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~~

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~~

(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, PA 17055

(Address of Principal Executive Offices and Zip code)

(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. Yes x☒ 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). Yes x☒ 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,~~September 30, 2020, Select Medical Holdings Corporation had outstanding ~~133,824,559~~134,762,890 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

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 September 30, 2020
ASSETS
Current Assets:
Cash and cash equivalents $ 335,882 $ 639,800
Accounts receivable 762,677 842,615
Prepaid income taxes 18,585 23,536
Other current assets 95,848 118,183
Total Current Assets 1,212,992 1,624,134
Operating lease right-of-use assets 1,003,986 1,005,689
Property and equipment, net 998,406 927,975
Goodwill 3,391,955 3,369,009
Identifiable intangible assets, net 409,068 392,506
Other assets 323,881 340,564
Total Assets $ 7,340,288 $ 7,659,877
LIABILITIES AND EQUITY
Current Liabilities:
Current operating lease liabilities $ 207,950 $ 215,235
Current portion of long-term debt and notes payable 25,167 11,031
Accounts payable 145,731 160,474
Accrued payroll 183,754 182,461
Accrued vacation 124,111 124,898
Accrued interest 33,853 10,152
Accrued other 191,076 239,201
Government advances (Note 14) 0 318,116
Unearned government assistance (Note 14) 0 66,938
Income taxes payable 2,638 16,980
Total Current Liabilities 914,280 1,345,486
Non-current operating lease liabilities 852,897 852,555
Long-term debt, net of current portion 3,419,943 3,390,945
Non-current deferred tax liability 148,258 131,423
Other non-current liabilities 101,334 178,967
Total Liabilities 5,436,712 5,899,376
Commitments and contingencies (Note 13)
Redeemable non-controlling interests 974,541 541,856
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 134,762,890 shares issued and outstanding at 2019 and 2020, respectively 134 135
Capital in excess of par 491,038 500,972
Retained earnings 279,800 537,479
Total Stockholders’ Equity 770,972 1,038,586
Non-controlling interests 158,063 180,059
Total Equity 929,035 1,218,645
Total Liabilities and Equity $ 7,340,288 $ 7,659,877

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

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 September 30,
2019 2020
Net operating revenues $ 1,393,343 $ 1,423,869
Costs and expenses:
Cost of services, exclusive of depreciation and amortization 1,183,111 1,180,951
General and administrative 34,385 35,516
Depreciation and amortization 52,941 50,110
Total costs and expenses 1,270,437 1,266,577
Other operating income (Note 14) 0 (1,160)
Income from operations 122,906 156,132
Other income and expense:
Loss on early retirement of debt (18,643) 0
Equity in earnings of unconsolidated subsidiaries 6,950 8,765
Gain on sale of businesses 0 5,143
Interest expense (54,336) (34,026)
Income before income taxes 56,877 136,014
Income tax expense 12,847 31,557
Net income 44,030 104,457
Less: Net income attributable to non-controlling interests 13,298 27,511
Net income attributable to Select Medical Holdings Corporation $ 30,732 $ 76,946
Earnings per common share (Note 12):
Basic $ 0.23 $ 0.57
Diluted $ 0.23 $ 0.57

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

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 Nine Months Ended September 30,
2019 2020
Net operating revenues $ 4,079,338 $ 4,071,219
Costs and expenses:
Cost of services, exclusive of depreciation and amortization 3,465,353 3,463,778
General and administrative 94,401 102,808
Depreciation and amortization 160,072 154,133
Total costs and expenses 3,719,826 3,720,719
Other operating income (Note 14) 0 53,828
Income from operations 359,512 404,328
Other income and expense:
Loss on early retirement of debt (18,643) 0
Equity in earnings of unconsolidated subsidiaries 18,710 19,677
Gain on sale of businesses 6,532 12,690
Interest expense (156,611) (117,499)
Income before income taxes 209,500 319,196
Income tax expense 52,140 76,805
Net income 157,360 242,391
Less: Net income attributable to non-controlling interests 40,978 60,670
Net income attributable to Select Medical Holdings Corporation $ 116,382 $ 181,721
Earnings per common share (Note 12):
Basic $ 0.86 $ 1.35
Diluted $ 0.86 $ 1.35

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

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 Nine Months Ended September 30, 2020
Total Stockholders’ Equity
Common
Stock
Issued Common
Stock
Par Value Capital in
Excess
of Par Retained
Earnings Total Stockholders’ Equity Non-controlling
Interests Total
Equity
Balance at December 31, 2019 134,328 $ 134 $ 491,038 $ 279,800 $ 770,972 $ 158,063 $ 929,035
Net income attributable to Select Medical Holdings Corporation 53,125 53,125 53,125
Net income attributable to non-controlling interests — 10,067 10,067
Issuance of restricted stock 2 0 0 — 0
Forfeitures of unvested restricted stock (15) 0 0 — 0
Vesting of restricted stock 6,136 6,136 6,136
Repurchase of common shares (492) 0 (5,350) (3,341) (8,691) (8,691)
Issuance of non-controlling interests — 1,679 1,679
Distributions to and purchases of non-controlling interests (2,726) (2,726) (4,048) (6,774)
Redemption adjustment on non-controlling interests (10,123) (10,123) (10,123)
Other (55) (55) 420 365
Balance at March 31, 2020 133,823 $ 134 $ 491,824 $ 316,680 $ 808,638 $ 166,181 $ 974,819
Net income attributable to Select Medical Holdings Corporation 51,650 51,650 51,650
Net income attributable to non-controlling interests — 12,572 12,572
Issuance of restricted stock 200 0 0 — 0
Forfeitures of unvested restricted stock (7) 0 0 — 0
Vesting of restricted stock 6,262 6,262 6,262
Repurchase of common shares (46) 0 (441) (283) (724) (724)
Issuance of non-controlling interests — 7 7
Distributions to and purchases of non-controlling interests (65) (65) (418) (483)
Redemption adjustment on non-controlling interests 127,916 127,916 127,916
Other (795) 1 (794) 1,205 411
Balance at June 30, 2020 133,970 $ 134 $ 496,785 $ 495,964 $ 992,883 $ 179,547 $ 1,172,430
Net income attributable to Select Medical Holdings Corporation 76,946 76,946 76,946
Net income attributable to non-controlling interests — 10,183 10,183
Issuance of restricted stock 1,049 1 (1) — 0
Forfeitures of unvested restricted stock (2) 0 0 — 0
Vesting of restricted stock 6,456 6,456 6,456
Repurchase of common shares (254) 0 (2,366) (2,461) (4,827) (4,827)
Distributions to and purchases of non-controlling interests 98 (416) (318) (10,020) (10,338)
Redemption adjustment on non-controlling interests (32,555) (32,555) (32,555)
Other 1 1 349 350
Balance at September 30, 2020 134,763 $ 135 $ 500,972 $ 537,479 $ 1,038,586 $ 180,059 $ 1,218,645

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of ~~Cash Flows~~

Changes in Equity and Income

(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

For the Nine Months Ended September 30, 2019
Total Stockholders’ Equity
Common
Stock
Issued Common
Stock
Par Value Capital in
Excess
of Par Retained
Earnings Total Stockholders’ Equity Non-controlling
Interests Total
Equity
Balance at December 31, 2018 135,266 $ 135 $ 482,556 $ 320,351 $ 803,042 $ 113,198 $ 916,240
Net income attributable to Select Medical Holdings Corporation 40,834 40,834 40,834
Net income attributable to non-controlling interests — 4,810 4,810
Issuance of restricted stock 21 0 0 — 0
Forfeitures of unvested restricted stock (24) 0 0 — 0
Vesting of restricted stock 5,488 5,488 5,488
Issuance of non-controlling interests — 6,837 6,837
Distributions to and purchases of non-controlling interests 259 259 (2,739) (2,480)
Redemption adjustment on non-controlling interests (47,470) (47,470) (47,470)
Other (122) (122) 413 291
Balance at March 31, 2019 135,263 $ 135 $ 488,303 $ 313,593 $ 802,031 $ 122,519 $ 924,550
Net income attributable to Select Medical Holdings Corporation 44,816 44,816 44,816
Net income attributable to non-controlling interests — 3,663 3,663
Issuance of restricted stock 187 0 0 — 0
Vesting of restricted stock 5,591 5,591 5,591
Repurchase of common shares (936) 0 (8,164) (5,456) (13,620) (13,620)
Exercise of stock options 50 0 459 459 459
Issuance of non-controlling interests 6,366 6,366 24,761 31,127
Distributions to and purchases of non-controlling interests 14 14 (1,430) (1,416)
Redemption adjustment on non-controlling interests 270 270 270
Other 82 82 428 510
Balance at June 30, 2019 134,564 $ 135 $ 492,569 $ 353,305 $ 846,009 $ 149,941 $ 995,950
Net income attributable to Select Medical Holdings Corporation 30,732 30,732 30,732
Net income attributable to non-controlling interests — 7,202 7,202
Issuance of restricted stock 1,069 1 (1) — 0
Forfeitures of unvested restricted stock (12) 0 0 — 0
Vesting of restricted stock 6,050 6,050 6,050
Repurchase of common shares (1,494) (2) (13,616) (10,071) (23,689) (23,689)
Exercise of stock options 45 0 413 413 413
Distributions to and purchases of non-controlling interests 0 (6,538) (6,538)
Redemption adjustment on non-controlling interests (104,553) (104,553) (104,553)
Other (244) (244) 420 176
Balance at September 30, 2019 134,172 $ 134 $ 485,415 $ 269,169 $ 754,718 $ 151,025 $ 905,743

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

For the Nine Months Ended September 30,
2019 2020
Operating activities
Net income $ 157,360 $ 242,391
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries 13,609 21,720
Depreciation and amortization 160,072 154,133
Provision for expected credit losses 2,344 281
Equity in earnings of unconsolidated subsidiaries (18,710) (19,677)
Loss on extinguishment of debt 10,160 0
Gain on sale of assets and businesses (6,349) (24,723)
Stock compensation expense 19,431 20,828
Amortization of debt discount, premium and issuance costs 9,469 1,635
Deferred income taxes (7,247) (14,556)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable (93,425) (91,413)
Other current assets (6,016) (22,815)
Other assets 1,259 16,335
Accounts payable 1,369 24,246
Accrued expenses 22,396 117,781
Government advances 0 318,116
Unearned government assistance 0 66,938
Income taxes 918 9,415
Net cash provided by operating activities 266,640 820,635
Investing activities
Business combinations, net of cash acquired (86,269) (14,076)
Purchases of property and equipment (123,956) (105,572)
Investment in businesses (60,668) (25,857)
Proceeds from sale of assets and businesses 183 83,320
Net cash used in investing activities (270,710) (62,185)
Financing activities
Borrowings on revolving facilities 700,000 470,000
Payments on revolving facilities (720,000) (470,000)
Proceeds from term loans 593,683 0
Payments on term loans (375,084) (39,843)
Proceeds from 6.250% senior notes 539,176 0
Payment on 6.375% senior notes (710,000) 0
Revolving facility debt issuance costs (310) 0
Borrowings of other debt 19,282 35,086
Principal payments on other debt (22,628) (42,820)
Repurchase of common stock (37,309) (14,242)
Proceeds from exercise of stock options 872 0
Decrease in overdrafts (25,083) 0
Proceeds from issuance of non-controlling interests 18,288 1,686
Distributions to and purchases of non-controlling interests (16,032) (28,196)
Purchase of membership interests of Concentra Group Holdings Parent (Note 4) 0 (366,203)
Net cash used in financing activities (35,145) (454,532)
Net increase (decrease) in cash and cash equivalents (39,215) 303,918
Cash and cash equivalents at beginning of period 175,178 335,882
Cash and cash equivalents at end of period $ 135,963 $ 639,800
Supplemental Information
Cash paid for interest $ 149,090 $ 140,174
Cash paid for taxes 58,472 81,945

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

Table of Contents

SELECT MEDICAL HOLDINGS CORPORATION ~~AND SELECT MEDICAL CORPORATION~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, ~~2017,~~2020, and for the three and nine month periods ended September 30, ~~2016~~2019 and ~~2017,~~2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and the 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 the 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~~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.~~

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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In ~~January 2017,~~March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2017-01,~~ ~~Business Combinations~~2020-04, Reference Rate Reform (Topic ~~805)~~848), ~~Clarifying~~ Facilitation of the ~~Definition~~Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary relief from some of the existing rules governing contract modifications when the modification is related to the replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform. The ASU specifically provides optional practical expedients for contract modification accounting related to contracts subject to ASC 310, Receivables, ASC 470, Debt, ASC 842, Leases, and ASC 815, Derivatives and Hedging. The ASU also establishes a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients. For eligible contract modifications, the principle generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a ~~Business, which clarifies~~previous accounting determination. That is, the ~~definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be~~modified contract is accounted for as ~~acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all~~a continuation of the ~~fair value of~~existing contract. The standard was effective upon issuance on March 12, 2020, and the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 willoptional practical expedients can generally be applied ~~prospectively~~to contract modifications made and ~~is effective for annual periods beginning after~~hedging relationships entered into on or before December ~~15, 2017. Early adoption is permitted.~~

31, 2022.

Borrowings under the Company’s senior secured credit agreement bear interest, at the election of Select, based on LIBOR or an alternate base rate. Provisions within the senior secured credit agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist.

Table of Contents

In ~~October 2016,~~August 2020, the FASB issued ASU ~~2016-16,~~ ~~Income~~ ~~Taxes (Topic 740), Intra-Entity Transfers~~2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity which simplifies the accounting for certain financial instruments with characteristics of ~~Assets Other Than Inventory.~~ ~~Current GAAP prohibits~~liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the ~~recognition~~if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of ~~current~~whether the entity or the counterparty can choose between cash and ~~deferred income taxes~~share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy.

This pronouncement is effective 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 effectivefiscal years, and for interim periods within those fiscal years, beginning after December 15, ~~2017.~~2021. The Company plans to adopt ~~the guidance effective~~this pronouncement as of January 1, ~~2018. Adoption~~2022. The use of either the ~~guidance will be applied on a~~ modified retrospective ~~approach through a cumulative effect adjustment to retained earnings as~~or fully retrospective method of ~~the effective date.~~transition is permitted. The Company is currently evaluating the ~~standard to determine the~~ impact ~~it will have on its consolidated financial statements.~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~~~. This ASU includes a lessee accounting model that recognizes two types~~ of leases; 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.

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

The Company will implement the new standard beginning January 1, 2019. The Company’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~~

~~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~~2020-06 on the Company's consolidated financial statements.

Recently Adopted Accounting Pronouncements

Financial Instruments

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of ~~Deferred Taxes.~~

~~3. Acquisitions~~

~~Physiotherapy Acquisition~~

~~On March 4, 2016, Select acquired 100%~~Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.

