3,239,756

$
3,329,202

2.8
%
Income (loss) from operations:

Specialty hospitals

$
33,947

$
54,017

59.1
%
$
175,737

$
206,900

17.7
%
Outpatient rehabilitation(1)

25,836

23,334

(9.7
)
82,609

84,393

2.2

Concentra

25,417

24,777

(2.5
)
71,933

78,308

8.9

Other(2)

(29,038
)
(30,030
)
(3.4
)
(86,177
)
(90,075
)
(4.5
)
Total Company

$
56,162

$
72,098

28.4
%
$
244,102

$
279,526

14.5
%
Adjusted EBITDA:

Specialty hospitals

$
48,264

$
69,454

43.9
%
$
217,759

$
256,291

17.7
%
Outpatient rehabilitation(1)

31,995

29,298

(8.4
)
99,006

102,575

3.6

Concentra

40,888

40,003

(2.2
)
118,080

125,656

6.4

Other(2)

(23,070
)
(22,928
)
0.6

(66,696
)
(71,125
)
(6.6
)
Total Company

$
98,077

$
115,827

18.1
%
$
368,149

$
413,397

12.3
%
Adjusted EBITDA margins:

Specialty hospitals

8.9
%
11.9
%

12.6
%
14.4
%

Outpatient rehabilitation(1)

12.8

11.7

13.3

13.4

Concentra

15.8

15.3

15.5

16.1

Other(2)

N/M

N/M

N/M

N/M

Total Company

9.3
%
10.6
%

11.4
%
12.4
%

Total assets:(3)

Specialty hospitals

$
2,469,060

$
2,748,761

$
2,469,060

$
2,748,761

Outpatient rehabilitation

955,359

945,765

955,359

945,765

Concentra

1,318,866

1,332,012

1,318,866

1,332,012

Other(2)

73,992

97,269

73,992

97,269

Total Company

$
4,817,277

$
5,123,807

$
4,817,277

$
5,123,807

Purchases of property and equipment, net:

Specialty hospitals

$
24,378

$
37,376

$
79,366

$
106,424

Outpatient rehabilitation(1)

6,234

6,496

15,032

19,370

Concentra

2,720

5,369

10,647

21,656

Other(2)

4,670

19,257

13,215

26,350

Total Company

$
38,002

$
68,498

$
118,260

$
173,800



	Three Months Ended March 31,
	2019⁽²⁾			2020			% Change

Net operating revenues:
Critical illness recovery hospital	$	457,534		$	500,521		9.4	%
Rehabilitation hospital	154,558			182,019			17.8
Outpatient rehabilitation	246,905			255,249			3.4
Concentra	396,321			398,535			0.6
Other⁽¹⁾	69,313			78,308			13.0
Total Company	$	1,324,631		$	1,414,632		6.8	%
Income (loss) from operations:
Critical illness recovery hospital	$	61,547		$	76,234		23.9	%
Rehabilitation hospital	19,395			31,682			63.4
Outpatient rehabilitation	21,959			19,904			(9.4	)
Concentra	40,587			37,812			(6.8	)
Other⁽¹⁾	(31,764		)	(36,954		)	(16.3	)
Total Company	$	111,724		$	128,678		15.2	%
Adjusted EBITDA:
Critical illness recovery hospital	$	72,998		$	88,570		21.3	%
Rehabilitation hospital	25,797			38,569			49.5
Outpatient rehabilitation	28,991			27,122			(6.4	)
Concentra	66,258			61,466			(7.2	)
Other⁽¹⁾	(23,927		)	(28,394		)	(18.7	)
Total Company	$	170,117		$	187,333		10.1	%
Adjusted EBITDA margins:
Critical illness recovery hospital	16.0		%	17.7		%
Rehabilitation hospital	16.7			21.2
Outpatient rehabilitation	11.7			10.6
Concentra	16.7			15.4
Other⁽¹⁾	N/M			N/M
Total Company	12.8		%	13.2		%
Total assets:
Critical illness recovery hospital	$	2,062,659		$	2,148,779
Rehabilitation hospital	1,089,391			1,127,267
Outpatient rehabilitation	1,250,015			1,285,449
Concentra	2,464,317			2,354,169
Other⁽¹⁾	155,110			199,903
Total Company	$	7,021,492		$	7,115,567
Purchases of property and equipment:
Critical illness recovery hospital	$	10,160		$	8,965
Rehabilitation hospital	13,183			3,325
Outpatient rehabilitation	9,040			8,384
Concentra	15,698			15,586
Other⁽¹⁾	992			2,948
Total Company	$	49,073		$	39,208

~~N/M—Not Meaningful.~~

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

~~(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 September 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $28.1 million.~~

(1) Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.
(2) For the three months ended March 31, 2019, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.
N/M — Not meaningful.

Three Months Ended ~~September 30, 2017~~March 31, 2020, Compared to Three Months Ended ~~September 30, 2016~~

March 31, 2019

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

Please refer to “Effects of the ~~same~~COVID-19 Pandemic on our Results of Operations” for ~~Holdings and Select.~~

further discussion regarding the impact of the COVID-19 pandemic on our operating results for the three months ended March 31, 2020.

Net Operating Revenues

Our net operating revenues increased ~~4.1%~~6.8% to ~~$1,097.2~~$1,414.6 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to $~~1,053.8~~$1,324.6 million for the three months ended ~~September 30, 2016.~~

~~Specialty Hospitals~~March 31, 2019.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~7.5%~~9.4% to ~~$585.3~~$500.5 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$544.5~~$457.5 million for the three months ended September 30, 2016 for our specialty hospitals segment. The increase in net operating revenues is principally due to several new inpatient rehabilitation facilities which commenced operations during 2016 and 2017 and an increase in patient volumes at our LTCHs. Our patient days increased 6.7% to 316,170 days for the three months ended September 30, 2017, compared to 296,202 days for the three months ended September 30, 2016. The average net revenue per patient day for our specialty hospitals increased 2.1% to $1,676 for the three months ended September 30, 2017, compared to $1,642 for the three months ended September 30, 2016.

~~Outpatient Rehabilitation Segment.~~ Net operating revenues were $250.5 million for the three months ended September 30, 2017, compared to $250.7 million for the three months ended September 30, 2016 for our outpatient rehabilitation segment. The decrease in net operating revenues was principally due to a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues. Additionally, we experienced a decline in visits at Physiotherapy clinics within some of our markets. We had 1,986,213 visits in our clinics for the three months ended September 30, 2017, compared to 2,052,678 visits for the three months ended September 30, 2016. The decline in net operating revenues attributable to lower patient volumes was offset in part by an increase in net revenue per visit. Net revenue per visit increased 2.0% to $104 for the three months ended September 30, 2017, compared to $102 for the three months ended September 30, 2016.

~~Concentra Segment.~~ Net operating revenues increased 1.1% to $261.3 million for the three months ended September 30, 2017, compared to $258.5 million for the three months ended September 30, 2016 for our Concentra segment.March 31, 2019. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 4.8% to 270,458 days for the three months ended March 31, 2020, compared to 258,129 days for the three months ended March 31, 2019. The increase in patient days was primarily attributable to the acquisition of three hospitals in April 2019 and one hospital in October 2019. Net revenue per patient day increased 4.5% to $1,839 for the three months ended March 31, 2020, compared to $1,759 for the three months ended March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased 17.8% to $182.0 million for the three months ended March 31, 2020, compared to $154.6 million for the three months ended March 31, 2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the three months ended March 31, 2020. Our patient days increased 14.2% to 94,568 days for the three months ended March 31, 2020, compared to 82,816 days for the three months ended March 31, 2019. The increase in patient days was principally driven by our rehabilitation hospitals which commenced operations during 2019. We also experienced a 5.7% increase in patient days in our remaining hospitals. Of the 11,752 day increase experienced during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, 11,048 of those days occurred in January and February 2020. During the three months ended March 31, 2020, certain of our rehabilitation hospitals, particularly those operating in areas more significantly impacted by the spread of COVID-19, such as New Jersey, experienced lower patient volume. Further, our rehabilitation hospitals experienced overall lower patient volume during March 2020 due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Our net revenue per patient day increased 6.1% to $1,732 for the three months ended March 31, 2020, compared to $1,633 for the three months ended March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 3.4% to $255.2 million for the three months ended March 31, 2020, compared to $246.9 million for the three months ended March 31, 2019. The increase in net operating revenues was primarily attributable to an increase in visits, ~~from newly acquired and developed medical centers, offset in part by a decline in visits within areas affected by Hurricanes Harvey and Irma,~~ which ~~caused an estimated $1.2 million decrease in net operating revenues. Visits in our centers~~ increased ~~3.8%~~3.3% to ~~1,979,481~~2,122,665 for the three months ended March 31, 2020, compared to 2,054,483 visits for the three months ended ~~September 30, 2017,~~March 31, 2019. We experienced an increase of 150,615 visits during January and February 2020, as compared to ~~1,906,242~~the same period in 2019. During March 2020, our outpatient rehabilitation clinics experienced a decrease of 82,433 visits, as compared to March 2019. The decline in volume during March 2020, which became more significant by mid-month, resulted from the actions taken by governmental authorities and those in the private sector to limit the spread of COVID-19, combined with recommendations to practice social distancing. Our outpatient rehabilitation clinics experienced less demand for services due to a decline in patient referrals from physicians, a reduction in workers’ compensation injury visits due to the temporary closure of non-essential and non-life sustaining businesses, the suspension of elective surgeries at hospitals and other facilities, which has resulted in less demand for outpatient rehabilitation services, as well as mandated social distancing measures. By the end of March 2020, we have temporarily closed 131 clinics. In many instances, we were able to transfer patients and our staff to other nearby outpatient rehabilitation clinics which remained open. Our net revenue per visit was $104 for the three months ended March 31, 2020, compared to $103 for the three months ended March 31, 2019.

