SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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

SELECT MEDICAL HOLDINGS ~~CORPORATION~~CORPORATION

SELECT MEDICAL CORPORATION

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

Indicate by check mark whether the Registrants have submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit ~~and post~~ such files). Yes ý No o

Indicate by check mark whether the Registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o

~~Non-accelerated filer~~ o		~~Smaller reporting company~~ o
~~(Do not check if a smaller reporting company)~~		Emerging Growth Company o

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company o

~~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 ý

As of April 30, ~~2018,~~2019, Select Medical Holdings Corporation had outstanding ~~134,061,769~~135,416,312 shares of common stock.

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

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

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

(in thousands, except per share amounts)

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



	For the Three Months Ended March 31, 2019

	Select Medical Corporation Stockholders
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	0	$	0	$	970,156	$	(167,114	)	$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Corporation						40,834			40,834						40,834
Net income attributable to non-controlling interests									—			4,810			4,810
Contribution related to restricted stock award issuances by Holdings				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	0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550



	For the Three Months Ended March 31, 2018

	Select Medical Corporation Stockholders
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	0	$	0	$	947,370	$	(124,002	)	$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Corporation						33,739			33,739						33,739
Net income attributable to non-controlling interests									—			4,500			4,500
Additional investment by Holdings				738					738						738
Dividends declared and paid to Holdings						(122		)	(122		)				(122		)
Contribution related to restricted stock award issuances by Holdings				4,717					4,717						4,717
Issuance and exchange of non-controlling interests						74,341			74,341						74,341
Distributions to non-controlling interests						(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests						(1,051		)	(1,051		)				(1,051		)
Other						103			103			35			138
Balance at March 31, 2018	0	$	0	$	952,825	$	(100,225	)	$	852,600		$	112,677		$	965,277

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


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2018			2017			2018			2018			2019			2018			2019
Operating activities
Net income	$	23,463		$	43,982		$	23,463		$	43,982		$	43,982		$	53,344		$	43,982		$	53,344
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	4,911			1,364			4,911			1,364			1,364			7,872			1,364			7,872
Depreciation and amortization	42,539			46,771			42,539			46,771			46,771			52,138			46,771			52,138
Provision for bad debts	781			85			781			85			85			1,567			85			1,567
Equity in earnings of unconsolidated subsidiaries	(5,521		)	(4,697		)	(5,521		)	(4,697		)	(4,697		)	(4,366		)	(4,697		)	(4,366		)
Loss on extinguishment of debt	6,527			412			6,527			412			412			—			412			—
Gain on sale of assets and businesses	(4,609		)	(513		)	(4,609		)	(513		)	(513		)	(6,233		)	(513		)	(6,233		)
Stock compensation expense	4,586			4,927			4,586			4,927			4,927			6,255			4,927			6,255
Amortization of debt discount, premium and issuance costs	3,422			3,136			3,422			3,136			3,136			3,231			3,136			3,231
Deferred income taxes	(3,425		)	78			(3,425		)	78			78			(81		)	78			(81		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(118,269		)	(45,811		)	(118,269		)	(45,811		)	(45,811		)	(74,752		)	(45,811		)	(74,752		)
Other current assets	(7,621		)	(8,945		)	(7,621		)	(8,945		)	(8,945		)	(7,523		)	(8,945		)	(7,523		)
Other assets	(48		)	16,633			(48		)	16,633			16,633			57,319			16,633			57,319
Accounts payable	412			(6,552		)	412			(6,552		)	(6,552		)	4,324			(6,552		)	4,324
Accrued expenses	(18,429		)	(11,981		)	(18,429		)	(11,981		)	(11,981		)	(69,163		)	(11,981		)	(69,163		)
Income taxes	15,420			11,838			15,420			11,838			11,838			17,830			11,838			17,830
Net cash provided by (used in) operating activities	(55,861		)	50,727			(55,861		)	50,727
Net cash provided by operating activities													50,727			41,762			50,727			41,762
Investing activities
Business combinations, net of cash acquired	(9,566		)	(515,359		)	(9,566		)	(515,359		)	(515,359		)	(6,120		)	(515,359		)	(6,120		)
Purchases of property and equipment	(50,653		)	(39,617		)	(50,653		)	(39,617		)	(39,617		)	(49,073		)	(39,617		)	(49,073		)
Investment in businesses	(500		)	(1,754		)	(500		)	(1,754		)	(1,754		)	(27,608		)	(1,754		)	(27,608		)
Proceeds from sale of assets and businesses	19,512			691			19,512			691			691			2			691			2
Net cash used in investing activities	(41,207		)	(556,039		)	(41,207		)	(556,039		)	(556,039		)	(82,799		)	(556,039		)	(82,799		)
Financing activities
Borrowings on revolving facilities	530,000			165,000			530,000			165,000			165,000			360,000			165,000			360,000
Payments on revolving facilities	(415,000		)	(150,000		)	(415,000		)	(150,000		)	(150,000		)	(220,000		)	(150,000		)	(220,000		)
Proceeds from term loans	1,139,822			779,904			1,139,822			779,904			779,904			—			779,904			—
Payments on term loans	(1,170,817		)	(2,875		)	(1,170,817		)	(2,875		)	(2,875		)	(132,685		)	(2,875		)	(132,685		)
Revolving facility debt issuance costs	(3,887		)	(1,333		)	(3,887		)	(1,333		)	(1,333		)	—			(1,333		)	—
Borrowings of other debt	6,571			11,600			6,571			11,600			11,600			8,290			11,600			8,290
Principal payments on other debt	(5,275		)	(5,909		)	(5,275		)	(5,909		)	(5,909		)	(6,155		)	(5,909		)	(6,155		)
Repurchase of common stock	(156		)	(122		)	—			—			(122		)	—			—			—
Dividends paid to Holdings	—			—			(156		)	(122		)	—			—			(122		)	—
Proceeds from exercise of stock options	617			738			—			—			738			—			—			—
Equity investment by Holdings	—			—			617			738			—			—			738			—
Decrease in overdrafts	(17,062		)	(7,916		)	(17,062		)	(7,916		)
Increase (decrease) in overdrafts													(7,916		)	6,050			(7,916		)	6,050
Proceeds from issuance of non-controlling interests	2,094			—			2,094			—			—			3,425			—			3,425
Distributions to non-controlling interests	(3,657		)	(286,641		)	(3,657		)	(286,641		)
Distributions to and purchases of non-controlling interests													(286,641		)	(5,251		)	(286,641		)	(5,251		)
Net cash provided by financing activities	63,250			502,446			63,250			502,446			502,446			13,674			502,446			13,674
Net decrease in cash and cash equivalents	(33,818		)	(2,866		)	(33,818		)	(2,866		)	(2,866		)	(27,363		)	(2,866		)	(27,363		)
Cash and cash equivalents at beginning of period	99,029			122,549			99,029			122,549			122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	65,211		$	119,683		$	65,211		$	119,683		$	119,683		$	147,815		$	119,683		$	147,815
Supplemental Information
Cash paid for interest	$	38,565		$	35,233		$	38,565		$	35,233		$	35,233		$	37,199		$	35,233		$	37,199
Cash paid for taxes	$	1,207		$	376		$	1,207		$	376		376			718			376			718
Non-cash equity exchange for acquisition of U.S. HealthWorks	$	—		$	238,000		$	—		$	238,000		238,000			—			238,000			—