The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the ~~issued and outstanding equity securities~~patient. The Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of ~~Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for $406.3 million, net of $12.3 million of cash acquired.~~

~~For~~ the ~~Physiotherapy acquisition,~~Company’s accounts receivable at January 1, 2020.

In estimating the Company’s expected credit losses under Topic 326, the Company ~~allocated the purchase price to tangible~~considers its incurred loss experience and ~~identifiable intangible assets acquired~~adjusts for known 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~~expected events 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~~adoption date of the standard.

Table of Contents

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 19% of the Company’s accounts receivable is from Medicare at December 31, 2019, and September 30, ~~2016 were~~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 were as follows (in thousands):


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

Distributions to and purchases of redeemable non-controlling interests	(2,771)		(5,687)
Purchase of membership interests of Concentra Group Holdings Parent	0		(366,203)
Redemption adjustment on redeemable non-controlling interests	47,470		10,123
Other	354		347
Balance as of March 31	$	833,241	$	620,377
Net income attributable to redeemable non-controlling interests	11,507		3,264
Distributions to and purchases of redeemable non-controlling interests	(395)		(30)
Redemption adjustment on redeemable non-controlling interests	(270)		(127,916)
Other	339		292
Balance as of June 30	$	844,422	$	495,987
Net income attributable to redeemable non-controlling interests	6,096		17,328
Distributions to and purchases of redeemable non-controlling interests	(1,721)		(4,171)
Redemption adjustment on redeemable non-controlling interests	104,553		32,555
Other	347		157
Balance as of September 30	$	953,697	$	541,856

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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~~$180.7 million at December 31, 2019, and September 30, 2020, respectively. The total liabilities of ~~goodwill~~Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $176.7 million and $179.4 million at December 31, 2019, and September 30, 2020, respectively.

6. Leases

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

The Company’s total lease cost was as follows (in thousands):


	Three Months Ended September 30, 2019						Three Months Ended September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease cost	$	68,046	$	1,342	$	69,388	$	69,308	$	1,799	$	71,107
Finance lease cost:
Amortization of right-of-use assets	73		0		73		147		0		147
Interest on lease liabilities	259		0		259		255		0		255
Short-term lease cost	592		0		592		0		0		0
Variable lease cost	11,789		156		11,945		12,121		156		12,277
Sublease income	(2,458)		0		(2,458)		(2,566)		0		(2,566)
Total lease cost	$	78,301	$	1,498	$	79,799	$	79,265	$	1,955	$	81,220


	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease cost	$	202,600	$	4,026	$	206,626	$	208,466	$	5,319	$	213,785
Finance lease cost:
Amortization of right-of-use assets	199		0		199		278		0		278
Interest on lease liabilities	555		0		555		743		0		743
Short-term lease cost	1,776		0		1,776		0		0		0
Variable lease cost	32,380		397		32,777		36,133		424		36,557
Sublease income	(7,388)		0		(7,388)		(7,742)		0		(7,742)
Total lease cost	$	230,122	$	4,423	$	234,545	$	237,878	$	5,743	$	243,621

Supplemental cash flow information related to leases was as follows (in thousands):


	Nine Months Ended September 30,
	2019		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	204,909	$	205,977
Operating cash flows for finance leases	526		758
Financing cash flows for finance leases	183		103
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases(1)	$	1,202,165	$	168,863
Finance leases	9,102		1,198

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

Supplemental balance sheet information related to leases was as follows (in thousands):


	December 31, 2019						September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating Leases
Operating lease right-of-use assets	$	971,382	$	32,604	$	1,003,986	$	974,254	$	31,435	$	1,005,689

Current operating lease liabilities	$	202,506	$	5,444	$	207,950	$	209,276	$	5,959	$	215,235
Non-current operating lease liabilities	826,049		26,848		852,897		827,638		24,917		852,555
Total operating lease liabilities	$	1,028,555	$	32,292	$	1,060,847	$	1,036,914	$	30,876	$	1,067,790


	December 31, 2019						September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Finance Leases


Property and equipment, net	$	4,965	$	0	$	4,965	$	5,677	$	0	$	5,677

Current portion of long-term debt and notes payable	$	195	$	0	$	195	$	518	$	0	$	518
Long-term debt, net of current portion	13,088		0		13,088		13,644		0		13,644
Total finance lease liabilities	$	13,283	$	0	$	13,283	$	14,162	$	0	$	14,162

The weighted average remaining lease terms and ~~Concentra reporting units, respectively.~~

discount rates were as follows:


	December 31, 2019		September 30, 2020
Weighted average remaining lease term (in years):
Operating leases	8.0		7.8
Finance leases	34.4		31.4
Weighted average discount rate:
Operating leases	5.9	%	5.6	%
Finance leases	7.3	%	7.2	%

As of September 30, 2020, maturities of lease liabilities were approximately as follows (in thousands):


	Operating Leases		Finance Leases
2020 (remainder of year)	$	69,597	$	289
2021	258,872		1,669
2022	216,986		1,656
2023	172,282		1,523
2024	136,408		1,194
Thereafter	544,469		30,223
Total undiscounted cash flows	1,398,614		36,554
Less: Imputed interest	330,824		22,392
Total discounted lease liabilities	$	1,067,790	$	14,162

Table of Contents

7.Intangible Assets ~~and Liabilities~~

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the nine 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.~~

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
Acquisition of businesses 0 0 1,137 12,287 13,424
Sale of businesses 0 (628) (6,034) (29,688) (36,350)
Measurement period adjustment 0 0 0 (20) (20)
Balance as of September 30, 2020 $ 1,078,804 $ 430,272 $ 644,866 $ 1,215,067 $ 3,369,009

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						September 30, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—	$	166,698	$	166,698	$	—	$	166,698
Certificates of need	17,157		—		17,157		18,401		—		18,401
Accreditations	1,874		—		1,874		1,874		—		1,874
Finite-lived intangible assets:
Trademarks	5,000		(5,000)		0		5,000		(5,000)		0
Customer relationships	287,373		(87,346)		200,027		289,813		(106,749)		183,064
Non-compete agreements	32,114		(8,802)		23,312		33,468		(10,999)		22,469
Total identifiable intangible assets	$	510,216	$	(101,148)	$	409,068	$	515,254	$	(122,748)	$	392,506

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,~~2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~2.1~~7.0 years, respectively.

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $6.9 million for both the three months ended September 30, 2019 and 2020. Amortization expense was $22.9 million and $20.6 million for the nine months ended September 30, 2019 and 2020, respectively.

Table of Contents

8.Long-Term Debt and Notes Payable

~~For purposes~~

As of ~~this indebtedness footnote, references to Select exclude Concentra because~~September 30, 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	$	35,330	$	(17,707)	$	1,242,623	$	1,274,000
Select credit facilities:

Select term loan	2,103,437		(8,899)		(9,700)		2,084,838		2,045,593
Other debt, including finance leases	74,840		0		(325)		74,515		74,515
Total debt	$	3,403,277	$	26,431	$	(27,732)	$	3,401,976	$	3,394,108

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	$	0	$	0	$	0	$	0	$	0	$	1,225,000	$	1,225,000
Select credit facilities:

Select term loan	0		0		0		4,757		11,150		2,087,530		2,103,437
Other debt, including finance leases	3,707		9,449		3,662		22,590		23,533		11,899		74,840
Total debt	$	3,707	$	9,449	$	3,662	$	27,347	$	34,683	$	3,324,429	$	3,403,277

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 term loan 2,143,280 (10,411) (11,348) 2,121,521 2,145,959
Other debt, including finance leases 78,941 0 (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 (the “Select term loan”) in accordance with the provision in its senior secured credit agreement, dated March 6, 2017, as amended (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.

Interest Rate Cap Transaction

In October 2020, the Company entered into an interest rate cap transaction in order to reduce its interest rate exposure associated with the Select term loan. The interest rate cap will limit the Company’s 1-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan. The agreement is effective March 31, 2021 for interest payments from and including April 30, 2021 through September 30, 2024.

Table of Contents

9. 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~~employee leasing services with non-consolidating subsidiaries. For the three and nine months ended September 30, 2020, the Company’s other ~~non-consolidating joint ventures~~activities also include other operating income related to the recognition of payments received under the Provider Relief Fund for losses of revenue and ~~minority investments in other healthcare~~health care related ~~businesses.~~ expenses attributable to the coronavirus disease 2019 (“COVID-19”). Refer to Note 14 – CARES Act for further information.

The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~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 results~~


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2020		2019		2020
	(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	462,892	$	519,454	$	1,381,569	$	1,539,601
Rehabilitation hospital	173,369		188,075		488,301		538,761
Outpatient rehabilitation	265,330		240,042		774,126		662,429
Concentra	421,900		391,859		1,231,672		1,102,732
Other	69,852		84,439		203,670		227,696
Total Company	$	1,393,343	$	1,423,869	$	4,079,338	$	4,071,219
Adjusted EBITDA:
Critical illness recovery hospital	$	57,247	$	88,830	$	194,383	$	267,143
Rehabilitation hospital	36,780		44,637		92,545		110,811
Outpatient rehabilitation	40,040		30,623		111,615		51,463
Concentra	77,679		80,547		220,024		183,510
Other	(29,081)		(31,433)		(79,552)		(33,638)
Total Company	$	182,665	$	213,204	$	539,015	$	579,289
Total assets:
Critical illness recovery hospital	$	2,116,512	$	2,160,157	$	2,116,512	$	2,160,157
Rehabilitation hospital	1,121,260		1,144,436		1,121,260		1,144,436
Outpatient rehabilitation	1,280,712		1,298,938		1,280,712		1,298,938
Concentra	2,366,227		2,355,644		2,366,227		2,355,644
Other	270,045		700,702		270,045		700,702
Total Company	$	7,154,756	$	7,659,877	$	7,154,756	$	7,659,877
Purchases of property and equipment:
Critical illness recovery hospital	$	12,254	$	11,126	$	36,902	$	35,061
Rehabilitation hospital	5,293		1,636		23,832		6,884
Outpatient rehabilitation	7,476		7,268		23,221		22,245
Concentra	8,240		11,985		36,178		34,391
Other	1,408		2,304		3,823		6,991
Total Company	$	34,671	$	34,319	$	123,956	$	105,572

Table of ~~Holdings are identical to those of Select.~~

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

Contents

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, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	57,247	$	36,780	$	40,040	$	77,679	$	(29,081)
Depreciation and amortization	(12,484)		(7,234)		(6,887)		(23,989)		(2,347)
Stock compensation expense	0		0		0		(768)		(6,050)
Income (loss) from operations	$	44,763	$	29,546	$	33,153	$	52,922	$	(37,478)	$	122,906
Loss on early retirement of debt											(18,643)
Equity in earnings of unconsolidated subsidiaries											6,950

Interest expense											(54,336)
Income before income taxes											$	56,877


	Three Months Ended September 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	88,830	$	44,637	$	30,623	$	80,547	$	(31,433)
Depreciation and amortization	(12,521)		(6,910)		(7,231)		(21,083)		(2,365)
Stock compensation expense	0		0		0		(506)		(6,456)
Income (loss) from operations	$	76,309	$	37,727	$	23,392	$	58,958	$	(40,254)	$	156,132

Equity in earnings of unconsolidated subsidiaries											8,765
Gain on sale of business											5,143
Interest expense											(34,026)
Income before income taxes											$	136,014


	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	194,383	$	92,545	$	111,615	$	220,024	$	(79,552)
Depreciation and amortization	(38,430)		(20,332)		(20,910)		(73,372)		(7,028)
Stock compensation expense	0		0		0		(2,302)		(17,129)
Income (loss) from operations	$	155,953	$	72,213	$	90,705	$	144,350	$	(103,709)	$	359,512
Loss on early retirement of debt											(18,643)
Equity in earnings of unconsolidated subsidiaries											18,710
Gain on sale of businesses											6,532
Interest expense											(156,611)
Income before income taxes											$	209,500


	Nine Months Ended September 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	267,143	$	110,811	$	51,463	$	183,510	$	(33,638)
Depreciation and amortization	(38,749)		(20,704)		(21,643)		(65,827)		(7,210)
Stock compensation expense	0		0		0		(1,974)		(18,854)
Income (loss) from operations	$	228,394	$	90,107	$	29,820	$	115,709	$	(59,702)	$	404,328

Equity in earnings of unconsolidated subsidiaries											19,677
Gain on sale of businesses											12,690
Interest expense											(117,499)
Income before income taxes											$	319,196

Table of Contents

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

10. Revenue from Contracts with Customers

~~(1)~~

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 March 31, 2016~~net operating revenues for the three and ~~Physiotherapy beginning March 4, 2016.~~

~~(2)~~ ~~Reflects the retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of~~nine months ended September 30, ~~2016 were retrospectively conformed~~2019 and 2020:


	Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	218,096	$	86,495	$	44,230	$	451	$	0	$	349,272
Non-Medicare	240,603		76,957		200,093		418,380		0		936,033
Total patient services revenues	458,699		163,452		244,323		418,831		0		1,285,305
Other revenues	4,193		9,917		21,007		3,069		69,852		108,038
Total net operating revenues	$	462,892	$	173,369	$	265,330	$	421,900	$	69,852	$	1,393,343


	Three Months Ended September 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	218,386	$	90,650	$	37,216	$	286	$	0	$	346,538
Non-Medicare	296,099		87,539		186,414		388,692		0		958,744
Total patient services revenues	514,485		178,189		223,630		388,978		0		1,305,282
Other revenues	4,969		9,886		16,412		2,881		84,439		118,587
Total net operating revenues	$	519,454	$	188,075	$	240,042	$	391,859	$	84,439	$	1,423,869


	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	679,953	$	238,334	$	128,377	$	1,480	$	0	$	1,048,144
Non-Medicare	692,178		221,571		586,248		1,221,893		0		2,721,890
Total patient services revenues	1,372,131		459,905		714,625		1,223,373		0		3,770,034
Other revenues	9,438		28,396		59,501		8,299		203,670		309,304
Total net operating revenues	$	1,381,569	$	488,301	$	774,126	$	1,231,672	$	203,670	$	4,079,338


	Nine Months Ended September 30, 2020
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	675,403	$	252,912	$	98,097	$	1,015	$	0	$	1,027,427
Non-Medicare	853,111		256,672		518,407		1,093,192		0		2,721,382
Total patient services revenues	1,528,514		509,584		616,504		1,094,207		0		3,748,809
Other revenues	11,087		29,177		45,925		8,525		227,696		322,410
Total net operating revenues	$	1,539,601	$	538,761	$	662,429	$	1,102,732	$	227,696	$	4,071,219

Table of Contents

11. Sale of Businesses

During the nine months ended September 30, 2020, the Company sold 3 businesses, including Concentra’s Department of Veterans Affairs community-based outpatient clinic business, for a total selling price of approximately $87.0 million, which excludes transaction expenses and is subject to ~~reflect~~certain adjustments in accordance with the ~~adoption~~terms set forth in each respective purchase agreement. These sales resulted in non-operating gains of approximately $21.6 million. During the ~~standard, resulting in~~nine months ended September 30, 2020, the Company also accrued a ~~reduction~~liability and incurred a non-operating loss of $9.0 million related to ~~total assets of $28.1 million.~~

~~7. Income~~the indemnity provision associated with a previously sold business.