Concentra Segment. Net operating revenues increased 0.6% to $398.5 million for the three months ended March 31, 2020, compared to $396.3 million for the three months ended March 31, 2019. Visits in our centers were 2,877,395 for the three months ended March 31, 2020, compared to 2,911,607 visits for the three months ended ~~September 30, 2016. The growth in visits primarily related to~~March 31, 2019. We experienced an increase of 93,147 visits during January and February 2020, as compared to the same period in 2019. During March 2020, our Concentra centers experienced a decrease of 127,359 visits, as compared to March 2019. In March 2020, employers began to furlough their workforces and temporarily cease or significantly reduce their operations as a result of the actions of governmental authorities and those in the private sector to limit the spread of COVID-19. Consequently, our centers experienced a reduction in workers’ compensation and employer services visits. By the end of March 2020, we have temporarily closed 19 centers and reduced the operating hours of 159 centers. In many instances where we temporarily closed centers, we were able to transfer patients and our staff to other nearby centers which remained open. Net revenue per visit was ~~$116~~$123 for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$119~~$124 for the three months ended ~~September 30, 2016.~~March 31, 2019. The decrease in net revenue per visit iswas principally due to ~~an increased proportion of employer service~~a decrease in workers’ compensation visits, which yield ~~lower~~higher per visit ~~rates.~~

rates, and a decrease in our employer services per visit rate during the three months ended March 31, 2020.

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 ~~$986.3~~$1,234.2 million, or ~~90.0%~~87.3% of net operating revenues, for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$960.5~~$1,160.8 million, or ~~91.1%~~87.7% of net operating revenues, for the three months ended ~~September 30, 2016.~~March 31, 2019. Our cost of services, a major component of which is labor expense, was ~~$938.9~~$1,200.4 million, or ~~85.6%~~84.9% of net operating revenues, for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$915.7~~$1,132.1 million, or ~~86.9%~~85.5% of net operating revenues, for the three months ended ~~September 30, 2016.~~March 31, 2019. The decrease in our operating expenses relative to our net operating revenues iswas principally due to the ~~improved~~ operating performance of our ~~acquired~~rehabilitation hospital and start-up specialty hospitals. Facility rent expense, a component of cost of services, was $57.9 million for the three months ended September 30, 2017, compared to $58.5 million for the three months ended September 30, 2016.critical illness recovery hospital segments. General and administrative expenses were $27.1 million for both the three months ended September 30, 2017 and 2016. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended September 30, 2017, compared to 2.6% for the three months ended September 30, 2016. Our bad debt expense was $20.3$33.8 million, or ~~1.9%~~2.4% of net operating revenues, for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to $~~17.7~~$28.7 million, or ~~1.7%~~2.2% of net operating revenues, for the three months ended ~~September 30, 2016. The increase in bad debt expense occurred principally in our specialty hospitals segment.~~

March 31, 2019.

Adjusted EBITDA

~~Specialty Hospitals~~

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~43.9%~~21.3% to ~~$69.5~~$88.6 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$48.3~~$73.0 million for the three months ended ~~September 30, 2016 for our specialty hospitals segment.~~March 31, 2019. Our Adjusted EBITDA margin for the ~~specialty hospitals~~critical illness recovery hospital segment was ~~11.9%~~17.7% for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~8.9%~~16.0% for the three months ended ~~September 30, 2016.~~March 31, 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our ~~specialty hospitals~~critical illness recovery hospital segment were primarily driven by increases in our net revenue per patient day and the ~~improved operating performance~~acquisition of ~~our LTCHs and reductions in~~four hospitals during 2019, as discussed above under “Net Operating Revenues.”

Rehabilitation Hospital Segment. Adjusted EBITDA ~~losses in our start-up specialty hospitals. Adjusted EBITDA losses in our start-up specialty hospitals were $1.5~~increased 49.5% to $38.6 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$9.0~~$25.8 million for the three months ended ~~September 30, 2016.~~

March 31, 2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months ended March 31, 2020, compared to 16.7% for the three months ended March 31, 2019. The increases in our Adjusted EBITDA and Adjusted EBITDA margin primarily occurred as a result of our operating performance in January and February 2020, as compared to the same period in 2019. Adjusted EBITDA increased 72.5% to $27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin are primarily attributable to increases in patient volume and net revenue per patient day at many of our existing hospitals. Additionally, we experienced an increase in Adjusted EBITDA from our hospitals which commenced operations during 2019. Though we experienced increases in Adjusted EBITDA and Adjusted EBITDA margin in March 2020, as compared to the prior year, these increases were offset, in part, by the effects of the COVID-19 pandemic on our operations, as discussed above. For the three months ended March 31, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $2.8 million.

Outpatient Rehabilitation Segment. Adjusted EBITDA was ~~$29.3~~$27.1 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$32.0~~$29.0 million for the three months ended ~~September 30, 2016 for our outpatient rehabilitation segment.~~March 31, 2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.6% for the three months ended March 31, 2020, compared to 11.7% for the three months ended ~~September 30, 2017, compared to 12.8% for~~March 31, 2019. For the three months ended ~~September 30, 2016. The decrease~~March 31, 2020, the decline in Adjusted EBITDA ~~was principally due~~and Adjusted EBITDA margin were primarily caused by an 11.6% decrease in visits during March 2020, as compared to athe same period in 2019. The decline in visits resulted from the effects of the COVID-19 pandemic, as described above. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within ~~areas~~close proximity to one another and took other steps to reduce labor costs. Prior to our outpatient rehabilitation clinics becoming affected by ~~Hurricanes Harvey and Irma, as discussed above under “~~~~Net Operating Revenues~~~~.” Additionally, we experienced a decline in visits at Physiotherapy clinics within some of our markets. The decline in~~the COVID-19 pandemic, our Adjusted EBITDA had increased 33.6% to $23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for ~~our outpatient rehabilitation segment was~~January and February 2020, compared to 10.7% for the ~~result of higher labor expenses relative to our net operating revenues within markets which have experienced a decline~~same period in ~~patient volumes.~~

2019.

Concentra Segment. Adjusted EBITDA was ~~$40.0~~$61.5 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$40.9~~$66.3 million for the three months ended ~~September 30, 2016 for our Concentra segment.~~March 31, 2019. Our Adjusted EBITDA margin for the Concentra segment was ~~15.3%~~15.4% for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~15.8%~~16.7% for the three months ended ~~September 30, 2016. The decrease~~March 31, 2019. For the three months ended March 31, 2020, the decline in Adjusted EBITDA ~~was principally due~~and Adjusted EBITDA margin were primarily caused by a 12.6% decrease in visits during March 2020, as compared to athe same period in 2019. The decline in visits resulted from the effects of the COVID-19 pandemic, as described above. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within ~~areas~~close proximity to one another, reduced the operating hours of certain centers, and took other steps to reduce labor costs. Prior to our centers becoming affected by ~~Hurricanes Harvey and Irma, as discussed above under “~~~~Net Operating Revenues~~.”

~~Other.~~ ~~The~~the COVID-19 pandemic, Adjusted EBITDA ~~loss~~had increased 11.7% to $45.5 million for January and February 2020, compared to $40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January and February 2020, compared to 15.7% for the same period in 2019.

Depreciation and Amortization

Depreciation and amortization expense was ~~$22.9~~$51.8 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~an Adjusted EBITDA loss of $23.1~~$52.1 million for the three months ended ~~September 30, 2016.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense was $38.8~~March 31, 2019.

Income from Operations

For the three months ended March 31, 2020, we had income from operations of $128.7 million, compared to $111.7 million for the three months ended ~~September 30, 2017, compared to~~ ~~$37.2 million for the three months ended September 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 September 30, 2017, we had income from operations of $72.1 million, compared to $56.2 million for the three months ended September 30, 2016.~~March 31, 2019. The increase in income from operations ~~resulted principally from the improved operating performance of~~occurred within our ~~specialty hospitals segment.~~

~~Loss on Early Retirement of Debt~~

On September 26, 2016, Concentra prepaid the second lien term loan under the Concentra credit facilities, resulting in a loss on early retirement of debt of approximately $10.9 million. The loss on early retirement of debt consisted of a prepayment premium, unamortized debt issuance costs,rehabilitation hospital and ~~unamortized original issue discounts.~~

critical illness recovery hospital segments.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the three months ended ~~September 30, 2017,~~March 31, 2020, we had equity in earnings of unconsolidated subsidiaries of ~~$4.4~~$2.6 million, compared to ~~$5.3~~$4.4 million for the three months ended ~~September 30, 2016.~~March 31, 2019. The decrease in ~~our~~ equity in earnings was principally caused by a decline in performance of ~~unconsolidated subsidiaries resulted principally from losses incurred by start-up companies~~the healthcare-related businesses in which we own a minority interest.

Gain on Sale of Businesses

We recognized gains of $7.2 million and $6.5 million during the three months ended March 31, 2020 and 2019, respectively. These gains were attributable to the sales of outpatient rehabilitation businesses.

Interest Expense

Interest expense was ~~$37.7~~$46.1 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~$44.5~~$50.8 million for the three months ended ~~September 30, 2016.~~March 31, 2019. The decrease in interest expense was principally ~~the result of decreases~~due a decline in ~~our~~variable interest

rates, ~~associated with~~as well as the refinancing of ~~the~~our Select credit facilities, Concentra-JPM credit facilities (as defined below), and senior notes during the ~~quarter ended March 31, 2017~~third and ~~the Concentra credit facilities during the quarter ended September 30, 2016.~~

fourth quarters of 2019.

Income Taxes

We recorded income tax expense of ~~$14.0~~$21.9 million for the three months ended ~~September 30, 2017,~~March 31, 2020, which represented an effective tax rate of ~~36.1%~~23.7%. We recorded income tax expense of ~~$1.1~~$18.5 million for the three months ended ~~September 30, 2016,~~March 31, 2019, which represented an effective tax rate of ~~21.2%~~25.7%. ~~Our quarterly~~For the three months ended March 31, 2020, the lower effective ~~income~~ tax rate ~~is derived~~resulted primarily from the discrete tax benefits realized from the exercise of certain equity options in connection with the purchase of additional membership interests in Concentra Group Holdings Parent, as described under “Other Significant Events.” The impact of these tax benefits were offset, in part, by the sale of an outpatient rehabilitation business. The selling price for this business exceeded our ~~full year estimated effective income~~ tax ~~rate and can be impacted by~~basis, resulting in a taxable gain. This sale was treated as a discrete ~~items specific to a particular quarter and quarterly changes in our full year~~ tax ~~provision estimate.~~

event for the three months ended March 31, 2020.