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

1.~~Basis of Presentation~~


1.	Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of March 31, ~~2018,~~2019, and for the three month periods ended March 31, ~~2017~~2018 and ~~2018,~~2019, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three months ended March 31, ~~2018,~~2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2018.~~2019. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2017,~~2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~22, 2018.~~21, 2019.

2.~~Accounting Policies~~


2.	Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and trade 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 the Company’s critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage or receives authorization from the patient’s employer prior to the patient’s visit.

Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% and 18% of the Company’s accounts receivable are from Medicare at December 31, 2018, and March 31, 2019, respectively.

Leases

The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.

Balance Sheet

For both operating and finance leases, the Company recognizes a right-of-use asset and lease liability at lease commencement. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents an obligation to make lease payments arising from a lease which are measured on a discounted basis. The Company elected the short-term lease exemption for its equipment leases; accordingly, equipment leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.

The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.

Statement of Operations

For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset.

For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.

The Company elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.

The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.

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 their approximate redemption values after the attribution of net income or loss.

The changes in redeemable non-controlling interests, which are the same for Holdings and Select, are as follows (in thousands):



Balance as of December 31, 2017	$	640,818
Net income attributable to redeemable non-controlling interests	5,743
Issuance and exchange of redeemable non-controlling interests	163,659
Distributions to redeemable non-controlling interests	(203,972		)
Redemption adjustment on redeemable non-controlling interests	1,051
Other	175
Balance as of March 31, 2018	$	607,474



Balance as of December 31, 2018	$	780,488
Net income attributable to redeemable non-controlling interests	7,700
Distributions to and purchases of redeemable non-controlling interests	(2,771		)
Redemption adjustment on redeemable non-controlling interests	47,470
Other	354
Balance as of March 31, 2019	$	833,241

Recent Accounting Pronouncements

~~Leases~~Financial Instruments

In ~~February~~June 2016, the ~~Financial Accounting Standards Board (the “FASB”)~~FASB issued Accounting Standards Update (“ASU”) ~~2016‑02,~~ ~~Leases~~2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. ~~This ASU includes~~The current standard delays the recognition of a ~~lessee accounting model that recognizes two types~~credit loss on a financial asset until the loss is probable of ~~leases: finance and operating. This ASU requires~~occurring. The new standard removes the requirement that a ~~lessee recognize on the balance sheet assets and liabilities~~credit loss be probable of occurring 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 leasesit to be ~~classified as either operating or finance.~~recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The ~~recognition, measurement, and presentation of expenses and cash flows arising~~Company’s accounts receivable derived from ~~a lease by a lessee~~contracts with customers will ~~depend on its classification as finance or operating lease. For short‑term leases of twelve months or less, lessees are permitted~~be subject 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.ASU 2016-13.