12. Earnings per ~~Common~~ Share

~~Holdings~~

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method ~~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~~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 ~~determines earnings per share~~must be paid for the current period for each class of stock. There were 0 dividends declared or contractual dividends paid for the three and nine months ended September 30, 2019 and 2020.

(ii)The remaining undistributed net income of the Company is then equally allocated to its common stock ~~participation rights~~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 ~~undistributed earnings.~~

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 September 30,				Three Months Ended September 30,
	2019		2020		2019		2020
	(in thousands)
Net income	$	44,030	$	104,457	$	44,030	$	104,457
Less: net income attributable to non-controlling interests	13,298		27,511		13,298		27,511
Net income attributable to the Company	30,732		76,946		30,732		76,946
Less: net income attributable to participating securities	1,052		2,666		1,052		2,666
Net income attributable to common shares	$	29,680	$	74,280	$	29,680	$	74,280


	Basic EPS				Diluted EPS
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2019		2020		2019		2020
	(in thousands)
Net income	$	157,360	$	242,391	$	157,360	$	242,391
Less: net income attributable to non-controlling interests	40,978		60,670		40,978		60,670
Net income attributable to the Company	116,382		181,721		116,382		181,721
Less: net income attributable to participating securities	3,889		6,254		3,888		6,254
Net income attributable to common shares	$	112,493	$	175,467	$	112,494	$	175,467

Table of Contents

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


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


	Three Months Ended September 30, 2020
	Net Income Allocation		Shares(1)	Basic EPS		Net Income Allocation		Shares(1)	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	74,280	129,882	$	0.57	$	74,280	129,882	$	0.57
Participating securities	2,666		4,662	$	0.57	2,666		4,662	$	0.57
Total Company	$	76,946				$	76,946


	Nine Months Ended September 30, 2019
	Net Income Allocation		Shares(1)	Basic EPS		Net Income Allocation		Shares(1)	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	112,493	130,442	$	0.86	$	112,494	130,474	$	0.86
Participating securities	3,889		4,509	$	0.86	3,888		4,509	$	0.86
Total Company	$	116,382				$	116,382


	Nine Months Ended September 30, 2020
	Net Income Allocation		Shares(1)	Basic EPS		Net Income Allocation		Shares(1)	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	175,467	129,616	$	1.35	$	175,467	129,616	$	1.35
Participating securities	6,254		4,620	$	1.35	6,254		4,620	$	1.35
Total Company	$	181,721				$	181,721

(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.during the period.

Table of Contents

13. Commitments and Contingencies

Litigation

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

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company 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 designed a separate insurance program that responds to the risks of the specific joint venture. The Company’s joint ventures are insured under a master program with an annual aggregate limit of up to $80.0 million, subject to a sublimit aggregate ranging from $23.0 million to $33.0 million for each specific joint venture. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of ~~$2.0 million per medical incident for professional liability claims~~insurance coverage and ~~$2.0 million per occurrence for general liability claims.~~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”), 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 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 alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, 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.

Table of Contents

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

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

Oklahoma City Subpoena.On August 24, 2020, the Company and Select Specialty Hospital – Oklahoma City, Inc. (“SSH–Oklahoma City”) received Civil Investigative Demands from the U.S. Attorney’s Office for the Western District of Oklahoma seeking responses to interrogatories and the production of various documents principally relating to the documentation, billing and reviews of medical services furnished to patients at SSH-Oklahoma City. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~Northern District~~

Table of ~~Alabama Investigation~~

Contents

14. CARES Act

Provider Relief Funds

On ~~October 30, 2017,~~March 27, 2020, the ~~Company~~Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was ~~contacted by~~enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the ~~U.S. Attorney’s Office~~COVID-19 pandemic, including $100.0 billion in appropriations for the ~~Northern District~~Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. These health care related expenses could include costs associated with constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce and trainings. The Company’s consolidated subsidiaries received approximately $120.8 million of ~~Alabama~~payments under the Provider Relief Fund as of September 30, 2020.

On September 19, 2020, the Department of Health and Human Services (“HHS”) released a post-payment notice of reporting requirements associated with the payments made under the Provider Relief Fund. Under these reporting requirements, among other things, recipients of Provider Relief Fund payments must first apply the payments against health care related expenses attributable to ~~request cooperation~~COVID-19 which are not reimbursable by other sources. Then, payments may be applied to lost revenues. HHS changed the definition of lost revenues provided in ~~connection with an investigation that may involve Medicare billing compliance at certain~~prior guidance, and now defines lost revenues as “a negative change in year-over-year net patient care operating income.” The calculation of lost revenues is net of health care related expenses attributable to COVID-19, as mentioned above.

Under 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.~~

~~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 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,~~accounting policy, payments are recognized as other operating income when it is ~~expected~~probable 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~~it has complied with the terms and conditions of the ~~Purchase Agreement. DHHC,~~funds, as outlined by HHS. The Company believes that the reporting requirements issued on September 19, 2020, are 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~~change to, rather than clarification of, the ~~purchase price will be paid in cash. Select will retain a majority voting interest in Group Holdings Parent following the closing~~terms and conditions which existed upon receipt of the ~~transaction.~~

~~Concentra expects to finance~~Provider Relief Fund payments. As such, the ~~transaction~~Company evaluated compliance with the terms 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~~set forth under the ~~Hart-Scott-Rodino Antitrust Improvements Act~~new reporting requirements as 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, 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~~2020 and, ~~for~~during the three ~~and~~months ended September 30, 2020, the Company recognized a reduction to other operating income of $1.2 million on the accompanying condensed consolidated statement of operations. During the nine months ended September 30, ~~2016 and 2017.~~

2020, the Company recognized approximately $53.8 million as other operating income on the accompanying condensed consolidated statement of operations.

The ~~equity method has been used~~remaining Provider Relief Fund payments of approximately $66.9 million are reported as “unearned government assistance” on the accompanying condensed consolidated balance sheet. There is uncertainty regarding whether all payments received by ~~Select with respect~~the Company’s consolidated subsidiaries will be recognized as other operating income in future periods. Such funds may need 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~~be repaid to the ~~current year guarantor structure.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

government to the extent that payments received exceed lost revenues and health care related expenses attributable to COVID-19.

Changes to Provider Relief Fund Reporting Requirements

On October 22, 2020, HHS released a second post-payment notice of reporting requirements associated with the payments made under the Provider Relief Fund. Under the revised reporting requirements, among other things, HHS defined lost revenues as “a negative change in year-over-year actual revenue from patient care related sources,” rather than “a negative change in year-over-year net patient care operating income” as outlined above.

The Company believes that the reporting requirements issued on October 22, 2020, are a change to, rather than clarification of, the terms and conditions which existed on September 19, 2020. As such, any changes in other operating income as a result of the revised reporting requirements issued on October 22, 2020, will be recognized in periods subsequent to 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

2020.

Medicare Accelerated and Advance Payments Program

~~(a)~~ ~~Elimination~~

In accordance with the CARES Act, CMS temporarily expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. The Company’s consolidated subsidiaries received approximately $318.1 million of ~~intercompany balances.~~

~~(b)~~ ~~Elimination~~advanced payments under this program. The majority of ~~investments~~these payments were received in April 2020.

For the Company’s critical illness recovery hospitals and rehabilitation hospitals, repayment of amounts received under the Accelerated and Advance Payment Program were originally due 210 days after the advanced payment was issued, with CMS having the ability to recoup the advanced payments through future Medicare claims billed by the Company’s hospitals, beginning 121 days after the advanced payment was issued. As of September 30, 2020, CMS had not recouped any of the advanced payments provided to the Company under this program.

Table of Contents

On October 1, 2020, a short-term government funding bill was signed into law. This bill, among other things, extended the repayment terms for providers who received advanced payments under the Medicare Accelerated and Advance Payment Program. The bill modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued, followed by a 25.0% recoupment of Medicare payments during the next 11 months, and 50.0% recoupment of Medicare payments during the last six months. Any amounts that remain unpaid after 29 months would be subject to a 4.0% interest rate.

There is still uncertainty regarding how these modified terms will impact the timing of the Company’s repayment of the advances it has received; accordingly, amounts received under the Accelerated and Advance Payment Program are reflected as a current liability under “government advances” on the accompanying condensed consolidated ~~subsidiaries.~~

~~(c)~~ ~~Elimination~~balance sheet.

Employer Payroll Tax Deferral

In April 2020, the Company began deferring payment on its share of ~~investments~~payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022. As of September 30, 2020, the Company deferred approximately $67.6 million of payroll taxes. These amounts are reflected in “other non-current liabilities” on the accompanying condensed consolidated ~~subsidiaries’ earnings.~~

~~(d)~~ ~~Reclassification~~balance sheet.

15. Income Taxes

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax law related to net operating losses and the deductibility of ~~equity attributable to non-controlling interests.~~

~~(e)~~ ~~Reclassification~~interest expense and depreciation. ASC 740, Income Taxes, requires the effects of ~~non-current~~changes in tax rates and laws on deferred tax ~~asset~~balances to ~~report net non-current~~be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred ~~tax liability in consolidation.~~

~~(f)~~ ~~Reclassification of prepaid~~ income taxes ~~to report net~~and decreasing its current income taxes payable by approximately $15.5 million and resulted from bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and the provision for an increase 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~~amounts allowed for interest expense deductions for tax years beginning January 1, 2019. The legislation related to net operating losses did not impact 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~~Company’s deferred tax ~~asset to report net non-current deferred tax liability in consolidation.~~

balances.

~~Select Medical Corporation~~

~~Condensed Consolidating Statement~~Table 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

Contents

~~(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 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

Table of Contents

•other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019 and in our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020, as such risk factors may be updated from time to time in our periodic filings with the SEC.

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

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

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of ~~specialty~~critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational ~~medicine~~health centers in the United States. As of September 30, ~~2017,~~2020, we had operations in 46 states and the District of Columbia. ~~As of September 30, 2017, we~~We operated ~~123 specialty~~100 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and ~~1,604~~1,777 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.~~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,~~worksites.

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~~$4,071.2 million for the nine months ended September 30, ~~2017.~~2020. Of this total, we earned approximately ~~54%~~38% of our net operating revenues from our ~~specialty hospitals~~critical illness recovery hospital segment, approximately ~~23%~~13% from our rehabilitation hospital segment, approximately 16% from our outpatient rehabilitation segment, and approximately ~~23%~~27% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our ~~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 Department of Veterans Affairs CBOCs~~ that deliver occupational medicine ~~physical therapy, veteran’s healthcare, and consumer health~~ services.

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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.~~EBITDA:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2020		2019		2020
	(in thousands)
Net income	$	44,030	$	104,457	$	157,360	$	242,391
Income tax expense	12,847		31,557		52,140		76,805
Interest expense	54,336		34,026		156,611		117,499
Gain on sale of businesses	—		(5,143)		(6,532)		(12,690)
Equity in earnings of unconsolidated subsidiaries	(6,950)		(8,765)		(18,710)		(19,677)
Loss on early retirement of debt	18,643		—		18,643		—
Income from operations	122,906		156,132		359,512		404,328
Stock compensation expense:
Included in general and administrative	5,305		5,600		14,849		16,488
Included in cost of services	1,513		1,362		4,582		4,340
Depreciation and amortization	52,941		50,110		160,072		154,133
Adjusted EBITDA	$	182,665	$	213,204	$	539,015	$	579,289

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

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

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

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


	Net Operating Revenues					Patient Days			Occupancy Rate		Number of Hospitals Owned(1)
	2019		2020		% Change	2019	2020	% Change	2019	2020	2019	2020
	(in thousands, except percentages)
January	$	149,799	$	163,238	9.0%	86,238	90,783	5.3%	69%	69%	96	100
February	145,586		165,375		13.6%	80,806	87,844	8.7%	71%	72%	96	100
March	162,149		171,908		6.0%	91,085	91,831	0.8%	73%	70%	96	100
Three Months Ended March 31	$	457,534	$	500,521	9.4%	258,129	270,458	4.8%	71%	70%	96	100

April	$	156,231	$	171,445	9.7%	88,357	90,710	2.7%	70%	71%	99	100
May	156,422		178,223		13.9%	89,350	95,191	6.5%	69%	72%	99	100
June	148,490		169,958		14.5%	85,153	90,988	6.9%	68%	71%	99	100
Three Months Ended June 30	$	461,143	$	519,626	12.7%	262,860	276,889	5.3%	69%	72%	99	100
Six Months Ended June 30	$	918,677	$	1,020,147	11.0%	520,989	547,347	5.1%	70%	71%	99	100

July	$	151,416	$	175,253	15.7%	87,143	94,144	8.0%	67%	71%	99	99
August	155,485		173,967		11.9%	86,553	93,964	8.6%	66%	71%	99	99
September	155,991		170,234		9.1%	84,393	90,955	7.8%	67%	71%	99	99
Three Months Ended September 30	$	462,892	$	519,454	12.2%	258,089	279,063	8.1%	67%	71%	99	99
Nine Months Ended September 30	$	1,381,569	$	1,539,601	11.4%	779,078	826,410	6.1%	69%	71%	99	99

(1) Represents the number of hospitals owned at the end of each period presented.

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

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


	Net Operating Revenues					Patient Days			Occupancy Rate		Number of Hospitals Owned(1)
	2019		2020		% Change	2019	2020	% Change	2019	2020	2019	2020
	(in thousands, except percentages)
January	$	50,615	$	61,673	21.8%	27,434	32,111	17.0%	74%	79%	17	19
February	48,080		60,690		26.2%	25,442	31,813	25.0%	76%	84%	17	19
March	55,863		59,656		6.8%	29,940	30,644	2.4%	78%	76%	18	19
Three Months Ended March 31	$	154,558	$	182,019	17.8%	82,816	94,568	14.2%	76%	79%	18	19

April	$	51,991	$	45,878	(11.8)%	28,266	23,553	(16.7)%	76%	61%	18	19
May	56,019		57,815		3.2%	29,730	29,787	0.2%	75%	73%	19	19
June	52,364		64,974		24.1%	28,529	30,741	7.8%	73%	78%	19	19
Three Months Ended June 30	$	160,374	$	168,667	5.2%	86,525	84,081	(2.8)%	75%	71%	19	19
Six Months Ended June 30	$	314,932	$	350,686	11.4%	169,341	178,649	5.5%	76%	75%	19	19

July	$	57,077	$	62,312	9.2%	30,054	31,986	6.4%	75%	81%	19	18
August	58,072		63,673		9.6%	30,228	32,518	7.6%	75%	83%	19	18
September	58,220		62,090		6.6%	29,172	31,176	6.9%	75%	82%	19	18
Three Months Ended September 30	$	173,369	$	188,075	8.5%	89,454	95,680	7.0%	75%	82%	19	18
Nine Months Ended September 30	$	488,301	$	538,761	10.3%	258,795	274,329	6.0%	75%	77%	19	18

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

(1) Represents the number of hospitals owned at the end of each period presented.