Net Income ~~(Loss)~~ Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$6.4~~$17.3 million for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to ~~net losses attributable to non-controlling interests of $2.5~~$12.5 million for the three months ended September 30, 2016. The increase is principally due to increases in net income of our joint venture subsidiary, Concentra, and the improved operating performance of joint venture inpatient rehabilitation facilities operating within our specialty hospitals segment.

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

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

~~Net Operating Revenues~~

~~Our net operating revenues increased 2.8% to $3,329.2 million for the nine months ended September 30, 2017, compared to $3,239.8 million for the nine months ended September 30, 2016.~~

~~Specialty Hospitals Segment.~~ Net operating revenues increased 3.2% to $1,785.0 million for the nine months ended September 30, 2017, compared to $1,729.3 million for the nine months ended September 30, 2016 for our specialty hospitals segment. The increase in net operating revenues is principally due to several new inpatient rehabilitation facilities which commenced operations during 2016 and 2017. The average net revenue per patient day for our specialty hospitals increased 3.4% to $1,707 for the nine months ended September 30, 2017, compared to $1,651 for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, we had 950,419 patient days, compared to 951,292 days for the nine months ended September 30, 2016. The decrease in patient days is principally due to closed specialty hospitals.

~~Outpatient Rehabilitation Segment.~~ Net operating revenues increased 2.5% to $764.5 million for the nine months ended September 30, 2017, compared to $745.7 million for the nine months ended September 30, 2016 for our outpatient rehabilitation segment. The increase in net operating revenues was principally due to the acquisition of Physiotherapy on March 4, 2016, which contributed to the overall growth in our visits. Additionally, we experienced an increase in our net revenue per visit. Visits increased 7.3% to 6,168,763 for the nine months ended September 30, 2017, compared to 5,751,562 visits for the nine months ended September 30, 2016. Net revenue per visit increased 1.0% to $103 for the nine months ended September 30, 2017, compared to $102 for the nine months ended September 30, 2016. The increase in net operating revenues was offset in part by the sale of our contract therapy businesses on March 31, ~~2016.~~

~~Concentra Segment.~~ Net operating revenues increased 1.9% to $779.0 million for the nine months ended September 30, 2017, compared to $764.3 million for the nine months ended September 30, 2016 for our Concentra segment. The increase in net operating revenues was principally due to an increase in visits from newly acquired and developed medical centers. Visits in our centers increased 3.7% to 5,848,551 for the nine months ended September 30, 2017, compared to 5,642,305 visits for the nine months ended September 30, 2016. The growth in visits principally related to an increase in employer services visits. Net revenue per visit was $117 for the nine months ended September 30, 2017, compared to $118 for the nine months ended September 30, 2016. The decrease in net revenue per visit is principally due to an increased proportion of employer service visits, which yield lower per visit rates.

~~Operating Expenses~~

Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses were $2,930.0 million, or 88.0% of net operating revenues, for the nine months ended September 30, 2017, compared to $2,887.8 million, or 89.1% of net operating revenues, for the nine months ended September 30, 2016. Our cost of services, a major component of which is labor expense, was $2,787.5 million, or 83.7% of net operating revenues, for the nine months ended September 30, 2017, compared to $2,755.0 million, or 85.0% of net operating revenues, for the nine months ended September 30, 2016. The decrease in our operating expenses relative to our net operating revenues is principally due to the improved operating performance of our acquired and start-up specialty hospitals, specialty hospitals closures, and cost reductions achieved by Concentra. Facility rent expense, a component of cost of services, was $171.7 million for the nine months ended September 30, 2017, compared to $167.5 million for the nine months ended September 30, 2016. General and administrative expenses were $83.4 million for the nine months ended September 30, 2017, compared to $81.2 million for the nine months ended September 30, 2016, which included $3.2 million of Physiotherapy acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both the nine months ended September 30, 2017 and 2016. Our bad debt expense was $59.1 million, or 1.8% of net operating revenues, for the nine months ended September 30, 2017, compared to $51.6 million, or 1.6% of net operating revenues, for the nine months ended September 30, 2016. The increase was principally the result of increases in bad debt expense in our specialty hospitals and Concentra segments.

~~Adjusted EBITDA~~

~~Specialty Hospitals Segment.~~ Adjusted EBITDA increased 17.7% to $256.3 million for the nine months ended September 30, 2017, compared to $217.8 million for the nine months ended September 30, 2016 for our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 14.4% for the nine months ended September 30, 2017, compared to 12.6% for the nine months ended September 30, 2016. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our specialty hospitals segment were 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 nine months ended September 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were $4.7 million for the nine months ended September 30, 2017, compared to $19.4 million for the nine months ended September 30, 2016.

~~Outpatient Rehabilitation Segment.~~ Adjusted EBITDA increased 3.6% to $102.6 million for the nine months ended September 30, 2017, compared to $99.0 million for the nine months ended September 30, 2016 for our outpatient rehabilitation segment. The increase in Adjusted EBITDA was principally due to growth in visits and an increase in net revenue per visit, as discussed above under “~~Net Operating Revenues~~.” Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.4% for the nine months ended September 30, 2017, compared to 13.3% for the nine months ended September 30, 2016. The increase in Adjusted EBITDA margin was principally due to the sale of our contract therapy businesses on March 31, 2016, which operated at lower Adjusted EBITDA margins than our outpatient rehabilitation clinics.

~~Concentra Segment.~~ Adjusted EBITDA increased 6.4% to $125.7 million for the nine months ended September 30, 2017, compared to $118.1 million for the nine months ended September 30, 2016 for our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 16.1% for the nine months ended September 30, 2017, compared to 15.5% for the nine months ended September 30, 2016. The increases in Adjusted EBITDA and Adjusted EBITDA margins for our Concentra segment were principally the result of cost reductions we have achieved.

~~Other.~~ The Adjusted EBITDA loss was $71.1 million for the nine months ended September 30, 2017, compared to an Adjusted EBITDA loss of $66.7 million for the nine months ended September 30, 2016. 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 $119.6 million for the nine months ended September 30, 2017, compared to~~ ~~$107.9 million for the nine months ended September 30, 2016.~~2019. The increase was principally due to ~~new inpatient rehabilitation facilities operating in our specialty hospitals segment.~~

~~Income from Operations~~

~~For~~ the nine months ended September 30, 2017, we had income from operations of $279.5 million, compared to $244.1 million for the nine months ended September 30, 2016. The increase in income from operations resulted principally from the improved operating performance of our specialty hospitals and Concentra segments.

~~Loss on Early Retirement of Debt~~

~~On March 6, 2017, we refinanced Select’s senior secured credit facilities which resulted in losses on early retirement of debt of $19.7 million during the nine months ended September 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. On September 26, 2016, Concentra prepaid the second lien term loan under the Concentra credit facilities, resulting in a loss on early retirement of debt of approximately $10.9 million.

~~Equity in Earnings of Unconsolidated Subsidiaries~~

For the nine months ended September 30, 2017, we had equity in earnings of unconsolidated subsidiaries of $15.6 million, compared to $14.5 million for the nine months ended September 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.~~

~~Non-Operating Gain~~

We recognized a non-operating gain of $37.1 million during the nine months ended September 30, 2016. The non-operating gain was principally due to the sale of our contract therapy businesses on March 31, 2016, as well as the sale of nine outpatient rehabilitation clinics to a non-consolidating subsidiary and the sale of five specialty hospitals in an exchange transaction during the quarter ended June 30, 2016.

~~Interest Expense~~

~~Interest expense was $116.2 million for the nine months ended September 30, 2017, compared to~~ $127.7 million for the nine months ended September 30, 2016. The decrease in interest expense was principally the result of decreases in our interest rates associated with the refinancing of the Select credit facilities during the quarter ended March 31, 2017 and the Concentra credit facilities during the quarter ended September 30, 2016.

~~Income Taxes~~

~~We recorded income tax expense of $59.6 million for the nine months ended September 30, 2017, which represented an effective tax rate of 37.4% We recorded income tax expense of~~ ~~$51.6 million for the nine months ended September 30, 2016, which represented an effective tax rate of 33.0%.~~

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. During the quarter 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 nine months ended September 30, 2016 resulted from the net effects of the two discrete tax events discussed above.

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

~~Net income attributable to non-controlling interests was $23.2 million for the nine months ended September 30, 2017, compared to~~ ~~$9.6 million for the nine months ended September 30, 2016. The increase is principally due to increases in net income~~several of our joint venture ~~subsidiary, Concentra, and the improved operating performance of joint venture inpatient~~ rehabilitation ~~facilities operating within our specialty hospitals segment.~~

hospitals.

Liquidity and Capital Resources

Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~Nine~~Three Months Ended ~~September 30, 2016~~

March 31, 2019

In the following, we discuss cash flows from operating activities, investing activities, and financing ~~activities, which, in each case, are the same for Holdings and Select.~~

Nine Months Ended September 30,

2016

2017

(in thousands)

Cash flows provided by operating activities

$
280,761

$
129,972

Cash flows used in investing activities

(463,002
)
(169,990
)
Cash flows provided by financing activities

236,029

48,289

Net increase in cash and cash equivalents

53,788

8,271

Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$
68,223

$
107,300

activities.



	Three Months Ended March 31,
	2019			2020
	(in thousands)
Cash flows provided by operating activities	$	41,762		$	44,084
Cash flows used in investing activities	(82,799		)	(44,659		)
Cash flows provided by (used in) financing activities	13,674			(262,144		)
Net decrease in cash and cash equivalents	(27,363		)	(262,719		)
Cash and cash equivalents at beginning of period	175,178			335,882
Cash and cash equivalents at end of period	$	147,815		$	73,163

Operating activities provided ~~$130.0~~$44.1 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017. The decrease in operating~~March 31, 2020, compared to $41.8 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017 compared to the nine months ended September 30, 2016 is principally due to increases in our accounts receivable.~~March 31, 2019. Our days sales outstanding was 6053 days at ~~September 30, 2017,~~March 31, 2020, compared to 51 days at December 31, ~~2016 and 52~~2019. Our days sales outstanding was 53 days at ~~September 30, 2016.~~March 31, 2019, compared to 51 days at December 31, 2018. Our days sales outstanding will fluctuate based upon variability in our collection cycles. ~~The increase in our~~Our days sales outstanding ~~and related decline in~~fell within our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

expected range.

Investing activities used ~~$170.0~~$44.7 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2020. The principal ~~use~~uses of cash ~~was $173.8~~were $39.2 million for purchases of property and equipment and ~~$19.4~~$16.7 million for ~~the acquisition~~investments in and acquisitions of businesses, offset in part by $34.6 million of proceeds received from the sale of assets. Investing activities used $463.0 million of cash flows for the nine months ended September 30, 2016, principally due to the acquisition of Physiotherapy. Investing activities for the nine months ended September 30, 2016 also included $118.3 million for purchases of property and equipment,businesses. This was offset in part by proceeds received from the ~~sales~~sale of assets and businesses ~~and an equity investment~~ of ~~$72.6~~$11.2 million.

~~Financing~~ Investing activities ~~provided $48.3~~used $82.8 million of cash flows for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. The principal uses of cash were $49.1 million for purchases of property and equipment and $33.7 million for investments in and acquisitions of businesses.

Financing activities used $262.1 million of cash flows for the three months ended March 31, 2020. The principal use of cash was $366.2 million for the purchase of additional membership interests of Concentra Group Holdings Parent during the three months ended March 31, 2020, as discussed above under “OtherSignificant Events.” We also used $39.8 million of cash for the mandatory prepayment of term loans under the Select credit facilities. This was offset in part by net borrowings of $165.0 million under the Select revolving facility (as defined below) during the three months ended March 31, 2020.

Financing activities provided $13.7 million of cash flows for the three months ended March 31, 2019. The principal source of cash was ~~$100.0 million of~~ net borrowings ~~under~~of $140.0 million on the Select revolving ~~facility,~~facility. This was offset in part by ~~$23.1~~$98.8 million and $33.9 million for mandatory prepayments of ~~cash used for a principal prepayment associated with the Concentra credit facilities, $5.8 million of cash used for~~ term ~~loan payments associated with~~loans under the Select credit facilities and ~~cash used for the payment of financing costs related to the refinancing of the Select~~Concentra-JPM credit ~~facilities.~~

Financing activities provided $236.0 million of cash flows for the nine months ended September 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 in part by $215.7 million of cash used to repay the series D tranche B term loans and $125.0 million of net repayments under the Select and Concentra revolving facilities.

facilities, respectively.

Capital Resources

Working capital. We had net working capital of ~~$304.5~~$154.1 million at ~~September 30, 2017,~~March 31, 2020, compared to ~~$191.3~~$298.7 million at December 31, ~~2016.~~2019. The ~~increase~~decrease in net working capital ~~is primarily~~was principally due to ~~an increase~~a decrease in ~~our accounts receivable.~~

~~Select credit facilities.~~ ~~On March 6, 2017, 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~~cash 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 under the Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

~~Select will be required 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~~equivalents as a result of ~~a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to~~ the ~~extent required,~~purchase of additional membership interests of Concentra Group Holdings Parent during the ~~payment of certain indebtedness secured by liens having priority over the debt~~three months ended March 31, 2020, as discussed above under ~~the~~ “Other Significant Events.”

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 (iii) 50% of excess cash flow (as defined in thefacilities.

In February 2020, 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.

At September 30, 2017, Select had outstanding borrowings under the Select credit facilities consisting of a $1,144.3 million Select term loan (excluding unamortized discounts and debt issuance costs of $26.0 million) and borrowings of $320.0 million (excluding letters of credit) under the Select revolving facility. At September 30, 2017, Select had $91.4 million of availability under the Select revolving facility after giving effect to $38.6 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 1, 2017, Concentra~~ made a principal prepayment of ~~$23.1~~approximately $39.8 million associated with its ~~first lien~~ term loans in accordance with the provision in the ~~Concentra~~Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the ~~Concentra~~Select credit facilities.

At March 31, 2020, Select had outstanding borrowings under the Select credit facilities consisting of ~~September 30, 2017, Concentra had $619.2~~$2,103.4 million ~~of first lien~~in term loans ~~outstanding~~ (excluding unamortized discounts and debt issuance costs of ~~$13.7~~$20.7 million) (the “Select term loan”) and borrowings of $165.0 million (excluding letters of credit) under its revolving facility (the “Select revolving facility”). At March 31, 2020, Select had $245.7 million of availability under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit.

Concentra credit facilities.

At March 31, 2020, Concentra Inc. did not have any term loan or revolving facility borrowings ~~excluding letters of~~under its first lien credit ~~outstanding under~~agreement dated June 1, 2015 (together with any borrowings thereunder, the “Concentra-JPM credit facilities”). At March 31, 2020, Concentra ~~revolving facility. At September 30 2017, Concentra~~Inc. had ~~$43.4~~$85.7 million of availability under its revolving facility (the “Concentra-JPM revolving facility”) after giving effect to ~~$6.6~~$14.3 million of outstanding letters of credit.

Select and Holdings are not obligors with respect to Concentra Inc.’s debt under the Concentra-JPM credit facilities. At March 31, 2020, Concentra Inc. had outstanding borrowings under its intercompany loan agreement with Select of $1,199.8 million.

Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, ~~2018,~~2020, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. ~~Holdings did not repurchase shares during~~During the three months ended ~~September 30, 2017.~~March 31, 2020, Holdings repurchased 491,559 shares at a cost of approximately $8.7 million, an average cost per share of $17.68, which includes transaction costs. Since the inception of the program through ~~September 30, 2017,~~March 31, 2020, Holdings has repurchased ~~35,924,128~~38,580,908 shares at a cost of approximately ~~$314.7~~$356.6 million, or ~~$8.76~~$9.24 per share, which includes transaction costs.

Liquidity. We The COVID-19 pandemic adversely affected our operations during the three months ended March 31, 2020. The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, we believe our internally generated cash flows, ~~and~~ borrowing capacity under the Select and ~~Concentra~~Concentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below, will ~~be sufficient~~allow us to finance our operations over the next twelve months. As of March 31, 2020, we had cash and cash equivalents of $73.2 million, availability of $245.7 million under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.

In response to the COVID-19 pandemic, the CARES Act, which is described further under “Regulatory Changes,” was enacted on March 27, 2020. As part of the CARES Act, $100.0 billion was authorized in relief funds to hospitals and other healthcare providers to prevent, prepare, and respond to the COVID-19 pandemic. These funds are used to reimburse providers for lost revenue attributable to the COVID-19 pandemic and to provide support for related healthcare expenses. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. We received approximately $93.7 million of payments as part of this relief in April 2020. These are payments, rather than loans, and will not need to be repaid. Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. In order to improve our liquidity position, we applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, we have received $316.1 million in payments. These advanced payments will be recouped by CMS from future Medicare claims billed by us, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim we bill will reduce the amount owed to CMS. We are required to repay any advanced payments not recouped by CMS within 210 days from the date we originally received the payment.

In addition to applying for and receiving payments under the Medicare Accelerated and Advance Payments Program to enhance our liquidity in the short term, we have taken preemptive measures to reduce operating costs and expenses. Beginning in March and continuing into April 2020, we began reducing labor costs through employee furloughs, salary and wage reductions for certain employees, reducing the hours worked by part time employees, and limiting discretionary spending on capital expenditures. In April 2020, we began deferring payment on our share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020, and negotiating with our landlords to receive temporary rent deferrals on certain of our facilities which have temporarily closed.

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

At March 31, 2020, we were in compliance with each of our financial covenants. As of March 31, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 4.76 to 1.00. As of March 31, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. Please refer to our risk factors discussed in Item 1A. Risk Factors of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare ~~providers, and from time to time we may also develop new inpatient rehabilitation hospitals and occupational medicine centers.~~providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic ~~acquisitions such as the pending acquisition of U.S. HealthWorks.~~

acquisitions.

Recent Accounting Pronouncements

~~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~~

Refer 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~~Note 2 – Accounting Policies 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 activitiesnotes 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 will be applied prospectively and 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. The Company is currently evaluating the standard to determine the impact it will have on itsour condensed consolidated financial ~~statements.~~

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

The Company will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and 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,~~ ~~Revenue from Contracts with Customers~~~~, ASU 2016-08,~~ ~~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 revenue recognition requirements. 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 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 is not expected to materially change 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 September 30, 2016 and September 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~~

pronouncements.

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 September 30, 2017,~~Concentra-JPM revolving facility.

At March 31, 2020, Select had ~~a $1,144.3~~outstanding borrowings under the Select credit facilities consisting of the $2,103.4 million Select term loan ~~outstanding~~ (excluding unamortized discounts and debt issuance costs of ~~$26.0~~$20.7 million) and ~~$320.0~~borrowings of $165.0 million ~~in revolving borrowings outstanding~~(excluding letters of credit) under the Select ~~credit facilities,~~revolving facility, which bear interest at variable rates.

~~As of September 30, 2017,~~

At March 31, 2020, Concentra had $619.2 million of first lien term loans outstanding (excluding unamortized discounts and debt issuance costs of $13.7 million) under the Concentra credit facilities, which bear interest at variable rates. ConcentraInc. did not have any ~~outstanding~~borrowings under the Concentra-JPM revolving ~~borrowings at September 30, 2017.~~

~~At September 30, 2017, the 3-month LIBOR rate was 1.33%. Consequently,~~facility.

As of March 31, 2020, each 0.25% increase in market interest rates will impact the interest expense on ~~Select’s and Concentra’s~~our variable rate debt by ~~$5.2~~$5.7 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 March 31, 2020, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective ~~as of September 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.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the ~~third~~first quarter ended ~~September 30, 2017~~March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

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, 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~~

the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. 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~~

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”)~~, 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.