Outpatient Rehabilitation Segment. Beginning in mid-March, state governments began implementing mandatory closures of non-essential or non-life sustaining businesses, restricting travel and individual activities outside of the home, closing schools, and mandating other social distancing measures. Additionally, hospitals and other facilities began to suspend elective surgeries. As a result, our outpatient rehabilitation clinics experienced significantly less patient visit volume due to a decline in patient referrals from physicians, a reduction in workers’ compensation injury visits resulting from the temporary closure of businesses, and the suspension of elective surgeries which would have required outpatient rehabilitation services. Beginning in May, state governments began to ease restrictions imposed on individuals and businesses. Further, most physician offices have reopened for routine office visits and hospitals and other facilities have begun to perform elective surgeries again, which has since increased the need for services provided by our outpatient rehabilitation clinics.

Table of Contents

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


	Net Operating Revenues					Visits			Working Days(1)
	2019		2020		% Change	2019	2020	% Change	2019	2020
	(in thousands, except percentages)
January	$	83,185	$	90,924	9.3%	687,007	757,171	10.2%	22	22
February	78,573		88,239		12.3%	658,610	739,061	12.2%	20	20
March	85,147		76,086		(10.6)%	708,866	626,433	(11.6)%	21	22
Three Months Ended March 31	$	246,905	$	255,249	3.4%	2,054,483	2,122,665	3.3%	63	64

April	$	90,230	$	49,084	(45.6)%	762,914	386,108	(49.4)%	22	22
May	90,272		51,186		(43.3)%	759,829	409,703	(46.1)%	22	20
June	81,389		66,868		(17.8)%	680,762	546,456	(19.7)%	20	22
Three Months Ended June 30	$	261,891	$	167,138	(36.2)%	2,203,505	1,342,267	(39.1)%	64	64
Six Months Ended June 30	$	508,796	$	422,387	(17.0)%	4,257,988	3,464,932	(18.6)%	127	128

July	$	89,267	$	77,793	(12.9)%	754,102	636,826	(15.6)%	22	22
August	90,687		79,034		(12.8)%	743,813	651,738	(12.4)%	22	21
September	85,376		83,215		(2.5)%	706,413	694,808	(1.6)%	20	21
Three Months Ended September 30	$	265,330	$	240,042	(9.5)%	2,204,328	1,983,372	(10.0)%	64	64
Nine Months Ended September 30	$	774,126	$	662,429	(14.4)%	6,462,316	5,448,304	(15.7)%	191	192

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

Concentra Segment. Beginning in mid-March, state governments began placing significant restrictions on businesses and mandating closures of non-essential or non-life sustaining businesses, causing many employers to furlough their workforce and temporarily cease or significantly reduce their operations. These actions have had significant effects on our patient visit volumes. Beginning in May, state governments began to ease restrictions imposed on businesses and employers began to increase their workforce, which has since resulted in an increased need for our occupational health services.

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


	Net Operating Revenues					Visits			Working Days(1)
	2019		2020		% Change	2019	2020	% Change	2019	2020
	(in thousands, except percentages)
January	$	133,507	$	141,236	5.8%	985,598	1,032,069	4.7%	22	22
February	126,309		133,690		5.8%	919,065	965,741	5.1%	20	20
March	136,505		123,609		(9.4)%	1,006,944	879,585	(12.6)%	21	22
Three Months Ended March 31	$	396,321	$	398,535	0.6%	2,911,607	2,877,395	(1.2)%	63	64

April	$	140,050	$	91,178	(34.9)%	1,040,543	610,555	(41.3)%	22	22
May	143,183		99,228		(30.7)%	1,073,763	674,629	(37.2)%	22	20
June	130,218		121,932		(6.4)%	988,783	865,896	(12.4)%	20	22
Three Months Ended June 30	$	413,451	$	312,338	(24.5)%	3,103,089	2,151,080	(30.7)%	64	64
Six Months Ended June 30	$	809,772	$	710,873	(12.2)%	6,014,696	5,028,475	(16.4)%	127	128

July	$	142,385	$	132,465	(7.0)%	1,057,809	930,427	(12.0)%	22	22
August	144,452		130,291		(9.8)%	1,087,165	933,555	(14.1)%	22	21
September	135,063		129,103		(4.4)%	1,005,929	963,065	(4.3)%	20	21
Three Months Ended September 30	$	421,900	$	391,859	(7.1)%	3,150,903	2,827,047	(10.3)%	64	64
Nine Months Ended September 30	$	1,231,672	$	1,102,732	(10.5)%	9,165,599	7,855,522	(14.3)%	191	192

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

Table of Contents

Please refer to “Summary Financial Results

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

The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could have a materially adverse impact our business, results of operations, and overall financial performance in future periods. See Item 1A. “Risk Factors” of our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020for further discussion of the possible impact of the COVID-19 pandemic on our business.

Other Significant Events

Purchase of Concentra Interest

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

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

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

Table of Contents
Summary Financial Results

Three Months Ended September 30, ~~2017~~

2020

For the three months ended September 30, ~~2017,~~2020, our net operating revenues increased ~~4.1%~~2.2% to ~~$1,097.2~~$1,423.9 million, compared to ~~$1,053.8~~$1,393.3 million for the three months ended September 30, ~~2016.~~2019. Income from operations increased ~~28.4%~~27.0% to ~~$72.1~~$156.1 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$56.2~~$122.9 million for the three months ended September 30, ~~2016.~~ 2019.

Net income increased 137.2% to ~~$24.8~~$104.5 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$4.0~~$44.0 million for the three months ended September 30, ~~2016.~~2019. Net income ~~for the three months ended September 30, 2016~~ included a pre-tax ~~loss~~gains on ~~early retirement~~sales of ~~debt~~businesses of ~~$10.9 million and a pre-tax non-operating loss of $1.0 million. Our Adjusted EBITDA increased 18.1% to $115.8~~$5.1 million for the three months ended September 30, ~~2017, compared to $98.1~~2020. Net income included pre-tax losses on early retirement of debt of $18.6 million for the three months ended September 30, ~~2016. Our~~ 2019.

Adjusted EBITDA ~~margin was 10.6%~~increased 16.7% to $213.2 million for the three months ended September 30, ~~2017,~~2020, compared to ~~9.3%~~$182.7 million for the three months ended September 30, ~~2016.~~2019. Our Adjusted EBITDA margin was 15.0% for the three months ended September 30, 2020, compared to 13.1% for the three months ended September 30, 2019.

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


	Three Months Ended September 30, 2020
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)
Net operating revenues	$	519,454		$	188,075		$	240,042		$	391,859		$	84,439	$	1,423,869
Operating expenses	(430,624)			(143,438)			(209,419)			(312,175)			(120,811)		(1,216,467)
Depreciation and amortization	(12,521)			(6,910)			(7,231)			(21,083)			(2,365)		(50,110)
Other operating income	—			—			—			357			(1,517)		(1,160)
Income (loss) from operations	$	76,309		$	37,727		$	23,392		$	58,958		$	(40,254)	$	156,132
Depreciation and amortization	12,521			6,910			7,231			21,083			2,365		50,110
Stock compensation expense	—			—			—			506			6,456		6,962
Adjusted EBITDA	$	88,830		$	44,637		$	30,623		$	80,547		$	(31,433)	$	213,204
Adjusted EBITDA margin	17.1		%	23.7		%	12.8		%	20.6		%	N/M		15.0		%


	Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)
Net operating revenues	$	462,892		$	173,369		$	265,330		$	421,900		$	69,852	$	1,393,343
Operating expenses	(405,645)			(136,589)			(225,290)			(344,989)			(104,983)		(1,217,496)
Depreciation and amortization	(12,484)			(7,234)			(6,887)			(23,989)			(2,347)		(52,941)

Income (loss) from operations	$	44,763		$	29,546		$	33,153		$	52,922		$	(37,478)	$	122,906
Depreciation and amortization	12,484			7,234			6,887			23,989			2,347		52,941
Stock compensation expense	—			—			—			768			6,050		6,818
Adjusted EBITDA	$	57,247		$	36,780		$	40,040		$	77,679		$	(29,081)	$	182,665
Adjusted EBITDA margin	12.4		%	21.2		%	15.1		%	18.4		%	N/M		13.1		%

Table of Contents

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


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	12.2	%	8.5	%	(9.5)	%	(7.1)	%	20.9	%	2.2	%
Change in income from operations	70.5	%	27.7	%	(29.4)	%	11.4	%	N/M		27.0	%
Change in Adjusted EBITDA	55.2	%	21.4	%	(23.5)	%	3.7	%	N/M		16.7	%

N/M — Not meaningful.

Nine Months Ended September 30, ~~2017~~

2020

For the nine months ended September 30, ~~2017,~~2020, our net operating revenues ~~increased 2.8% to $3,329.2~~were $4,071.2 million, compared to $~~3,239.8~~$4,079.3 million for the nine months ended September 30, ~~2016.~~2019. Income from operations increased ~~14.5%~~12.5% to ~~$279.5~~$404.3 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$244.1~~$359.5 million for the nine months ended September 30, ~~2016.~~ 2019. For the nine months ended September 30, 2020, income from operations included other operating income of $53.8 million related to the recognition of payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19. Refer to Note 14 – CARES Act for further information.

Net income ~~was $99.6~~increased 54.0% to $242.4 million for the nine months ended September 30, ~~2017, which includes~~2020, compared to $157.4 million for the nine months ended September 30, 2019. Net income included pre-tax gains on sales of businesses of $12.7 million for the nine months ended September 30, 2020. Net income included pre-tax losses on early retirement of debt of ~~$19.7 million. Net income was $104.8~~$18.6 million and a pre-tax gain on sale of businesses of $6.5 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~~ 2019.

Adjusted EBITDA increased ~~12.3%~~7.5% to ~~$413.4~~$579.3 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$368.1~~$539.0 million for the nine months ended September 30, ~~2016.~~2019. Our Adjusted EBITDA margin was ~~12.4%~~14.2% for the nine months ended September 30, ~~2017,~~2020, compared to ~~11.4%~~13.2% for the nine months ended September 30, ~~2016.~~

~~Implementation~~2019.

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

Nine Months Ended September 30, 2020
Critical Illness Recovery Hospital Rehabilitation Hospital Outpatient
Rehabilitation Concentra Other Total
(in thousands)
Net operating revenues $ 1,539,601 $ 538,761 $ 662,429 $ 1,102,732 $ 227,696 $ 4,071,219
Operating expenses (1,272,458) (427,950) (610,966) (922,342) (332,870) (3,566,586)
Depreciation and amortization (38,749) (20,704) (21,643) (65,827) (7,210) (154,133)
Other operating income — — — 1,146 52,682 53,828
Income (loss) from operations $ 228,394 $ 90,107 $ 29,820 $ 115,709 $ (59,702) $ 404,328
Depreciation and amortization 38,749 20,704 21,643 65,827 7,210 154,133
Stock compensation expense — — — 1,974 18,854 20,828
Adjusted EBITDA $ 267,143 $ 110,811 $ 51,463 $ 183,510 $ (33,638) $ 579,289
Adjusted EBITDA margin 17.4 % 20.6 % 7.8 % 16.6 % N/M 14.2 %

Table 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~~Contents


	Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other		Total
	(in thousands)
Net operating revenues	$	1,381,569		$	488,301		$	774,126		$	1,231,672		$	203,670	$	4,079,338
Operating expenses	(1,187,186)			(395,756)			(662,511)			(1,013,950)			(300,351)		(3,559,754)
Depreciation and amortization	(38,430)			(20,332)			(20,910)			(73,372)			(7,028)		(160,072)

Income (loss) from operations	$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709)	$	359,512
Depreciation and amortization	38,430			20,332			20,910			73,372			7,028		160,072
Stock compensation expense	—			—			—			2,302			17,129		19,431
Adjusted EBITDA	$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552)	$	539,015
Adjusted EBITDA margin	14.1		%	19.0		%	14.4		%	17.9		%	N/M		13.2		%

The following table summarizes changes in segment performance measures for ~~Medicare patients discharged from an LTCH who do not meet specified patient criteria, beginning October 1, 2015. Since completing our transition~~the nine months ended September 30, 2020, compared to the ~~new LTCH Medicare patient criteria regulations during the third quarter~~nine months ended September 30, 2019:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	11.4	%	10.3	%	(14.4)	%	(10.5)	%	11.8	%	(0.2)	%
Change in income from operations	46.5	%	24.8	%	(67.1)	%	(19.8)	%	N/M		12.5	%
Change in Adjusted EBITDA	37.4	%	19.7	%	(53.9)	%	(16.6)	%	N/M		7.5	%

N/M — Not meaningful.

Table of ~~2016, we have experienced an increase in admissions of patients eligible for the full LTCH-PPS standard reimbursement rate.~~

Contents

~~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.

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.

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~~HHS and CMS. Net operating revenues generated directly from the Medicare program represented approximately ~~30%~~25% of our net operating revenues for ~~both~~ the nine months ended September 30, ~~2017~~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, 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. The HHS Secretary renewed the public health emergency determination for 90-day periods effective on April 26, 2020, July 25, 2020, and October 23, 2020. On March 13, 2020, President Trump declared a national emergency due to the COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of certain requirements under the Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) pursuant to section 1135 of the Social Security Act. Under this authority, CMS issued a number of blanket waivers that excuse health care providers or suppliers from specific program requirements. The following blanket waivers, while in effect, may impact our results of operations:

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

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

iii.Medicare expanded the types of health care professionals who can furnish telehealth services to include all those who are eligible to bill Medicare for their professional services. This allows health care professionals who were previously ineligible to furnish and bill for Medicare telehealth services, including physical therapists, occupational therapists, speech language pathologists, and others, to receive payment for Medicare telehealth services.

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

v.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.