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~~has produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~Northern District of Alabama Investigation~~

On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. The Company intends to cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

ITEM 1A.RISK FACTORS

The ~~information~~risk factors set forth in this report update, and should be read ~~in conjunction~~together with, ~~the risk factors set forth below and~~ the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019.

Risks Related to Our Business

The ~~closing~~unpredictable effects of the ~~acquisition~~COVID-19 pandemic, including the duration and extent of ~~U.S. HealthWorks by Concentra is subject~~disruption on our operations, creates significant uncertainties about our future operating results and financial condition.

The extent to which the COVID-19 pandemic disrupts our business and results of operations, financial position, and cash flows will depend on a number of evolving factors and future developments that we are not able to predict, including, but not limited to, the ~~satisfaction of certain conditions, and we cannot predict whether the necessary conditions will be satisfied or waived.~~

~~The closing~~duration of the ~~acquisition~~outbreak; further actions by governmental authorities and the private sector to limit the spread of ~~U.S. HealthWorks by Concentra is subject~~COVID-19; continued encouragement to ~~regulatory approvals~~social distance; and ~~customary conditions,~~the economic impact on our patients and the communities we serve as a result of containment efforts. The adverse impacts of COVID-19 on our business may also exacerbate other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our hospitals may experience declines in their occupancy in future months in order protect both our patients and staff members and to prevent the spread of COVID-19 within our hospitals. Our critical illness recovery hospitals and rehabilitation hospitals may experience constrained staffing levels and increased operating costs resulting from increased usage of contract clinical labor due to the overwhelming need for healthcare professionals during the pandemic. Our hospitals may also experience increased operating costs resulting from shortages of medical supplies, including ~~without limitation:~~

· ~~the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;~~

· ~~the accuracy of the representations~~personal protective equipment, and ~~warranties in the Purchase Agreement and compliance with the respective covenants of the parties, subject to certain qualifiers;~~

· ~~the absence of any law or injunction that prohibits the consummation of the acquisition;~~

· ~~the absence of certain governmental actions; and~~

· ~~the absence of a material adverse effect on U.S. HealthWorks or Concentra.~~

The acquisition of U.S. HealthWorks may not close in the anticipated time frame, if at all. The Company has no control over certain conditions in the Purchase Agreement, and cannot predict whether such conditions will be satisfied or waived.

~~The acquisition of U.S. HealthWorks by Concentra and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.~~

~~As part of~~supply chain disruptions.

In our ~~growth strategy, we may pursue acquisitions of specialty hospitals,~~ outpatient rehabilitation clinics and Concentra centers, we may continue to experience declines in demand for our services as a result of actions taken by governmental authorities, which in some instances has led to the closure of non-essential and non-life sustaining businesses, as well as mandated social distancing measures. Our outpatient rehabilitation clinics have already experienced a reduction in patient volume due to hospitals and other ~~related healthcare~~facilities temporarily suspending elective surgeries which typically would result in a patient seeking outpatient services, a decline in patient referrals from physicians, and a reduction in workers’ compensation injury visits due to the temporary closure of businesses, as mentioned above. Our Concentra centers have also experienced a reduction in workers’ compensation and employer services visits due to furloughed workforces and temporarily ceased and reduced operations. As a result of reduced demand in some of our markets, we have adopted a strategy to temporarily consolidate the operations of certain clinics and centers which operate within close proximity to one another.

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

Adverse economic conditions in the U.S. ~~HealthWorks by Concentra, may involve significant cash expenditures, debt incurrence, additional operating losses~~or globally could adversely affect us.

We are subject to the risks arising from adverse conditions in the general economy. A U.S. or global recession or prolonged economic downturn could negatively impact our current and prospective patients, adversely affect the financial ability of health insurers to pay claims, adversely impact our ability to pay our expenses, and ~~compliance risks~~limit our ability to obtain financing for our operations. Healthcare spending in the U.S. could be negatively affected in the event of a downturn in economic conditions. For example, U.S. patients who have lost their jobs or healthcare coverage may no longer be covered by an employer-sponsored health insurance plan, and patients reducing their overall spending may elect to decrease the frequency of visits to our facilities or forgo elective treatments or procedures, thereby reducing demand for our services.

We could experience significant increases to our operating costs due to shortages of healthcare professionals or union activity.

Our critical illness recovery hospitals and our rehabilitation hospitals are highly dependent on nurses, our outpatient rehabilitation division is highly dependent on therapists for patient care, and Concentra is highly dependent upon the ability of its affiliated professional groups to recruit and retain qualified physicians and other licensed providers. The market for qualified healthcare professionals is highly competitive. We have sometimes experienced difficulties in attracting and retaining qualified healthcare personnel. We cannot assure you we will be able to attract and retain qualified healthcare professionals in the future. Additionally, the cost of attracting and retaining qualified healthcare personnel may be higher than we anticipate, and as a result, our profitability could decline. Furthermore, as a result of the heightened risk of infection related to the COVID-19 outbreak, we may be unable to attract and retain qualified healthcare personnel and may face staffing challenges resulting from infections among our personnel, which may result in an increase in labor and other costs.

In addition, United States healthcare providers are continuing to see an increase in the amount of union activity. Though we cannot predict the degree to which we will be affected by future union activity, there may be continuing legislative proposals that could result in increased union activity. We could experience an increase in labor and other costs from such union activity.

If the frequency of workplace injuries and illnesses continues to decline, Concentra’s results may be negatively affected.

Approximately 58% of Concentra’s revenue in 2019 was generated from the treatment of workers’ compensation claims. In the past decade, the number of workers’ compensation claims has decreased, which Concentra primarily attributes to improvements in workplace safety, improved risk management by employers, and changes in the type and composition of jobs. During the economic downturn between the years of 2007-2009, the number of employees with workers’ compensation insurance substantially decreased. A recession or prolonged economic contraction as a result of the COVID-19 pandemic could similarly cause the number of covered employees to decline, which may cause further declines in workers’ compensation claims. In addition, because of the greater access to health insurance and the fact that the United States economy has continued to shift from a manufacturing-based to a service-based economy along with general improvements in workplace safety, workers are generally healthier and less prone to work injuries. Increases in employer-sponsored wellness and health promotion programs, spurred in part by the ACA, have led to fitter and healthier employees who may be less likely to injure themselves on the job. Concentra’s business model is based, in part, on its ability to expand its relative share of the market for the treatment of claims for workplace injuries and illnesses. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States, which may continue even after the pandemic. If workplace injuries and illnesses decline at a greater rate than the increase in total employment, or if total employment declines at a greater rate than the increase in incident rates, the number of claims in the workers’ compensation market will decrease and may adversely affect Concentra’s business.

If Concentra loses several significant employer customers or payor contracts, its results may be adversely affected.

Concentra’s results may decline if it loses several significant employer customers or payor contracts. One or more of Concentra’s significant employer customers could be acquired. Additionally, Concentra could lose significant employer customers or payor contracts due to competitive pricing pressures or other reasons. Our Concentra centers have also experienced a reduction in employer services visits due to furloughed workforces and temporarily ceased and reduced operations during the COVID-19 pandemic. The loss of several significant employer customers or payor contracts could cause a material decline in Concentra’s profitability and operating performance.

Risks Related to Our Capital Structure

If WCAS and the other members of Concentra Group Holdings Parent or DHHC exercise their Put Right, it may have an adverse effect on our liquidity. Additionally, we may not have adequate funds to pay amounts due in connection with the Put Right, if exercised, in which case we would be required to issue Holdings’ common stock to purchase interests of Concentra Group Holdings Parent and our stockholders’ ownership interest will be diluted.

Pursuant to the Concentra LLC Agreement, WCAS and the other members of Concentra Group Holdings Parent and DHHC have separate put rights (each, a “Put Right”) with respect to their equity interests in Concentra Group Holdings Parent. If a Put Right is exercised by WCAS or DHHC, Select will be obligated to purchase up to 33 1/3% of the equity interests of Concentra Group Holdings Parent that WCAS or DHHC, respectively, owned as of February 1, 2018, at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA (as defined in the Concentra LLC Agreement) and capped at an agreed upon multiple of EBITDA. Select has the right to elect to pay the purchase price in cash or in shares of Holdings’ common stock.

On January 1, 2020, Select, WCAS and DHHC agreed to a transaction in lieu of, and deemed to constitute, the exercise of WCAS’ and DHHC’s first Put Right (the “January Interest Purchase”), pursuant to which Select acquired an aggregate amount of approximately 17.2% of the outstanding membership interests, on a fully diluted basis, of Concentra Group Holdings Parent from WCAS, DHHC and the other equity holders of Concentra Group Holdings Parent, in exchange for an aggregate payment of approximately $338.4 million. On February 1, 2020, Select, WCAS and DHHC agreed to a transaction pursuant to which Select acquired an additional amount of approximately 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $27.8 million (the “February Interest Purchase”). The February Interest Purchase was deemed to constitute an additional exercise of WCAS’ and DHHC’s first Put Right. Upon consummation of the January Interest Purchase and the February Interest Purchase, Select owns in the aggregate approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding voting membership interests of Concentra Group Holdings Parent.

WCAS and DHHC may exercise their remaining respective Put Rights to sell up to an additional 33 1/3% of the equity interests in Concentra Group Holdings Parent that each, respectively, owned as of February 1, 2018, on an annual basis beginning in 2021 during the sixty-day period following the delivery of the audited financial ~~condition~~statements for the immediately preceding fiscal year. If WCAS exercises future Put Rights, the other members of Concentra Group Holdings Parent, other than DHHC, may elect to sell to Select, on the same terms as WCAS, a percentage of their equity interests of Concentra Group Holdings Parent that such member owned as of the date of the Amended and Restated LLC Agreement, up to but not exceeding the percentage of equity interests owned by WCAS as of the date of the Amended and Restated LLC Agreement that WCAS has determined to sell to Select in the exercise of its Put Right.

Furthermore, WCAS, DHHC, and the other members of Concentra Group Holdings Parent have a put right with respect to their equity interest in Concentra Group Holdings Parent that may only be exercised in the event Holdings or Select experiences a change of control that has not been previously approved by WCAS and DHHC, and which results in change in the senior management of ~~operations.~~

Select (an “SEM COC Put Right”). If an SEM COC Put Right is exercised by WCAS, Select will be obligated to purchase all (but not less than all) of the equity interests of WCAS and the other members of Concentra Group Holdings Parent (other than DHHC) offered by such members at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA. Similarly, if an SEM COC Put Right is exercised by DHHC, Select will be obligated to purchase all (but not less than all) of the equity interests of DHHC at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.

We may not ~~be able to successfully integrate U.S. HealthWorks~~have sufficient funds, borrowing capacity, or other ~~acquired businesses into ours,~~capital resources available to pay for the interests of Concentra Group Holdings Parent in cash if WCAS, DHHC, and ~~therefore~~the other members of Concentra Group Holdings Parent exercise the Put Right or the SEM COC Put Right, or may be prohibited from doing so under the terms of our debt agreements. To the extent that we face increased operating costs and declines in demand for our services as a result of the adverse impacts of COVID-19, our ability to pay amounts due to WCAS and the other members of Concentra Group Holdings Parent or DHHC in connection with their Put Right, if exercised, may be affected. Such lack of available funds upon the exercising of the Put Right or the SEM COC Put Right would force us to issue stock at a time we might not otherwise desire to do so in order to purchase the interests of Concentra Group Holdings Parent. To the extent that the interests of Concentra Group Holdings Parent are purchased by issuing shares of our common stock, the increase in the number of shares of our common stock issued and outstanding may depress the price of our common stock and our stockholders will experience dilution in their respective percentage ownership in us. In addition, shares issued to purchase the interests in Concentra Group Holdings Parent will be valued at the twenty-one trading day volume-weighted average sales price of such shares for the period beginning ten trading days immediately preceding the first public announcement of the Put Right or the SEM COC Put Right being exercised and ending ten trading days immediately following such announcement. Because the value of the common stock issued to purchase the interests in Concentra Group Holdings Parent is, in part, determined by the sales price of our common stock following the announcement that the Put Right or the SEM COC Put Right is being exercised, which may cause the sales price of our common stock to decline, the amount of common stock we may ~~not be able~~have to ~~realize~~issue to purchase the ~~intended benefits from an acquisition. If we fail~~interests in Concentra Group Holdings Parent may increase, resulting in further dilution to ~~successfully integrate U.S. HealthWorks or other acquisitions,~~ our ~~financial condition and results~~existing stockholders.

Effects of ~~operations~~the COVID-19 pandemic may ~~be materially adversely affected. The acquisition of U.S. HealthWorks by Concentra and other acquisitions could~~ result in ~~difficulties integrating acquired operations, technologies and personnel into~~ our business. Such difficulties may divert significant financial, operational and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic objectives. We may fail to retain employees or patients acquired through the acquisition of U.S. HealthWorks by Concentra or other acquisitions, which may negatively impact the integration efforts. The acquisition of U.S. HealthWorks by Concentra or other acquisitions could also have a negative impact on our results of operations if it is subsequently determined that goodwill or other acquired intangible assets are impaired, thus resulting in an impairment charge in a future period.

In addition, the acquisition of U.S. HealthWorks by Concentra and other acquisitions involve risks that the acquired businesses will not perform in accordance with expectations; that we may become liable for unforeseen financial or business liabilities of the acquired businesses, including liabilities for failure to comply with ~~healthcare regulations; that~~ the ~~expected synergies associated with acquisitions will not be achieved; and that business judgments concerning~~financial covenant under the ~~value, strengths and weaknesses~~Select revolving facility.

The Select revolving facility requires Select to maintain a leverage ratio (based upon the ratio of ~~businesses acquired will prove incorrect, which could have an material adverse effect on our financial condition and results of operations.~~

~~Our substantial~~ indebtedness ~~may limit the amount of cash flow available~~ to ~~invest~~consolidated EBITDA as defined in the ~~ongoing needs~~Select credit facilities), which is tested quarterly. The effects of the COVID-19 pandemic may result in increased operating costs and reduced demand for our ~~business.~~

services, and to the extent such events were to occur, such events may result in our failure to comply with this covenant, which 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 terminate their commitments and accelerate all outstanding revolving borrowings under the Select revolving facility. If the revolving lenders terminate their commitments and accelerate the revolving loans, a cross-default to the Select term loan would then occur. Such events may require us to pursue alternative financing. We have ~~a substantial amount~~no assurance that any such alternative financing, if required, could be obtained on terms acceptable to us, or at all, particularly given the disruption of ~~indebtedness. As of September 30, 2017, Select had approximately $2,177.3 million of total indebtedness, and Concentra had approximately $613.0 million of total indebtedness, which is nonrecourse~~global financial markets due to ~~Select. As of September 30, 2017, our total indebtedness was $2,790.3 million. In connection with~~ the closing of the acquisition of U.S. HealthWorks, Concentra’s indebtedness is expected to substantially increase with the addition of a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility. Our indebtedness could have important consequences to you. For example, it:

· requires us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, acquisitions, and other general corporate purposes;

· ~~increases our vulnerability to adverse general economic or industry conditions;~~

· ~~limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;~~

· ~~makes us more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at variable rates;~~

· ~~limits our ability to obtain additional financing in the future for working capital or other purposes; and~~

· ~~places us at a competitive disadvantage compared to our competitors that have less indebtedness.~~

Any of these consequences could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our indebtedness. In addition, there would be a material adverse effect on our business, financial condition, results of operations and cash flows if we were unable to service our indebtedness or obtain additional financing, as needed.

~~See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”~~

COVID-19 pandemic.

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

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, ~~2018 and~~2020, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. ~~Holdings did not repurchase shares during the three months ended September 30, 2017 under the authorized common stock repurchase program.~~

The following table provides information regarding repurchases of our common stock during the three months ended September 30, 2017. The shares repurchased during the three months ended September 30, 2017 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

July 1 - July 31, 2017

—

$
—

—

$
185,249,408

August 1 - August 31, 2017

175,113

17.15

—

185,249,408

September 1 - September 30, 2017

—

—

—

185,249,408

Total

175,113

$
17.15

—

$
185,249,408

March 31, 2020.

Total Number of
Shares Purchased

Average Price
Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 1 - January 31, 2020 —
$ —
—
$ 152,086,459
February 1 - February 29, 2020 —
—
—
152,086,459
March 1 - March 31, 2020 491,559
17.68
491,559
143,394,863
Total 491,559
$ 17.68
491,559
$ 143,394,863

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

~~Not applicable~~

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

~~Number~~		~~Description~~

~~31.1~~ Number	Description
10.1	Interest Purchase Agreement, dated January 1, 2020, by and among Concentra Group Holdings Parent, LLC, Select Medical Corporation, Welsh, Carson, Anderson & Stowe XII, L.P., Dignity Health Holding Corporation and the other signatories thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on January 2, 2020).
10.2	Interest Purchase Agreement, dated February 1, 2020, by and among Concentra Group Holdings Parent, LLC, Select Medical Corporation, Welsh, Carson, Anderson & Stowe XII, L.P., Dignity Health Holding Corporation and the other signatories thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on February 3, 2020).
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.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
~~101~~ 101.SCH	~~The following financial information from~~XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File - the ~~Registrant’s Quarterly Report on Form 10-Q for~~cover page interactive data file does not appear in the ~~quarter ended September 30, 2017 formatted in~~Interactive Data File because its XBRL ~~(eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for~~tags are embedded within the three and nine months ended September 30, 2016 and 2017, (ii) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 and 2017, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the nine months ended September 30, 2017 and (v) Notes to Condensed Consolidated Financial Statements. Inline XBRL document.

SIGNATURES

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



	SELECT MEDICAL HOLDINGS CORPORATION


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

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

Dated: ~~November 2, 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: November 2, 2017~~

April 30, 2020

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

ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	107,300	$	99,029		$	107,300
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively	573,752		716,426		573,752			716,426
Prepaid income taxes	12,423		—		12,423			—
Other current assets	77,699		80,324		77,699			80,324
Total Current Assets	762,903		904,050		762,903			904,050

Property and equipment, net	892,217		946,063		892,217			946,063
Goodwill	2,751,000		2,767,896		2,751,000			2,767,896
Identifiable intangible assets, net	340,562		331,036		340,562			331,036
Other assets	173,944		174,762		173,944			174,762

Total Assets	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807

LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	39,362	$	18,923	$	39,362		$	18,923
Current portion of long-term debt and notes payable	13,656		37,560		13,656			37,560
Accounts payable	126,558		133,321		126,558			133,321
Accrued payroll	146,397		139,402		146,397			139,402
Accrued vacation	83,261		89,171		83,261			89,171
Accrued interest	22,325		30,998		22,325			30,998
Accrued other	140,076		143,443		140,076			143,443
Income taxes payable	—		6,718		—			6,718
Total Current Liabilities	571,635		599,536		571,635			599,536

Long-term debt, net of current portion	2,685,333		2,752,742		2,685,333			2,752,742
Non-current deferred tax liability	199,078		191,441		199,078			191,441
Other non-current liabilities	136,520		138,118		136,520			138,118

Total Liabilities	3,592,566		3,681,837		3,592,566			3,681,837

Commitments and contingencies (Note 8)

Redeemable non-controlling interests	422,159		621,515		422,159			621,515

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 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		459,004		925,111			942,142
Retained earnings (accumulated deficit)	371,685		262,505		(109,386		)	(220,500		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		721,642		815,725			721,642
Non-controlling interests	90,176		98,813		90,176			98,813
Total Equity	905,901		820,455		905,901			820,455

Total Liabilities and Equity	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807