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

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

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

Table of Contents
CMS also approved section 1135 waivers for 54 state Medicaid programs (including the District of Columbia, Puerto Rico, and other territories), 50 temporary changes to Medicaid or CHIP state plan amendments, 2 traditional changes to Medicaid state plan amendments, and section 1115 waivers for 7 state Medicaid demonstration projects addressing the COVID-19 public health emergency. 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 130 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.
In addition to these agency actions, the CARES Act was enacted on March 27, 2020. It provides additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 public health emergency. Some of the CARES Act provisions that may impact our operations include:
i.$100 billion in appropriations for the Public Health and Social Services Emergency Fund to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” The Paycheck Protection Program and Health Care Enhancement Act, Public Law 116-139, added $75 billion to this fund. HHS has allocated three general distributions from the fund for payments to Medicare providers. The Phase 1 General Distribution included $30 billion for health care providers that received Medicare fee-for-service payments in 2019. Another $20 billion was distributed to Medicare providers in a manner that makes the entire $50 billion Phase 1 General Distribution proportional to each provider’s share of 2018 net patient revenue. The Phase 2 General Distribution allocated $18 billion for providers in state Medicaid/CHIP programs, Medicaid managed care plans, dentists, and certain Medicare providers who did not receive a Phase 1 General Distribution payment. The Phase 3 General Distribution includes $20 billion for providers to apply for if they suffered financial losses caused by COVID-19 or if they were previously ineligible for a general distribution. The remainder of the COVID-19 related appropriations to the Public Health and Social Services Emergency Fund is for targeted allocations to providers in high impact COVID-19 areas ($22 billion), rural providers (approximately $11.3 billion), skilled nursing facilities (approximately $7.4 billion), safety net hospitals (approximately $14.7 billion), Indian Health Service ($500 million), and unspecified allocations for providers treating uninsured COVID-19 patients.
ii.Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers. CMS has the ability to recoup the advanced payments through future Medicare claims. Section 2501 of the Continuing Appropriations Act, 2021 and Other Extensions Act, Public Law 116-159, modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued, followed by a 25% offset the next 11 months, and a 50% offset the last 6 months. Any amounts that remain unpaid after 29 months will be subject to a 4% interest rate (instead of 10.25%).
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.
vi.Broader waiver authority for HHS under section 1135 of the Social Security Act to issue additional telehealth waivers.
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.

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Medicare Reimbursement of LTCH Services

There have been significant regulatory changes affecting LTCHs that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our LTCHs are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCHs are generally published in April or May, finalized in August, and effective on October 1st of each year.

The following is a summary of significant regulatory changes to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as LTCHs, 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~~future results of operations. Medicare payments to our critical illness recovery hospitals are made in accordance with the ~~future.~~

long-term care hospital prospective payment system (“LTCH-PPS”).

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~~$25,743. For LTCH discharges occurring in cost reporting periods beginning in FY 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate. However, the CARES Act waives the site neutral payment rate for patients admitted during such coronavirus emergency period and in response to the public health emergency, as discussed above.

Fiscal Year 2021. On September 18, 2020, CMS published the final rule updating policies and payment rates for the LTCH-PPS for ~~Medicare patients discharged from an LTCH. Specifically, for Medicare patients discharged in~~fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2015, LTCHs will be reimbursed at the LTCH-PPS~~2020 through September 30, 2021). The standard federal 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, to be paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH will be paid a lower “site neutral” payment rate, which will be the lower of: (i) IPPS comparable per diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) payment rate plus any outlier payments; or (ii) 100 percent of the estimated costs for services.

~~The BBA of 2013 provides for a transition to the site-neutral payment~~ rate for ~~those patients not paid~~fiscal year 2021 was set at the LTCH-PPS standard federal payment rate. During the transition period (applicable to hospital cost reporting periods beginning on or after October 1, 2015 and on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral payment rate amount and 50% of$43,755, an increase from the standard federal ~~payment~~ rate ~~amount. For discharges in cost reporting periods beginning on or after October 1, 2017, only~~applicable during fiscal year 2020 of $42,678. The update to 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~~for fiscal year 2021 included a market basket increase of 2.3% with no productivity adjustment. The standard federal rate also included an area wage budget neutrality factor of 1.0016837 and a permanent, one-time budget neutrality adjustment of 1.000517 in connection with the ~~number~~elimination of ~~discharges~~the 25 Percent Rule. The fixed-loss amount for ~~which payment is made~~high cost outlier cases paid under LTCH-PPS was set at $27,195, an increase from the fixed-loss amount in the 2020 fiscal year of $26,778. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate ~~is greater than 50% of the total number of discharges~~was set at $29,051, an increase 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~~fixed-loss amount 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 for2020 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 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, 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.

$26,552.

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.

Table of Contents

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,~~10, 2020, CMS published the final rule updating 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~~2021 was set at ~~$15,838,~~$16,856, 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~~2021 included a market basket increase of ~~2.6%, less a~~2.4% with no 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%.adjustment. CMS ~~increased~~decreased the outlier threshold amount for fiscal year ~~2018~~2021 to ~~$8,679~~$7,906 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 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 2020 Medicare physician fee schedule final rule, CMS revised coding, documentation guidelines, and increased the valuation for evaluation and management (“E/M”) office visit codes, beginning in 2021. 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 will cut the values of other codes to make up the difference, beginning in 2021. In the 2021 Medicare physician fee schedule proposed rule, CMS announced these cuts to Medicare payments, including a proposed 9% cut to physical and occupational therapy services in 2021. Many providers have opposed the proposed cuts. Legislation was introduced in Congress that, if enacted, would waive the budget neutrality requirement with respect to the E/M codes for 2021 in order to avoid or minimize cuts to other code values. CMS is expected to release the 2021 final rule in November 2020 with final estimates regarding the impact on Medicare payments for physical and occupational therapy services.

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.

Table of Contents

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:~~

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2020			2019			2020
Critical illness recovery hospital data:
Number of hospitals owned—start of period	99			100			96			100
Number of hospitals acquired	—			—			3			—

Number of hospitals closed/sold	—			(1)			—			(1)
Number of hospitals owned—end of period	99			99			99			99
Number of hospitals managed—end of period	1			1			1			1
Total number of hospitals (all)—end of period	100			100			100			100
Available licensed beds(1)	4,230			4,250			4,230			4,250
Admissions(1)(2)	9,051			9,380			27,679			28,080
Patient days(1)(3)	258,089			279,063			779,078			826,410
Average length of stay (days)(1)(4)	28			30			28			30
Net revenue per patient day(1)(5)	$	1,773		$	1,845		$	1,757		$	1,850
Occupancy rate(1)(6)	67		%	71		%	69		%	71		%
Percent patient days—Medicare(1)(7)	49		%	43		%	51		%	45		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	19			19			17			19

Number of hospital start-ups	—			—			2			—
Number of hospitals closed/sold	—			(1)			—			(1)
Number of hospitals owned—end of period	19			18			19			18
Number of hospitals managed—end of period	10			11			10			11
Total number of hospitals (all)—end of period	29			29			29			29
Available licensed beds(1)	1,309			1,267			1,309			1,267
Admissions(1)(2)	6,400			6,443			18,253			18,489
Patient days(1)(3)	89,454			95,680			258,795			274,329
Average length of stay (days)(1)(4)	14			15			14			15
Net revenue per patient day(1)(5)	$	1,724		$	1,775		$	1,665		$	1,777
Occupancy rate(1)(6)	75		%	82		%	75		%	77		%
Percent patient days—Medicare(1)(7)	53		%	48		%	51		%	48		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,419			1,475			1,423			1,461
Number of clinics acquired	3			5			17			8
Number of clinic start-ups	14			18			36			43
Number of clinics closed/sold	(7)			(5)			(47)			(19)
Number of clinics owned—end of period	1,429			1,493			1,429			1,493
Number of clinics managed—end of period	278			284			278			284
Total number of clinics (all)—end of period	1,707			1,777			1,707			1,777
Number of visits(1)(8)	2,204,328			1,983,372			6,462,316			5,448,304
Net revenue per visit(1)(9)	$	103		$	104		$	103		$	105

Table of Contents


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2020		2019		2020
Concentra data:
Number of centers owned—start of period	526		522		524		521
Number of centers acquired	1		2		6		6
Number of center start-ups	—		1		—		1
Number of centers closed/sold	(4)		(2)		(7)		(5)
Number of centers owned—end of period	523		523		523		523
Number of onsite clinics operated—end of period	131		133		131		133
Number of CBOCs owned—end of period	32		—		32		—
Number of visits(1)(8)	3,150,903		2,827,047		9,165,599		7,855,522
Net revenue per visit(1)(9)	$	120	$	121	$	122	$	123

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~~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 ~~specialty hospitals direct~~ patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.

~~(4)~~

(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 ~~outpatient rehabilitation clinic direct~~ patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits. ~~For purposes~~

Table of ~~this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy revenue.~~

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

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

Contents

Results of Operations

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2020		2019		2020
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of services, exclusive of depreciation and amortization(1)	84.9		82.9		84.9		85.1
General and administrative	2.5		2.5		2.3		2.5
Depreciation and amortization	3.8		3.5		4.0		3.8
Total costs and expenses	91.2		88.9		91.2		91.4
Other operating income	—		(0.1)		—		1.3
Income from operations	8.8		11.0		8.8		9.9
Loss on early retirement of debt	(1.3)		—		(0.5)		—
Equity in earnings of unconsolidated subsidiaries	0.5		0.6		0.5		0.5
Gain on sale of businesses	—		0.4		0.2		0.3
Interest expense	(3.9)		(2.4)		(3.9)		(2.9)
Income before income taxes	4.1		9.6		5.1		7.8
Income tax expense	0.9		2.3		1.2		1.8
Net income	3.2		7.3		3.9		6.0
Net income attributable to non-controlling interests	1.0		1.9		1.0		1.5
Net income attributable to Select Medical Holdings Corporation	2.2	%	5.4	%	2.9	%	4.5	%

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
%

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

Table of Contents

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2019			2020			% Change		2019			2020			% Change
	(in thousands, except percentages)
Net operating revenues:
Critical illness recovery hospital	$	462,892		$	519,454		12.2	%	$	1,381,569		$	1,539,601		11.4	%
Rehabilitation hospital	173,369			188,075			8.5		488,301			538,761			10.3
Outpatient rehabilitation	265,330			240,042			(9.5)		774,126			662,429			(14.4)
Concentra	421,900			391,859			(7.1)		1,231,672			1,102,732			(10.5)
Other(1)	69,852			84,439			20.9		203,670			227,696			11.8
Total Company	$	1,393,343		$	1,423,869		2.2	%	$	4,079,338		$	4,071,219		(0.2)	%
Income (loss) from operations:
Critical illness recovery hospital	$	44,763		$	76,309		70.5	%	$	155,953		$	228,394		46.5	%
Rehabilitation hospital	29,546			37,727			27.7		72,213			90,107			24.8
Outpatient rehabilitation	33,153			23,392			(29.4)		90,705			29,820			(67.1)
Concentra(2)	52,922			58,958			11.4		144,350			115,709			(19.8)
Other(1)(2)	(37,478)			(40,254)			N/M		(103,709)			(59,702)			N/M
Total Company	$	122,906		$	156,132		27.0	%	$	359,512		$	404,328		12.5	%
Adjusted EBITDA:
Critical illness recovery hospital	$	57,247		$	88,830		55.2	%	$	194,383		$	267,143		37.4	%
Rehabilitation hospital	36,780			44,637			21.4		92,545			110,811			19.7
Outpatient rehabilitation	40,040			30,623			(23.5)		111,615			51,463			(53.9)
Concentra(2)	77,679			80,547			3.7		220,024			183,510			(16.6)
Other(1)(2)	(29,081)			(31,433)			N/M		(79,552)			(33,638)			N/M
Total Company	$	182,665		$	213,204		16.7	%	$	539,015		$	579,289		7.5	%
Adjusted EBITDA margins:
Critical illness recovery hospital	12.4		%	17.1		%			14.1		%	17.4		%
Rehabilitation hospital	21.2			23.7					19.0			20.6
Outpatient rehabilitation	15.1			12.8					14.4			7.8
Concentra(2)	18.4			20.6					17.9			16.6
Other(1)(2)	N/M			N/M					N/M			N/M
Total Company	13.1		%	15.0		%			13.2		%	14.2		%
Total assets:
Critical illness recovery hospital	$	2,116,512		$	2,160,157				$	2,116,512		$	2,160,157
Rehabilitation hospital	1,121,260			1,144,436					1,121,260			1,144,436
Outpatient rehabilitation	1,280,712			1,298,938					1,280,712			1,298,938
Concentra	2,366,227			2,355,644					2,366,227			2,355,644
Other(1)	270,045			700,702					270,045			700,702
Total Company	$	7,154,756		$	7,659,877				$	7,154,756		$	7,659,877
Purchases of property and equipment:
Critical illness recovery hospital	$	12,254		$	11,126				$	36,902		$	35,061
Rehabilitation hospital	5,293			1,636					23,832			6,884
Outpatient rehabilitation	7,476			7,268					23,221			22,245
Concentra	8,240			11,985					36,178			34,391
Other(1)	1,408			2,304					3,823			6,991
Total Company	$	34,671		$	34,319				$	123,956		$	105,572

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

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

~~(3)~~ ~~Reflects~~

(2) For the ~~retrospective adoption of ASU No. 2015-17,~~ ~~Balance Sheet Classification of Deferred Taxes.~~ ~~Total assets as of~~three and nine months ended September 30, ~~2016 were retrospectively conformed~~2020, we recognized payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to ~~reflect~~COVID-19 as other operating income. Other operating income is included within the ~~adoption~~operating results of our Concentra segment and other activities, which is illustrated in the ~~standard, resulting in a reduction to total assets~~tables presented under “Summary Financial Results” for the three and nine months ended September 30, 2020.

N/M — Not meaningful.

Table of ~~$28.1 million.~~

Contents

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

2019

In the following, we discuss our results of operations related to net operating revenues, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income ~~(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” above for ~~Holdings and Select.~~

further discussion.

Net Operating Revenues

Our net operating revenues increased ~~4.1%~~2.2% to ~~$1,097.2~~$1,423.9 million for the three months ended September 30, ~~2017,~~2020, compared to $~~1,053.8~~$1,393.3 million for the three months ended September 30, ~~2016.~~

~~Specialty Hospitals~~2019.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~7.5%~~12.2% to ~~$585.3~~$519.5 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$544.5~~$462.9 million for the three months ended September 30, ~~2016 for our specialty hospitals segment.~~2019. The increase in net operating revenues ~~is principally due to several new inpatient rehabilitation facilities which commenced operations~~resulted from increases in both patient volume and net revenue per patient day during ~~2016 and 2017 and an increase in patient volumes at our LTCHs.~~the three months ended September 30, 2020. Our patient days increased ~~6.7%~~8.1% to ~~316,170~~279,063 days for the three months ended September 30, ~~2017,~~2020, compared to ~~296,202~~258,089 days for the three months ended September 30, ~~2016. The average net revenue per patient day for~~2019. Occupancy in our ~~specialty~~critical illness recovery hospitals increased ~~2.1%~~ to ~~$1,676~~71% during the three months ended September 30, 2020, compared to 67% for the three months ended September 30, ~~2017, compared~~2019. Net revenue per patient day increased 4.1% to ~~$1,642~~$1,845 for the three months ended September 30, ~~2016.~~

~~Outpatient~~ 2020, compared to $1,773 for the three months ended September 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. Our critical illness recovery hospitals experienced an increase in patient acuity during the three months ended September 30, 2020, which contributed to the increase in Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues ~~were $250.5~~increased 8.5% to $188.1 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$250.7~~$173.4 million for the three months ended September 30, ~~2016~~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 September 30, 2020. Our patient days increased 7.0% to 95,680 days for the three months ended September 30, 2020, compared to 89,454 days for the three months ended September 30, 2019. This increase occurred despite declines in volume experienced within certain of our ~~outpatient~~ rehabilitation ~~segment.~~hospitals in New Jersey and South Florida. These hospitals restricted admissions as a result of the COVID-19 pandemic during the three months ended June 30, 2020. Although these restrictions were in place only temporarily, admissions have not recovered to the levels experienced prior to the COVID-19 pandemic and are lower than those experienced during the three months ended September 30, 2019. Occupancy in our rehabilitation hospitals increased to 82% during the three months ended September 30, 2020, compared to 75% for the three months ended September 30, 2019. Our net revenue per patient day increased 3.0% to $1,775 for the three months ended September 30, 2020, compared to $1,724 for the three months ended September 30, 2019. The increase in net revenue per patient day was driven by an increase in our Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues were $240.0 million for the three months ended September 30, 2020, compared to $265.3 million for the three months ended September 30, 2019. The decrease in net operating revenues was ~~principally due~~attributable 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 clinicswere 1,983,372 for the three months ended September 30, ~~2017,~~2020, compared to ~~2,052,678~~2,204,328 visits for the three months ended September 30, ~~2016. The~~2019. For the three months ended September 30, 2020, our outpatient rehabilitation clinics experienced less demand for services due to a decline in ~~net operating revenues attributable~~patient referrals from physicians, a reduction in workers’ compensation injury visits due to ~~lower patient volumes was offset~~the closure of businesses, the suspension of elective surgeries at hospitals and other facilities which resulted in ~~part by an increase~~less demand for outpatient rehabilitation services, and social distancing practices resulting from the COVID-19 pandemic. Patient volume in our outpatient rehabilitation clinics has improved since April and May 2020 as restrictions imposed on individuals and businesses ease. During the three months ended September 30, 2020, we experienced a 10.0% decrease in visits, as compared to the three months ended September 30, 2019, while we experienced a 39.1% decrease in visits during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Our net revenue per ~~visit. Net revenue per~~ visit ~~increased 2.0% to~~was $104 for the three months ended September 30, ~~2017,~~2020, compared to ~~$102~~$103 for the three months ended September 30, ~~2016.~~

2019. Our net revenue per visit benefited from improved contracted rates with some of our payors.

Table of Contents

Concentra Segment. Net operating revenues ~~increased 1.1% to $261.3~~were $391.9 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$258.5~~$421.9 million for the three months ended September 30, ~~2016 for our Concentra segment.~~2019. The ~~increase~~decrease in net operating revenues was ~~principally due~~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%~~were 2,827,047 for the three months ended September 30, 2020, compared to ~~1,979,481~~3,150,903 visits for the three months ended September 30, ~~2017,~~2019. For the three months ended September 30, 2020, we continued to experience a decline in volume resulting from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations as a result of the COVID-19 pandemic. Consequently, our centers experienced a reduction in workers’ compensation and employer services visits. Patient volume has improved since April and May 2020 as restrictions imposed on businesses ease. During the three months ended September 30, 2020, we experienced a 10.3% decrease in visits, as compared to ~~1,906,242~~the three months ended September 30, 2019, while we experienced a 30.7% decrease in visits during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. As of September 30, 2020, we have six centers that remain temporarily closed and 207 centers are operating at reduced hours. Our net operating revenues were also impacted by the sale of our Department of Veterans Affairs community-based outpatient clinic business, which occurred on September 1, 2020. Our net revenue per visit was $121 for the three months ended September 30, ~~2016. The growth in visits primarily related~~2020, compared to ~~an increase in employer services visits. Net revenue per visit was $116~~$120 for the three months ended September 30, ~~2017, compared to $119 for~~2019. During the three months ended September 30, ~~2016. The decrease in~~2020, we experienced a higher net revenue per visit ~~is principally~~ due to ~~an increased proportion~~increases in the reimbursement rates payable pursuant to certain state fee schedules for workers’ compensation visits, as well as increases in our contracted rates with some of ~~employer service visits, which yield lower per visit rates.~~

our payors.

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~~$1,216.5 million, or ~~90.0%~~85.4% of net operating revenues, for the three months ended September 30, ~~2017,~~2020, compared to ~~$960.5~~$1,217.5 million, or ~~91.1%~~87.4% of net operating revenues, for the three months ended September 30, ~~2016.~~2019. Our cost of services, a major component of which is labor expense, was ~~$938.9~~$1,181.0 million, or ~~85.6%~~82.9% of net operating revenues, for the three months ended September 30, ~~2017,~~2020, compared to ~~$915.7~~$1,183.1 million, or ~~86.9%~~84.9% of net operating revenues, for the three months ended September 30, ~~2016.~~2019. The decrease in our operating expenses relative to our net operating revenues iswas principally due to the improved operating performance of our ~~acquired~~critical illness recovery hospital and ~~start-up specialty hospitals. Facility rent expense, a component of~~rehabilitation hospital segments, as well as the 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.~~reductions achieved by our Concentra segment. 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$35.5 million, or ~~1.9%~~2.5% of net operating revenues, for the three months ended September 30, ~~2017,~~2020, compared to $~~17.7~~$34.4 million, or ~~1.7%~~2.5% of net operating revenues, for the three months ended September 30, ~~2016.~~2019.

Other Operating Income

For the three months ended September 30, 2020, we recognized a reduction to other operating income of $1.2 million. We recognize payments received under the Provider Relief Fund as other operating income as we incur losses of revenue and health care related expenses attributable to COVID-19. The ~~increase~~reduction in ~~bad debt expense occurred principally~~other operating income resulted from changes in the terms and conditions associated with the acceptance of the Provider Relief Fund payments; these terms and conditions have changed from those which existed upon receipt of the payments. Refer to Note 14 – CARES Act of the notes to our ~~specialty hospitals segment.~~

condensed consolidated financial statements included herein for further information.

Adjusted EBITDA

~~Specialty Hospitals~~

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~43.9%~~55.2% to ~~$69.5~~$88.8 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$48.3~~$57.2 million for the three months ended September 30, ~~2016 for our specialty hospitals segment.~~2019. Our Adjusted EBITDA margin for the ~~specialty hospitals~~critical illness recovery hospital segment was ~~11.9%~~17.1% for the three months ended September 30, ~~2017,~~2020, compared to ~~8.9%~~12.4% for the three months ended September 30, ~~2016.~~2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our ~~specialty hospitals~~critical illness recovery hospital segment were ~~primarily~~ driven by ~~the improved operating performance of~~increases in both patient volume and our ~~LTCHs and reductions~~net revenue per patient day, as discussed above under “Net Operating Revenues.” The increases in Adjusted EBITDA ~~losses in our start-up specialty hospitals.~~and Adjusted EBITDA ~~losses~~margin occurred despite the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our critical illness recovery hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our ~~start-up specialty hospitals were $1.5~~patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.

Table of Contents

Rehabilitation Hospital Segment. Adjusted EBITDA increased 21.4% to $44.6 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$9.0~~$36.8 million for the three months ended September 30, ~~2016.~~

2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 23.7% for the three months ended September 30, 2020, compared to 21.2% for the three months ended September 30, 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were driven by increases in both patient volume and our net revenue per patient day. These increases occurred despite declines in the Adjusted EBITDA and Adjusted EBITDA margins of certain of our rehabilitation hospitals in New Jersey and South Florida. These declines were caused by lower patient volume during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, which is discussed above under “Net Operating Revenues.”

Outpatient Rehabilitation Segment. Adjusted EBITDA was ~~$29.3~~$30.6 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$32.0~~$40.0 million for the three months ended September 30, ~~2016 for our outpatient rehabilitation segment.~~2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~11.7% for the three months ended September 30, 2017, compared to~~ 12.8% for the three months ended September 30, ~~2016.~~2020, compared to 15.1% for the three months ended September 30, 2019. The ~~decrease~~decline in Adjusted EBITDA ~~was principally due to a decline in visits within areas 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 our~~ Adjusted EBITDA margin ~~for our outpatient rehabilitation segment was the result of higher labor expenses relative to our net operating revenues within markets which have experienced~~were primarily caused by a decline in patient ~~volumes.~~

volume resulting from the effects of the COVID-19 pandemic. Our outpatient rehabilitation segment experienced a 10.0% decrease in visits during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

Concentra Segment. Adjusted EBITDA ~~was $40.0~~increased 3.7% to $80.5 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$40.9~~$77.7 million for the three months ended September 30, ~~2016 for our Concentra segment.~~2019. Our Adjusted EBITDA margin for the Concentra segment was ~~15.3%~~20.6% for the three months ended September 30, ~~2017,~~2020, compared to ~~15.8%~~18.4% for the three months ended September 30, ~~2016. The~~2019. As a result of the effects of the COVID-19 pandemic, our Concentra segment experienced a 10.3% decrease in visits during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor and other discretionary costs. These efforts resulted in increases in both our Adjusted EBITDA ~~was principally due to a decline in visits within areas affected by Hurricanes Harvey~~ and ~~Irma, as discussed above under “~~~~Net Operating Revenues~~.”

~~Other.~~ ~~The~~ Adjusted EBITDA ~~loss~~margin for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

Depreciation and Amortization

Depreciation and amortization expense was ~~$22.9~~$50.1 million for the three months ended September 30, ~~2017,~~2020, compared to ~~an Adjusted EBITDA loss of $23.1~~$52.9 million for the three months ended September 30, ~~2016.~~

~~Depreciation and Amortization~~

~~Depreciation~~2019. The decrease in depreciation and amortization expense ~~was $38.8~~occurred principally in our Concentra segment. The decrease in depreciation and amortization expense is primarily due to certain assets acquired as part of the acquisitions of U.S. HealthWorks, Inc. and Concentra Inc. becoming fully depreciated.

Income from Operations

For the three months ended September 30, 2020, we had income from operations of $156.1 million, compared to $122.9 million for the three months ended September 30, ~~2017, compared~~2019. The increase in income from operations was primarily attributable to ~~$37.2 million for~~the improved operating performance of our critical illness recovery hospital and rehabilitation hospital segments, as well as the cost reductions achieved by our Concentra segment.

Loss on Early Retirement of Debt

During the three months ended September 30, ~~2016. The increase was principally due~~2019, the amendment to ~~new inpatient~~the Select credit facilities, the amendment to the Concentra-JPM first lien credit agreement, the repayment of term loans outstanding under the Concentra-JPM second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation ~~facilities operating~~businesses and other healthcare-related businesses in ~~our specialty hospitals segment.~~

~~Income from Operations~~

which we are a minority owner. 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. The increase in income from operations resulted principally from the improved operating performance of 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, and unamortized original issue discounts.

~~Equity in Earnings of Unconsolidated Subsidiaries~~

~~For the three months ended September 30, 2017,~~2020, we had equity in earnings of unconsolidated subsidiaries of ~~$4.4~~$8.8 million, compared to ~~$5.3~~$7.0 million for the three months ended September 30, ~~2016. The decrease~~2019.

Gain on Sale of Businesses

We recognized a gain of $5.1 million during the three months ended September 30, 2020. During the three months ended September 30, 2020, we sold Concentra’s Department of Veterans Affairs community-based outpatient clinic business and a rehabilitation hospital business, which resulted in ~~our equity in earnings~~gains totaling $14.1 million. We also incurred a loss of ~~unconsolidated subsidiaries resulted principally from losses incurred by start-up companies in which we own~~$9.0 million related to the indemnity provision associated with a ~~minority interest.~~

previously sold business.

Table of Contents

Interest Expense

Interest expense was ~~$37.7~~$34.0 million for the three months ended September 30, ~~2017,~~2020, compared to ~~$44.5~~$54.3 million for the three months ended September 30, ~~2016.~~2019. The decrease in interest expense was principally ~~the result of decreases~~due to a decline in ~~our~~variable interest

rates, ~~associated with~~as well as the refinancing of ~~the~~our Select credit facilities, Concentra-JPM first and second lien credit agreements, 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~~$31.6 million for the three months ended September 30, ~~2017,~~2020, which represented an effective tax rate of ~~36.1%~~23.2%. We recorded income tax expense of ~~$1.1~~$12.8 million for the three months ended September 30, ~~2016,~~2019, which represented an effective tax rate of ~~21.2%~~22.6%. ~~Our quarterly~~The increase in the effective ~~income~~ tax rate ~~is derived~~resulted from ~~our full year estimated effective~~a higher estimate of state and local 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.~~

taxes.

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

Net income attributable to non-controlling interests was ~~$6.4~~$27.5 million for the three months ended September 30, ~~2017,~~2020, compared to ~~net losses attributable to non-controlling interests of $2.5~~$13.3 million for the three months ended September 30, ~~2016.~~2019. The increase iswas principally due to increases in the net income of our Concentra segment and several of our joint venture ~~subsidiary, Concentra, and~~rehabilitation hospitals during the ~~improved operating performance~~three months ended September 30, 2020.

Table of ~~joint venture inpatient rehabilitation facilities operating within our specialty hospitals segment.~~

Contents

Nine Months Ended September 30, ~~2017~~2020, Compared to Nine Months Ended September 30, ~~2016~~

2019

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

further discussion.