	December 31, 2019		March 31, 2020
ASSETS
Current Assets:
Cash and cash equivalents	$	335,882	$	73,163
Accounts receivable	762,677		816,405
Prepaid income taxes	18,585		12,634
Other current assets	95,848		95,828
Total Current Assets	1,212,992		998,030
Operating lease right-of-use assets	1,003,986		1,014,969
Property and equipment, net	998,406		978,547
Goodwill	3,391,955		3,391,078
Identifiable intangible assets, net	409,068		405,374
Other assets	323,881		327,569
Total Assets	$	7,340,288	$	7,115,567
LIABILITIES AND EQUITY
Current Liabilities:
Current operating lease liabilities	$	207,950	$	212,884
Current portion of long-term debt and notes payable	25,167		17,161
Accounts payable	145,731		131,601
Accrued payroll	183,754		140,009
Accrued vacation	124,111		128,705
Accrued interest	33,853		11,339
Accrued other	191,076		194,165
Income taxes payable	2,638		8,090
Total Current Liabilities	914,280		843,954
Non-current operating lease liabilities	852,897		860,796
Long-term debt, net of current portion	3,419,943		3,553,056
Non-current deferred tax liability	148,258		158,782
Other non-current liabilities	101,334		103,783
Total Liabilities	5,436,712		5,520,371
Commitments and contingencies (Note 11)
Redeemable non-controlling interests	974,541		620,377
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,823,713 shares issued and outstanding at 2019 and 2020, respectively	134		134
Capital in excess of par	491,038		491,824
Retained earnings	279,800		316,680
Total Stockholders’ Equity	770,972		808,638
Non-controlling interests	158,063		166,181
Total Equity	929,035		974,819
Total Liabilities and Equity	$	7,340,288	$	7,115,567

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

Net operating revenues	$	1,053,795		$	1,097,166		$	1,053,795		$	1,097,166

Costs and expenses:
Cost of services	915,703			938,910			915,703			938,910
General and administrative	27,088			27,065			27,088			27,065
Bad debt expense	17,677			20,321			17,677			20,321
Depreciation and amortization	37,165			38,772			37,165			38,772
Total costs and expenses	997,633			1,025,068			997,633			1,025,068

Income from operations	56,162			72,098			56,162			72,098

Other income and expense:
Loss on early retirement of debt	(10,853		)	—			(10,853		)	—
Equity in earnings of unconsolidated subsidiaries	5,268			4,431			5,268			4,431
Non-operating loss	(1,028		)	—			(1,028		)	—
Interest expense	(44,482		)	(37,688		)	(44,482		)	(37,688		)

Income before income taxes	5,067			38,841			5,067			38,841

Income tax expense	1,075			14,017			1,075			14,017
Net income	3,992			24,824			3,992			24,824

Less: Net income (loss) attributable to non-controlling interests	(2,479		)	6,362			(2,479		)	6,362

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	6,471		$	18,462		$	6,471		$	18,462

Income per common share:
Basic	$	0.05		$	0.14
Diluted	$	0.05		$	0.14

Weighted average shares outstanding:
Basic	127,848			129,142
Diluted	127,989			129,322



	For the Three Months Ended March 31,
	2019			2020
Net operating revenues	$	1,324,631		$	1,414,632
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,132,092			1,200,371
General and administrative	28,677			33,831
Depreciation and amortization	52,138			51,752
Total costs and expenses	1,212,907			1,285,954
Income from operations	111,724			128,678
Other income and expense:
Equity in earnings of unconsolidated subsidiaries	4,366			2,588
Gain on sale of businesses	6,532			7,201
Interest expense	(50,811		)	(46,107		)
Income before income taxes	71,811			92,360
Income tax expense	18,467			21,912
Net income	53,344			70,448
Less: Net income attributable to non-controlling interests	12,510			17,323
Net income attributable to Select Medical Holdings Corporation	$	40,834		$	53,125
Earnings per common share (Note 10):
Basic	$	0.30		$	0.40
Diluted	$	0.30		$	0.40

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017

Net operating revenues	$	3,239,756		$	3,329,202		$	3,239,756		$	3,329,202

Costs and expenses:
Cost of services	2,754,950			2,787,497			2,754,950			2,787,497
General and administrative	81,226			83,415			81,226			83,415
Bad debt expense	51,591			59,120			51,591			59,120
Depreciation and amortization	107,887			119,644			107,887			119,644
Total costs and expenses	2,995,654			3,049,676			2,995,654			3,049,676

Income from operations	244,102			279,526			244,102			279,526

Other income and expense:
Loss on early retirement of debt	(11,626		)	(19,719		)	(11,626		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	14,466			15,618			14,466			15,618
Non-operating gain (loss)	37,094			(49		)	37,094			(49		)
Interest expense	(127,662		)	(116,196		)	(127,662		)	(116,196		)

Income before income taxes	156,374			159,180			156,374			159,180

Income tax expense	51,585			59,593			51,585			59,593
Net income	104,789			99,587			104,789			99,587

Less: Net income attributable to non-controlling interests	9,550			23,200			9,550			23,200

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	95,239		$	76,387		$	95,239		$	76,387

Income per common share:
Basic	$	0.72		$	0.57
Diluted	$	0.72		$	0.57

Weighted average shares outstanding:
Basic	127,659			128,745
Diluted	127,804			128,916



	For the Three Months Ended March 31, 2020

			Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2019	134,328		$	134	$	491,038		$	279,800		$	770,972		$	158,063		$	929,035
Net income attributable to Select Medical Holdings Corporation								53,125			53,125						53,125
Net income attributable to non-controlling interests											—			10,067			10,067
Issuance of restricted stock	2		0		0						—						—
Forfeitures of unvested restricted stock	(15	)	0		0						—						—
Vesting of restricted stock					6,136						6,136						6,136
Repurchase of common shares	(492	)	0		(5,350		)	(3,341		)	(8,691		)				(8,691		)
Issuance of non-controlling interests											—			1,679			1,679
Distributions to and purchases of non-controlling interests								(2,726		)	(2,726		)	(4,048		)	(6,774		)
Redemption adjustment on non-controlling interests								(10,123		)	(10,123		)				(10,123		)
Other								(55		)	(55		)	420			365
Balance at March 31, 2020	133,823		$	134	$	491,824		$	316,680		$	808,638		$	166,181		$	974,819

				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											76,387			76,387						76,387
Net income attributable to non-controlling interests	18,519													—			4,681			4,681
Issuance and vesting of restricted stock				1,323		1		13,445						13,446						13,446
Repurchase of common shares				(220	)	0		(1,934		)	(1,669		)	(3,603		)				(3,603		)
Exercise of stock options				185		0		1,634						1,634						1,634
Issuance of non-controlling interests								1,951						1,951			8,944			10,895
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(4,003		)											—			(5,153		)	(5,153		)
Redemption adjustment on non-controlling interests	184,294										(184,294		)	(184,294		)				(184,294		)
Other	673										389			389			165			554
Balance at September 30, 2017	$	621,515		133,885		$	133	$	459,004		$	262,505		$	721,642		$	98,813		$	820,455

	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

	Nine Months Ended September 30, 2016
	(in thousands, except per share amounts)
Net revenue	$	3,293,286
Net income attributable to Holdings	93,418
Income per common share:
Basic	$	0.71
Diluted	$	0.71

	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	797			1,768		14,505		17,070
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of September 30, 2017	$	1,447,861		$	645,493	$	674,542	$	2,767,896

	December 31, 2016							September 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		19,166		—			19,166
Accreditations	2,235		—			2,235		1,965		—			1,965
Finite-lived assets:
Customer relationships	142,198		(23,185		)	119,013		143,953		(34,482		)	109,471
Favorable leasehold interests	13,089		(2,317		)	10,772		13,295		(3,745		)	9,550
Non-compete agreements	26,655		(1,837		)	24,818		27,555		(3,369		)	24,186
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	372,632	$	(41,596	)	$	331,036

Finite-lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(2,529	)	$	2,814

	2017		2018		2019		2020		2021		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	—	$	710,000	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		—		320,000		320,000
Term loan	2,875		11,500		11,500		11,500		11,500		1,095,375		1,144,250
Other	17,828		5,437		11,827		68		14		10		35,184
Total Select debt	20,703		16,937		23,327		11,568		721,514		1,415,385		2,209,434

Concentra:
Credit facilities:
Term loan	—		—		—		3,016		6,520		609,639		619,175
Other	657		2,843		144		161		160		3,559			7,524
Total Concentra debt	657		2,843		144		3,177		6,680		613,198		626,699

Total debt	$	21,360	$	19,780	$	23,471	$	14,745	$	728,194	$	2,028,583	$	2,836,133

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2017			2016			2017
	(in thousands)
Net operating revenues:
Specialty hospitals	$	544,491		$	585,288		$	1,729,261		$	1,785,035
Outpatient rehabilitation(1)	250,710			250,527			745,720			764,450
Concentra	258,507			261,295			764,252			779,030
Other	87			56			523			687
Total Company	$	1,053,795		$	1,097,166		$	3,239,756		$	3,329,202

Adjusted EBITDA:
Specialty hospitals	$	48,264		$	69,454		$	217,759		$	256,291
Outpatient rehabilitation(1)	31,995			29,298			99,006			102,575
Concentra	40,888			40,003			118,080			125,656
Other	(23,070		)	(22,928		)	(66,696		)	(71,125		)
Total Company	$	98,077		$	115,827		$	368,149		$	413,397

Total assets:(2)
Specialty hospitals	$	2,469,060		$	2,748,761		$	2,469,060		$	2,748,761
Outpatient rehabilitation	955,359			945,765			955,359			945,765
Concentra	1,318,866			1,332,012			1,318,866			1,332,012
Other	73,992			97,269			73,992			97,269
Total Company	$	4,817,277		$	5,123,807		$	4,817,277		$	5,123,807

Purchases of property and equipment, net:
Specialty hospitals	$	24,378		$	37,376		$	79,366		$	106,424
Outpatient rehabilitation(1)	6,234			6,496			15,032			19,370
Concentra	2,720			5,369			10,647			21,656
Other	4,670			19,257			13,215			26,350
Total Company	$	38,002		$	68,498		$	118,260		$	173,800


(1)	Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.