Net Operating Revenues

Our net operating revenues ~~increased 2.8% to $3,329.2~~were $4,071.2 million for the nine months ended September 30, ~~2017,~~2020, compared to $~~3,239.8~~$4,079.3 million for the nine months ended September 30, ~~2016.~~

~~Specialty Hospitals~~2019.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~3.2%~~11.4% to ~~$1,785.0~~$1,539.6 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$1,729.3~~$1,381.6 million for the nine months ended September 30, ~~2016 for our specialty hospitals segment.~~2019. The increase in net operating revenues ~~is principally~~was due to ~~several new inpatient rehabilitation facilities which commenced operations during 2016~~increases in both patient volume and ~~2017. The average~~ net revenue per patient day ~~for our specialty hospitals increased 3.4% to $1,707 for~~during 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~~2020. Our patient days ~~compared~~increased 6.1% to ~~951,292~~826,410 days for the nine months ended September 30, ~~2016. The decrease~~2020, compared to 779,078 days for the nine months ended September 30, 2019. We experienced a 3.9% increase in patient days ~~is principally due~~in our existing critical illness recovery hospitals. The remaining increase occurred in the four critical illness recovery hospitals we acquired in 2019. Occupancy in our critical illness recovery hospitals increased to ~~closed specialty hospitals.~~

~~Outpatient~~ 71% during the nine months ended September 30, 2020, compared to 69% for the nine months ended September 30, 2019. Net revenue per patient day increased 5.3% to $1,850 for the nine months ended September 30, 2020, compared to $1,757 for the nine months ended September 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. Our critical illness recovery hospitals experienced an increase in patient acuity during the nine months ended September 30, 2020, which contributed to the increase in Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased ~~2.5%~~10.3% to ~~$764.5~~$538.8 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$745.7~~$488.3 million for the nine months ended September 30, ~~2016 for our outpatient rehabilitation segment.~~2019. The increase in net operating revenues ~~was principally due to the acquisition of Physiotherapy on March 4, 2016, which contributed to the overall growth~~resulted from increases in ~~our visits. Additionally, we experienced an increase in our~~both patient volume and net revenue per ~~visit. Visits~~patient day during the nine months ended September 30, 2020. Our patient days increased ~~7.3%~~6.0% to ~~6,168,763~~274,329 days for the nine months ended September 30, ~~2017,~~2020, compared to ~~5,751,562~~258,795 days for the nine months ended September 30, 2019. The increase in patient days was principally driven by our rehabilitation hospitals which commenced operations during 2019. We also experienced a 2.3% increase in patient days in our existing rehabilitation hospitals. This increase occurred despite declines in volume experienced within our rehabilitation hospitals in New Jersey and South Florida which temporarily restricted admissions as a result of the COVID-19 pandemic. Certain of our rehabilitation hospitals have also experienced overall lower patient volume due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services, during the nine months ended September 30, 2020. These declines in volume principally occurred in April and May 2020. Our net revenue per patient day increased 6.7% to $1,777 for the nine months ended September 30, 2020, compared to $1,665 for the nine months ended September 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues were $662.4 million for the nine months ended September 30, 2020, compared to $774.1 million for the nine months ended September 30, 2019. The decrease in net operating revenues was attributable to a decline in visits, which were 5,448,304 for the nine months ended September 30, 2020, compared to 6,462,316 visits for the nine months ended September 30, ~~2016. Net~~2019. During January and February 2020, our outpatient rehabilitation clinics experienced an 11.2% increase in visits, as compared to the same period in 2019. During the months of March through September 2020, we experienced a 22.8% decrease in visits, as compared to same period in 2019. The decline in volume, which was most significant during April and May 2020, was attributable to the effects of the COVID-19 pandemic. Patient volume in our outpatient rehabilitation clinics has improved since April and May 2020 as restrictions imposed on individuals and businesses ease. Our net revenue per visit ~~increased 1.0%~~was $105 for the nine months ended September 30, 2020, compared to $103 for the nine months ended September 30, ~~2017, compared to $102 for the nine months ended September 30, 2016. The increase in~~2019. Our net ~~operating revenues was offset in part by the sale~~revenue per visit benefited from improved contracted rates with some of our ~~contract therapy businesses on March 31, 2016.~~

payors.

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Concentra Segment. Net operating revenues ~~increased 1.9% to $779.0~~were $1,102.7 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$764.3~~$1,231.7 million for the nine months ended September 30, ~~2016 for our Concentra segment.~~2019. The ~~increase~~decrease in net operating revenues was ~~principally due~~attributable to ~~an increase~~a decline in visits, ~~from newly acquired and developed medical centers. Visits in our centers increased 3.7% to 5,848,551~~which were 7,855,522 for the nine months ended September 30, ~~2017,~~2020, compared to ~~5,642,305~~9,165,599 visits for the nine months ended September 30, ~~2016. The growth~~2019. During January and February 2020, we experienced a 4.9% increase in visits, ~~principally related~~as compared to ~~an increase~~the same period in ~~employer services visits.~~2019. During the months of March through September 2020, our centers experienced a 19.3% decrease in visits, as compared to same period in 2019. The decline in volume, which was most significant during April and May 2020, was attributable to the effects of the COVID-19 pandemic. Patient volume in our centers has continued to improve since April and May 2020 as restrictions imposed on businesses ease. As of September 30, 2020, we have six centers that remain temporarily closed and 207 centers are operating at reduced hours. Net revenue per visit was ~~$117~~$123 for the nine months ended September 30, ~~2017,~~2020, compared to ~~$118~~$122 for the nine months ended September 30, ~~2016. The decrease in~~2019. During the nine months ended September 30, 2020, we experienced a higher net revenue per visit ~~is principally~~ due to ~~an increased proportion~~increases in the reimbursement rates payable pursuant to certain state fee schedules for workers’ compensation visits, as well as increases in our contracted rates with some of ~~employer service visits, which yield lower~~our payors. The higher net revenue per visit ~~rates.~~

rate also reflects a higher percentage of workers’ compensation patients treated during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

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 ~~$2,930.0~~$3,566.6 million, or ~~88.0%~~87.6% of net operating revenues, for the nine months ended September 30, ~~2017,~~2020, compared to ~~$2,887.8~~$3,559.8 million, or ~~89.1%~~87.2% of net operating revenues, for the nine months ended September 30, ~~2016.~~2019. Our cost of services, a major component of which is labor expense, was ~~$2,787.5~~$3,463.8 million, or ~~83.7%~~85.1% of net operating revenues, for the nine months ended September 30, ~~2017,~~2020, compared to ~~$2,755.0~~$3,465.4 million, or ~~85.0%~~84.9% of net operating revenues, for the nine months ended September 30, ~~2016.~~2019. The ~~decrease~~increase in our operating expenses relative to our net operating revenues iswas principally due to the ~~improved operating performance of~~reduced patient volume in our ~~acquired~~outpatient rehabilitation 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.Concentra segments, as discussed above. 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$102.8 million, or ~~1.8%~~2.5% of net operating revenues, for the nine months ended September 30, ~~2017,~~2020, compared to ~~$51.6~~$94.4 million, or ~~1.6%~~2.3% of net operating revenues, for the nine months ended September 30, ~~2016. The increase was principally~~2019.

Other Operating Income

For the ~~result~~nine months ended September 30, 2020, we had other operating income of ~~increases~~$53.8 million. We recognize payments received under the Provider Relief Fund as other operating income as we incur losses of revenue and health care related expenses attributable to COVID-19. Refer to Note 14 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the nine months ended September 30, 2020, $52.7 million of other operating income is included within the operating results of our other activities; $1.1 million of other operating income is included in ~~bad debt expense in~~the operating results of our ~~specialty hospitals and~~ Concentra ~~segments.~~

segment.

Adjusted EBITDA

~~Specialty Hospitals~~

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~17.7%~~37.4% to ~~$256.3~~$267.1 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$217.8~~$194.4 million for the nine months ended September 30, ~~2016 for our specialty hospitals segment.~~2019. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~14.4%~~17.4% for the nine months ended September 30, ~~2017,~~2020, compared to ~~12.6%~~14.1% for the nine months ended September 30, ~~2016.~~2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our ~~specialty hospitals~~critical illness recovery hospital segment were ~~primarily~~ driven by ~~the improved operating performance of our LTCHs, reductions~~increases in both patient volume and net revenue per patient day, as discussed above under “Net Operating Revenues.” The increases in Adjusted EBITDA ~~losses in our start-up specialty hospitals,~~ and ~~the closure of specialty hospitals which had generated~~ Adjusted EBITDA ~~losses during~~margin occurred despite the ~~nine months ended September 30, 2016.~~incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our critical illness recovery hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.

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Rehabilitation Hospital Segment. Adjusted EBITDA ~~losses in our start-up specialty hospitals were $4.7~~increased 19.7% to $110.8 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$19.4~~$92.5 million for the nine months ended September 30, ~~2016.~~

~~Outpatient Rehabilitation Segment.~~2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 20.6% for the nine months ended September 30, 2020, compared to 19.0% for the nine months ended September 30, 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to our hospitals which commenced operations in 2019. We also experienced increases in Adjusted EBITDA and Adjusted EBITDA margin at many of our existing hospitals as a result of increased patient volume and increases in net revenue per patient day. These increases occurred despite the declines in Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation hospitals in New Jersey and South Florida which temporarily restricted admissions as a result of the COVID-19 pandemic during the three months ended June 30, 2020. Our Adjusted EBITDA and Adjusted EBITDA margin were also adversely impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment. As previously discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, prior to our rehabilitation hospitals becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased ~~3.6%~~72.5% to ~~$102.6~~$27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Our Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. For the nine months ended September 30, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $8.8 million.

Outpatient Rehabilitation Segment. Adjusted EBITDA was $51.5 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$99.0~~$111.6 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~~.”2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~13.4%~~7.8% for the nine months ended September 30, ~~2017,~~2020, compared to ~~13.3%~~14.4% for the nine months ended September 30, ~~2016.~~2019. The ~~increase~~decrease in Adjusted EBITDA ~~margin was principally due to the sale of our contract therapy businesses on March 31, 2016, which operated at lower~~and Adjusted EBITDA ~~margins than~~margin were caused by a decline in visits, beginning in mid-March 2020, as a result of the effects of the COVID-19 pandemic, as described above. During the months of March through September 2020, our outpatient rehabilitation ~~clinics.~~

~~Concentra Segment.~~clinics experienced a 22.8% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs. As previously discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, prior to our outpatient rehabilitation clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased ~~6.4%~~33.6% to ~~$125.7~~$23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January and February 2020, compared to 10.7% for the same period in 2019.

Concentra Segment. Adjusted EBITDA was $183.5 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$118.1~~$220.0 million for the nine months ended September 30, ~~2016 for our Concentra segment.~~2019. Our Adjusted EBITDA margin for the Concentra segment was ~~16.1%~~16.6% for the nine months ended September 30, ~~2017,~~2020, compared to ~~15.5%~~17.9% for the nine months ended September 30, ~~2016.~~2019. The ~~increases~~decreases in Adjusted EBITDA and Adjusted EBITDA ~~margins for our Concentra segment~~margin were ~~principally the~~caused by a decline in visits, beginning in mid-March 2020, as a result of ~~cost reductions~~the effects of the COVID-19 pandemic, as described above. During the months of March through September 2020, our centers experienced a 19.3% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we ~~have achieved.~~

~~Other.~~ ~~The~~temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor and other discretionary costs. As previously discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, prior to our centers becoming affected by the COVID-19 pandemic, our Adjusted EBITDA ~~loss~~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 ~~$71.1~~$154.1 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~an Adjusted EBITDA loss of $66.7~~$160.1 million for the nine months ended September 30, ~~2016.~~2019. The ~~increase~~decrease 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~~depreciation and amortization expense ~~was $119.6~~occurred in our Concentra segment. The decrease in depreciation and amortization expense is primarily due to certain assets acquired as part of the acquisitions of U.S. HealthWorks, Inc. and Concentra Inc. becoming fully depreciated.

Income from Operations

For the nine months ended September 30, 2020, we had income from operations of $404.3 million, compared to $359.5 million for the nine months ended September 30, ~~2017, compared~~2019. The increase in income from operations was primarily attributable to ~~$107.9~~the improved operating performance of our critical illness recovery hospital and rehabilitation hospital segments, as well as the recognition of $53.8 million ~~for~~of other operating income, as discussed above.

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Loss on Early Retirement of Debt

During the nine months ended September 30, ~~2016. The increase was principally due~~2019, the amendment 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~~Select credit facilities, ~~which~~the amendment to the Concentra-JPM first lien credit agreement, the repayment of term loans outstanding under the Concentra-JPM second lien credit agreement, and the redemption of the 6.375% senior notes 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~~totaling $18.6 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

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 nine months ended September 30, ~~2017,~~2020, we had equity in earnings of unconsolidated subsidiaries of ~~$15.6~~$19.7 million, compared to ~~$14.5~~$18.7 million for the nine months ended September 30, ~~2016. The increase in our equity in earnings~~2019.

Gain on Sale of ~~unconsolidated subsidiaries resulted principally from improved performance of the inpatient rehabilitation businesses in which we have a minority interest.~~

~~Non-Operating Gain~~

Businesses

We recognized ~~a non-operating gain~~gains of ~~$37.1~~$12.7 million during the nine months ended September 30, ~~2016. The non-operating~~2020. During the nine months ended September 30, 2020, we sold an outpatient rehabilitation business, a rehabilitation hospital business, and Concentra’s Department of Veterans Affairs community-based outpatient clinic business. These sales resulted in gains of approximately $21.6 million. We also incurred a loss of $9.0 million related to the indemnity provision associated with a previously sold business.

We recognized a gain ~~was principally due~~of $6.5 million related to the sale of ~~our contract therapy businesses on March 31, 2016, as well as the sale of nine~~an outpatient rehabilitation ~~clinics to a non-consolidating subsidiary and the sale of five specialty hospitals in an exchange transaction~~business during the ~~quarter~~nine months ended ~~June~~September 30, ~~2016.~~

2019.

Interest Expense

Interest expense was ~~$116.2~~$117.5 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$127.7~~$156.6 million for the nine months ended September 30, ~~2016.~~2019. The decrease in interest expense was principally ~~the result of decreases~~due to a decline in ~~our~~variable interest rates, ~~associated with~~as well as the refinancing of ~~the~~our Select credit facilities, Concentra-JPM first and second lien credit agreements, 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 ~~$59.6~~$76.8 million for the nine months ended September 30, ~~2017,~~2020, which represented an effective tax rate of ~~37.4%~~24.1%. We recorded income tax expense of ~~$51.6~~$52.1 million for the nine months ended September 30, ~~2016,~~2019, which represented an effective tax rate of ~~33.0%~~24.9%.

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 For the nine months ended September 30, ~~2016~~2020, the lower effective tax rate resulted primarily from ~~the net effects~~an increase in income before income taxes generated from our consolidated subsidiaries which are taxable as partnerships. For these subsidiaries, we only incur income tax expense on our share of ~~the two discrete tax events discussed above.~~

their earnings.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$23.2~~$60.7 million for the nine months ended September 30, ~~2017,~~2020, compared to ~~$9.6~~$41.0 million for the nine months ended September 30, ~~2016.~~2019. The increase iswas principally due to increases in the net income of our joint venture ~~subsidiary, Concentra,~~critical illness recovery hospitals and rehabilitation hospitals during the ~~improved operating performance~~nine months ended September 30, 2020.

Table of ~~joint venture inpatient rehabilitation facilities operating within our specialty hospitals segment.~~

Contents

Liquidity and Capital Resources

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

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.


	Nine Months Ended September 30,
	2019		2020
	(in thousands)
Cash flows provided by operating activities	$	266,640	$	820,635
Cash flows used in investing activities	(270,710)		(62,185)
Cash flows used in financing activities	(35,145)		(454,532)
Net increase (decrease) in cash and cash equivalents	(39,215)		303,918
Cash and cash equivalents at beginning of period	175,178		335,882
Cash and cash equivalents at end of period	$	135,963	$	639,800

Operating activities provided ~~$130.0~~$820.6 million of cash flows for the nine months ended September 30, ~~2017. The decrease in operating cash flows for the nine months ended September 30, 2017~~2020, compared to the nine months ended September 30, 2016 is principally due to increases in our accounts receivable. Our days sales outstanding was 60 days at September 30, 2017, compared to 51 days at December 31, 2016 and 52 days at September 30, 2016. Our days sales outstanding will fluctuate based upon variability in our collection cycles. The increase in our days sales outstanding and related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

Investing activities used $170.0 million for the nine months ended September 30, 2017. The principal use of cash was $173.8 million for purchases of property and equipment and $19.4 million for the acquisition of businesses, offset in part by $34.6 million of proceeds received from the sale of assets. Investing activities used $463.0$266.6 million of cash flows for the nine months ended September 30, ~~2016, principally due~~2019. The increase in cash flows provided by operating activities is primarily attributable to $318.1 million of advanced payments received under the ~~acquisition~~Accelerated and Advance Payment Program, as well as approximately $120.8 million of ~~Physiotherapy.~~ payments received under the Provider Relief Fund. Refer to Note 14 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information.

Our days sales outstanding was 54 days at September 30, 2020, compared to 51 days at December 31, 2019. Our days sales outstanding was 53 days at September 30, 2019, compared to 51 days at December 31, 2018. Our days sales outstanding experiences variability throughout the collection cycle and the trend we have observed is an increase in days sales outstanding at September 30, 2020 and 2019, as compared to our days sales outstanding at December 31, 2019 and 2018, respectively. Our cash collections from accounts receivable have been ample and are expected to provide us with sufficient working capital to operate our businesses.

Investing activities for the nine months ended September 30, 2016 also included $118.3 million for purchases of property and equipment, offset in part by proceeds received from the sales of businesses and an equity investment of $72.6 million.

~~Financing activities provided $48.3~~used $62.2 million of cash flows for the nine months ended September 30, ~~2017.~~2020. The principal ~~source~~uses of cash ~~was $100.0~~were $105.6 million for purchases of ~~net borrowings under~~property and equipment and $39.9 million for investments in and acquisitions of businesses. We also received proceeds from the ~~Select revolving facility, offset in part by $23.1 million~~sale of ~~cash~~assets and businesses of $83.3 million. Investing activities used for a principal prepayment associated with the Concentra credit facilities, $5.8 million of cash used for term loan payments associated with the Select credit facilities, and cash used for the payment of financing costs related to the refinancing of the Select credit facilities.

~~Financing activities provided $236.0~~$270.7 million of cash flows for the nine months ended September 30, ~~2016.~~2019. The principal ~~source~~uses of cash were $124.0 million for purchases of property and equipment and $146.9 million for investments in and acquisitions of businesses.

Financing activities used $454.5 million of cash flows for the nine months ended September 30, 2020. The principal use of cash was $366.2 million for the purchase of additional membership interests of Concentra Group Holdings Parent during the nine months ended September 30, 2020, as discussed above under “OtherSignificant Events.” We also used $39.8 million of cash for the mandatory prepayment of term loans under the Select credit facilities.

Financing activities used $35.1 million of cash flows for the nine months ended September 30, 2019. The principal sources of cash were from the issuance of ~~$625.0~~$550.0 million 6.250% senior notes, $500.0 million of ~~series F tranche B~~incremental term ~~loans, resulting~~loan borrowings under the Select credit facilities, and $100.0 million of incremental term loan borrowings under the Concentra-JPM first lien credit agreement. These borrowings resulted in net proceeds of ~~$600.1~~$1,132.9 million. A portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities, were used to redeem in full Select’s $710.0 million ~~offset~~6.375% senior notes at a redemption price of 100.000% of the principal amount. The proceeds from the incremental term loans under the Concentra-JPM first lien credit agreement were used, in part, ~~by $215.7~~to repay the $240.0 million of term loans outstanding under the Concentra-JPM second lien credit agreement. We also used $98.8 million and $33.9 million of cash ~~used to repay the series D tranche B~~for mandatory prepayments of term loans ~~and $125.0 million of net repayments~~ under the Select credit facilities and ~~Concentra~~Concentra-JPM first and second lien credit agreements, respectively. During the nine months ended September 30, 2019, we had net repayments of $20.0 million under our revolving ~~facilities.~~

credit facility (the “Select revolving facility”).

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Capital Resources

Working capital. We had net working capital of ~~$304.5~~$278.6 million at September 30, ~~2017,~~2020, compared to ~~$191.3~~$298.7 million at December 31, ~~2016. The increase in net working capital is primarily due to an increase in our accounts receivable.~~

2019.

Select credit facilities. ~~On March 6, 2017,~~

In February 2020, 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 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.

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.

~~As of~~

At September 30, ~~2017, Concentra~~2020, Select had ~~$619.2~~outstanding borrowings under the Select credit facilities consisting of $2,103.4 million ~~of first lien~~in term loans ~~outstanding~~ (excluding unamortized discounts and debt issuance costs of ~~$13.7~~$18.6 million). At September 30, 2020, Select had $410.7 million of availability under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit.

Concentra credit facilities.

At September 30, 2020, Concentra Inc. did not have any borrowings ~~excluding letters of credit,~~ outstanding under ~~the Concentra revolving facility.~~its first lien credit agreement dated June 1, 2015 (the “Concentra-JPM credit facilities”). At September 30, ~~2017,~~2020, 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 September 30, 2020, Concentra Inc. had outstanding borrowings under its term loan agreement with Select of $1,133.1 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,~~2021, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. Holdings did not repurchase shares during the three months ended September 30, ~~2017.~~2020. Since the inception of the program through September 30, ~~2017,~~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 and nine months ended September 30, 2020. The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, we believe our internally generated cash flows, ~~and~~ borrowing capacity under the Select and ~~Concentra~~Concentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below, will ~~be sufficient~~allow us to finance our operations over the next twelve months. As of September 30, 2020, we had cash and cash equivalents of $639.8 million, availability of $410.7 million under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.

On March 27, 2020, the CARES Act, which is explained further within “Regulatory Changes,” was enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to the coronavirus. We received approximately $120.8 million of payments under the Provider Relief Fund.

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In accordance with the CARES Act, CMS expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. We received approximately $318.1 million of advanced payments under this program. The majority of these payments were received in April 2020. For our critical illness recovery hospitals and rehabilitation hospitals, repayment of amounts received under the Accelerated and Advance Payment Program were originally due 210 days after the advanced payment was issued, with CMS having the ability to recoup the advanced payments through future Medicare claims billed by our hospitals, beginning 121 days after the advanced payment was issued. As of September 30, 2020, CMS had not recouped any of the advanced payments provided to us under this program. On October 1, 2020, a short-term government funding bill was signed into law. This bill, among other things, extended the repayment terms for providers who received advanced payments under the Medicare Accelerated and Advance Payment Program. The bill modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued, followed by a 25.0% recoupment of Medicare payments during the next 11 months, and 50.0% recoupment of Medicare payments during the last six months. Any amounts that remain unpaid after 29 months would be subject to a 4.0% interest rate. There is still uncertainty regarding how these modified terms will impact the timing of our repayment of the advances we have received.

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

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

In October 2020, we entered into an interest rate cap transaction in order to reduce our interest rate exposure associated with the Select term loan. The interest rate cap will limit our 1-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan. We will pay a premium of 0.0916% on the notional amount. The agreement is effective March 31, 2021 for interest payments from and including April 30, 2021 through September 30, 2024.

At September 30, 2020, we were in compliance with each of our financial covenants. As of September 30, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 3.66 to 1.00. As of September 30, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. Please refer to our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020for 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~~pronouncements.

Table 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.

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

~~Recently Adopted Accounting 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~~Concentra-JPM revolving facility.

At September 30, ~~2017,~~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~~$18.6 million) ~~and $320.0 million in revolving~~. At September 30, 2020, Select did not have any borrowings ~~outstanding~~ under the Select ~~credit facilities, which bear interest at variable rates.~~

revolving facility.

At September 30, 2020, Concentra Inc. did not have any borrowings under the Concentra-JPM revolving facility.

As of September 30, 2017, 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. Concentra did not have any outstanding revolving borrowings at September 30, 2017.

~~At September 30, 2017, the 3-month LIBOR rate was 1.33%. Consequently,~~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~~$5.3 million per annum.

In October 2020, we entered into an interest rate cap transaction. The interest rate cap will limit our 1-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan. The agreement is effective on March 31, 2021 after our current interest rate commitment period has ended. The interest rate cap will apply to interest payments from and including April 30, 2021 through September 30, 2024.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of September 30, 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 quarter ended September 30, ~~2017~~2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

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

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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”)~~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 U.S. Attorney’s Office has indicated that the subpoena was issued in connection with a qui tam lawsuit. The Company has produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

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

Oklahoma City Subpoena.On August 24, 2020, the Company and SSH–Oklahoma City received Civil Investigative Demands from the U.S. Attorney’s Office for the Western District of Oklahoma seeking responses to interrogatories and the production of various documents principally relating to the documentation, billing and reviews of medical services furnished to patients at SSH-Oklahoma City. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~Northern District of Alabama Investigation~~

On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. 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 set forth in this report should be read in conjunction with the~~

There have been no material changes from our risk factors ~~set forth below and the risk factors discussed~~as previously reported in ~~Item 1A of~~ our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

~~The closing~~2019 and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020.

Table of ~~the acquisition of U.S. HealthWorks by Concentra is subject to the satisfaction of certain conditions, and we cannot predict whether the necessary conditions will be satisfied or waived.~~

~~The closing of the acquisition of U.S. HealthWorks by Concentra is subject to regulatory approvals and customary conditions, 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 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.

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~~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 our growth strategy, we may pursue acquisitions of specialty hospitals, outpatient rehabilitation clinics and other related healthcare facilities and services. These acquisitions, including the acquisition of U.S. HealthWorks by Concentra, may involve significant cash expenditures, debt incurrence, additional operating losses and expenses and compliance risks that could have a material adverse effect on our financial condition and results of operations.

We may not be able to successfully integrate U.S. HealthWorks or other acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate U.S. HealthWorks or other acquisitions, our financial condition and results of operations 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 the value, strengths and weaknesses 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 in the ongoing needs of our business.~~

We have a substantial amount 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 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.”~~

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~~2021, 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~~2020.


	Total Number of Shares Purchased(1)	Average Price Paid Per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
July 1 - July 31, 2020	—	$	—	—	$	143,394,863
August 1 - August 31, 2020	253,510	19.04		—	143,394,863
September 1 - September 30, 2020	—	—		—	143,394,863
Total	253,510	$	19.04	—	$	143,394,863

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

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

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not ~~applicable~~

applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

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~~None.~~

ITEM 6.EXHIBITS

~~Number~~	~~Description~~
Number		Description
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~~Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File - the ~~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.

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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~~

October 29, 2020


PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	7 8

	Notes to condensed consolidated financial statements	8 9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31 25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52 54

ITEM 4.	CONTROLS AND PROCEDURES	52 54

PART II	OTHER INFORMATION	53 55

ITEM 1.	LEGAL PROCEEDINGS	53 55

ITEM 1A.	RISK FACTORS	55 56

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

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57

ITEM 4.	MINE SAFETY DISCLOSURES	57

ITEM 5.	OTHER INFORMATION	57

ITEM 6.	EXHIBITS	57 58

SIGNATURES

	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		September 30, 2020
ASSETS
Current Assets:
Cash and cash equivalents	$	335,882	$	639,800
Accounts receivable	762,677		842,615
Prepaid income taxes	18,585		23,536
Other current assets	95,848		118,183
Total Current Assets	1,212,992		1,624,134
Operating lease right-of-use assets	1,003,986		1,005,689
Property and equipment, net	998,406		927,975
Goodwill	3,391,955		3,369,009
Identifiable intangible assets, net	409,068		392,506
Other assets	323,881		340,564
Total Assets	$	7,340,288	$	7,659,877
LIABILITIES AND EQUITY
Current Liabilities:

Current operating lease liabilities	$	207,950	$	215,235
Current portion of long-term debt and notes payable	25,167		11,031
Accounts payable	145,731		160,474
Accrued payroll	183,754		182,461
Accrued vacation	124,111		124,898
Accrued interest	33,853		10,152
Accrued other	191,076		239,201
Government advances (Note 14)	0		318,116
Unearned government assistance (Note 14)	0		66,938

Income taxes payable	2,638		16,980
Total Current Liabilities	914,280		1,345,486
Non-current operating lease liabilities	852,897		852,555
Long-term debt, net of current portion	3,419,943		3,390,945
Non-current deferred tax liability	148,258		131,423
Other non-current liabilities	101,334		178,967
Total Liabilities	5,436,712		5,899,376
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	974,541		541,856
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 134,762,890 shares issued and outstanding at 2019 and 2020, respectively	134		135
Capital in excess of par	491,038		500,972
Retained earnings	279,800		537,479
Total Stockholders’ Equity	770,972		1,038,586
Non-controlling interests	158,063		180,059
Total Equity	929,035		1,218,645
Total Liabilities and Equity	$	7,340,288	$	7,659,877

	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

	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 Nine Months Ended September 30,
	2019		2020
Net operating revenues	$	4,079,338	$	4,071,219
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	3,465,353		3,463,778
General and administrative	94,401		102,808
Depreciation and amortization	160,072		154,133
Total costs and expenses	3,719,826		3,720,719
Other operating income (Note 14)	0		53,828
Income from operations	359,512		404,328
Other income and expense:
Loss on early retirement of debt	(18,643)		0
Equity in earnings of unconsolidated subsidiaries	18,710		19,677
Gain on sale of businesses	6,532		12,690
Interest expense	(156,611)		(117,499)
Income before income taxes	209,500		319,196
Income tax expense	52,140		76,805
Net income	157,360		242,391
Less: Net income attributable to non-controlling interests	40,978		60,670
Net income attributable to Select Medical Holdings Corporation	$	116,382	$	181,721
Earnings per common share (Note 12):
Basic	$	0.86	$	1.35
Diluted	$	0.86	$	1.35

				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

	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

	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

	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

	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

	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