	Three Months Ended September 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	48,264		$	31,995		$	40,888		$	(23,070	)
Depreciation and amortization	(14,317		)	(6,159		)	(15,278		)	(1,411		)
Stock compensation expense	—			—			(193		)	(4,557		)
Income (loss) from operations	$	33,947		$	25,836		$	25,417		$	(29,038	)	$	56,162
Loss on early retirement of debt													(10,853		)
Equity in earnings of unconsolidated subsidiaries													5,268
Non-operating loss													(1,028		)
Interest expense													(44,482		)
Income before income taxes													$	5,067

	Three Months Ended September 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	69,454		$	29,298		$	40,003		$	(22,928	)
Depreciation and amortization	(15,437		)	(5,964		)	(15,014		)	(2,357		)
Stock compensation expense	—			—			(212		)	(4,745		)
Income (loss) from operations	$	54,017		$	23,334		$	24,777		$	(30,030	)	$	72,098
Equity in earnings of unconsolidated subsidiaries													4,431
Interest expense													(37,688		)
Income before income taxes													$	38,841

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2017		2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	6,471	$	18,462	$	95,239	$	76,387
Less: Earnings allocated to unvested restricted stockholders	209		608		2,852		2,464
Net income available to common stockholders	$	6,262	$	17,854	$	92,387	$	73,923

Denominator:
Weighted average shares—basic	127,848		129,142		127,659		128,745
Effect of dilutive securities:
Stock options	141		180		145		171
Weighted average shares—diluted	127,989		129,322		127,804		128,916

Basic income per common share:	$	0.05	$	0.14	$	0.72	$	0.57
Diluted income per common share:	$	0.05	$	0.14	$	0.72	$	0.57

	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		$	6,359	$	4,548		$	96,320	$	—		$	107,300
Accounts receivable, net	—			468,370		120,463			127,593		—			716,426
Intercompany receivables	—			1,488,527		36,784			—		(1,525,311		)(a)	—
Prepaid income taxes	2,882			—		—			—		(2,882		)(f)	—
Other current assets	10,937			30,142		16,814			22,431		—			80,324
Total Current Assets	13,892			1,993,398		178,609			246,344		(1,528,193		)	904,050

Property and equipment, net	50,736			646,672		75,315			173,340		—			946,063
Investment in affiliates	4,421,777			116,370		—			—		(4,538,147		)(b)(c)	—
Goodwill	—			2,093,354		—			674,542		—			2,767,896
Identifiable intangible assets, net	—			104,570		4,824			221,642		—			331,036
Other assets	42,852			101,285		36,285			16,144		(21,804		)(e)	174,762

Total Assets	$	4,529,257		$	5,055,649	$	295,033		$	1,332,012	$	(6,088,144	)	$	5,123,807

Liabilities and Equity
Current Liabilities:
Overdrafts	$	18,923		$	—	$	—		$	—	$	—		$	18,923
Current portion of long-term debt and notes payable	30,838			773		2,483			3,466		—			37,560
Accounts payable	13,066			82,662		24,196			13,397		—			133,321
Intercompany payables	1,488,527			36,784		—			—		(1,525,311		)(a)	—
Accrued payroll	11,186			86,257		3,931			38,028		—			139,402
Accrued vacation	3,848			55,949		12,040			17,334		—			89,171
Accrued interest	28,763			7		—			2,228		—			30,998
Accrued other	40,075			59,088		12,183			32,097		—			143,443
Income taxes payable	—			—		—			9,600		(2,882		)(f)	6,718
Total Current Liabilities	1,635,226			321,520		54,833			116,150		(1,528,193		)	599,536

Long-term debt, net of current portion	2,133,355			243		9,564			609,580		—			2,752,742
Non-current deferred tax liability	—			131,902		767			80,576		(21,804		)(e)	191,441
Other non-current liabilities	39,034			55,572		8,039			35,473		—			138,118

Total Liabilities	3,807,615			509,237		73,203			841,779		(1,549,997		)	3,681,837

Redeemable non-controlling interests	—			—		—			14,641		606,874		(d)	621,515

Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	942,142			—		—			—		—			942,142
Retained earnings (accumulated deficit)	(220,500		)	1,328,453		(40,068		)	34,338		(1,322,723		)(c)(d)	(220,500		)
Subsidiary investment	—			3,217,959		261,898			437,568		(3,917,425		)(b)(d)	—
Total Select Medical Corporation Stockholder’s Equity	721,642			4,546,412		221,830			471,906		(5,240,148		)	721,642

Non-controlling interests	—			—		—			3,686		95,127		(d)	98,813
Total Equity	721,642			4,546,412		221,830			475,592		(5,145,021		)	820,455

Total Liabilities and Equity	$	4,529,257		$	5,055,649	$	295,033		$	1,332,012	$	(6,088,144	)	$	5,123,807

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments			Consolidated Select Medical Corporation
	(in thousands)

Net operating revenues	$	687		$	2,038,955		$	510,530		$	779,030		$	—		$	3,329,202

Costs and expenses:
Cost of services	1,843			1,713,091			434,130			638,433			—			2,787,497
General and administrative	83,291			124			—			—			—			83,415
Bad debt expense	—			32,456			10,941			15,723			—			59,120
Depreciation and amortization	5,503			57,471			10,104			46,566			—			119,644
Total costs and expenses	90,637			1,803,142			455,175			700,722			—			3,049,676

Income (loss) from operations	(89,950		)	235,813			55,355			78,308			—			279,526

Other income and expense:
Intercompany interest and royalty fees	24,760			(13,586		)	(11,174		)	—			—			—
Intercompany management fees	176,443			(147,117		)	(29,326		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			15,555			63			—			—			15,618
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest income (expense)	(93,725		)	269			(104		)	(22,636		)	—			(116,196		)

Income (loss) before income taxes	(2,191		)	90,885			14,814			55,672			—			159,180

Income tax expense (benefit)	(3,230		)	41,620			943			20,260			—			59,593
Equity in earnings of consolidated subsidiaries	75,348			10,174			—			—			(85,522		)(a)	—

Net income	76,387			59,439			13,871			35,412			(85,522		)	99,587

Less: Net income attributable to non-controlling interests	—			—			3,627			19,573			—			23,200

Net income attributable to Select Medical Corporation	$	76,387		$	59,439		$	10,244		$	15,839		$	(85,522	)	$	76,387



	Two Months Ended February								One Month Ended March								Three Months Ended March
	2019			2020			% Change		2019			2020			% Change		2019			2020
Selected financial data:
Net operating revenues:
Critical illness recovery hospital	$	295,385		$	328,613		11.2	%	$	162,149		$	171,908		6.0	%	$	457,534		$	500,521
Rehabilitation hospital	98,695			122,363			24.0		55,863			59,656			6.8		154,558			182,019
Outpatient rehabilitation	161,758			179,163			10.8		85,147			76,086			(10.6	)	246,905			255,249
Concentra	259,816			274,926			5.8		136,505			123,609			(9.4	)	396,321			398,535
Other⁽¹⁾	38,532			54,283			40.9		30,781			24,025			(21.9	)	69,313			78,308
Total Company	$	854,186		$	959,348		12.3	%	$	470,445		$	455,284		(3.2	)%	$	1,324,631		$	1,414,632
Income (loss) from operations:
Critical illness recovery hospital	$	36,355		$	48,395		33.1	%	$	25,192		$	27,839		10.5	%	$	61,547		$	76,234
Rehabilitation hospital	11,605			22,855			96.9		7,790			8,827			13.3		19,395			31,682
Outpatient rehabilitation	12,623			18,289			44.9		9,336			1,615			(82.7	)	21,959			19,904
Concentra	23,373			29,624			26.7		17,214			8,188			(52.4	)	40,587			37,812
Other⁽¹⁾	(22,432		)	(24,868		)	(10.9	)	(9,332		)	(12,086		)	(29.5	)	(31,764		)	(36,954		)
Total Company	$	61,524		$	94,295		53.3	%	$	50,200		$	34,383		(31.5	)%	$	111,724		$	128,678
Adjusted EBITDA:
Critical illness recovery hospital	$	44,035		$	56,648		28.6	%	$	28,963		$	31,922		10.2	%	$	72,998		$	88,570
Rehabilitation hospital	15,908			27,448			72.5		9,889			11,121			12.5		25,797			38,569
Outpatient rehabilitation	17,265			23,062			33.6		11,726			4,060			(65.4	)	28,991			27,122
Concentra	40,785			45,537			11.7		25,473			15,929			(37.5	)	66,258			61,466
Other⁽¹⁾	(17,278		)	(19,281		)	(11.6	)	(6,649		)	(9,113		)	(37.1	)	(23,927		)	(28,394		)
Total Company	$	100,715		$	133,414		32.5	%	$	69,402		$	53,919		(22.3	)%	$	170,117		$	187,333
Adjusted EBITDA margins:
Critical illness recovery hospital	14.9		%	17.2		%			17.9		%	18.6		%			16.0		%	17.7		%
Rehabilitation hospital	16.1			22.4					17.7			18.6					16.7			21.2
Outpatient rehabilitation	10.7			12.9					13.8			5.3					11.7			10.6
Concentra	15.7			16.6					18.7			12.9					16.7			15.4
Other⁽¹⁾	N/M			N/M					N/M			N/M					N/M			N/M
Total Company	11.8		%	13.9		%			14.8		%	11.8		%			12.8		%	13.2		%

	Two Months Ended February								One Month Ended March								Three Months Ended March
	2019			2020			% Change		2019			2020			% Change		2019			2020
Operating statistics:
Critical illness recovery hospital:
Admissions	6,303			6,427			2.0	%	3,153			3,106			(1.5	)%	9,456			9,533
Patient days	167,044			178,627			6.9	%	91,085			91,831			0.8	%	258,129			270,458
Occupancy rate	70		%	70		%			73		%	70		%			71		%	70		%
Rehabilitation hospital:
Admissions	3,758			4,412			17.4	%	2,078			1,921			(7.6	)%	5,836			6,333
Patient days	52,876			63,924			20.9	%	29,940			30,644			2.4	%	82,816			94,568
Occupancy rate	75		%	81		%			78		%	76		%			76		%	79		%
Outpatient rehabilitation:
Number of visits	1,345,617			1,496,232			11.2	%	708,866			626,433			(11.6	)%	2,054,483			2,122,665
Concentra:
Number of visits	1,904,663			1,997,810			4.9	%	1,006,944			879,585			(12.6	)%	2,911,607			2,877,395

	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	65	%	1.27
December 31	70	%	1.21	63	%	1.26


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


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


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


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


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


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


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


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