The ~~amendments in ASU 2016-02~~standard will ~~take effect for public companies~~be effective for fiscal years beginning after December 15, ~~2018,~~2019, including interim periods within those fiscal years. ~~Earlier application is permitted as of the beginning of an interim or annual reporting period. A~~The guidance must be applied using a modified retrospective approach ~~is required for leases that exist or are entered into after~~through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements.

~~Upon adoption,~~ Given the very high rate of collectability of the Company’s accounts receivable derived from contracts with customers, the Company ~~will recognize significant assets and liabilities on~~believes that the ~~consolidated balance sheets as a result~~impact of ~~the operating lease obligations of the Company. Operating lease expense will still~~ASU 2016-13 is unlikely to 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.

material.

Recently Adopted Accounting Pronouncements

~~Revenue from Contracts with Customers~~Leases

~~Beginning in May 2014, the FASB issued several~~The Company adopted Accounting Standards ~~Updates~~Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which ~~established Topic 606,~~ ~~Revenue from Contracts with Customers~~ ~~(the “standard”). This standard supersedes existing revenue recognition requirements~~existed on that date. Prior comparative periods were not adjusted and seeks to eliminate most industry-specific guidance under current GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectscontinue to be ~~entitled~~reported in ~~exchange for those goods or services.~~accordance with ASC Topic 840, Leases.

The Company ~~adopted~~elected the ~~new standard on January 1, 2018, using~~package of practical expedients, which permitted the ~~full retrospective transition method. Adoption~~Company not to reassess under ASC Topic 842 the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

The adoption of the ~~revenue recognition~~ standard ~~impacted the Company’s reported results as follows:~~

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

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

~~_____________________________________________________________~~

~~(1) Bad debt expense is now included~~resulted in ~~cost of services on the condensed consolidated statements of operations.~~

December 31, 2017
As Reported As Adjusted Adoption Impact
(in thousands)
Condensed Consolidated Balance Sheets
Accounts receivable $ 767,276
$ 691,732
$ (75,544 )
Allowance for doubtful accounts 75,544
—
(75,544 )
Accounts receivable $ 691,732
$ 691,732
$ —

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

~~Income Taxes~~

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~IncomeTaxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory.~~ ~~Previous GAAP prohibited~~ the recognition of ~~current~~operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, 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.rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company ~~adopted the guidance effective January 1, 2018. Adoption of the guidance~~ did not ~~have~~recognize a ~~material impact on the Company’s consolidated financial statements.~~cumulative-effect adjustment to retained earnings upon adoption.

~~3. Acquisitions~~


3.	Acquisitions

U.S. HealthWorks Acquisition

On February 1, 2018, Concentra Inc. (“Concentra”) acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, ~~pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”~~from Dignity Health Holding Corporation (“DHHC”) ~~dated as of October 22, 2017, by and among~~ .

Concentra acquired U.S. HealthWorks ~~Concentra Group Holdings, LLC (“Concentra Group Holdings”),~~for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and Dignity Health Holding Corporation (“DHHC”). For the three months ended March 31, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.

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

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

For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their ~~preliminary~~ estimated fair values in accordance with the provisions of ~~Accounting Standards Codification~~ASC Topic 805, Business Combinations. ~~The Company is in~~During the process of completing its assessment of the acquisition-date fair values of the assets acquired and the liabilities assumed and determining the estimated useful lives of long-lived assets and finite-lived intangible assets; therefore, the values set forth below are subject to adjustment during the measurement period. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities byyear ended December 31, ~~2018.~~2018, the Company finalized the purchase accounting related to this acquisition.

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



Accounts receivable	$	68,934
Other current assets	10,810
Property and equipment	69,712
Identifiable intangible assets	140,406
Other assets	25,435
Goodwill	540,067
Total assets	855,364
Accounts payable and other current liabilities	49,925
Deferred income taxes and other long-term liabilities	51,851
Total liabilities	101,776
Consideration given	$	753,588

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

A preliminary estimate for goodwill of $535.6 million has been recognized for the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.

For the period February 1, 2018 through March 31, 2018, U.S. HealthWorks ~~had~~contributed net operating revenues of $89.9 million which is reflected in the Company’s consolidated ~~statements~~statement of ~~operations.~~operations for the three months ended March 31, 2018. Due to the integrated nature of ~~our~~the Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.

Pro Forma Results

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

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

Basic $ 0.06
$ 0.26
Diluted $ 0.06
$ 0.26

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

For the three months ended March 31, ~~2017,~~2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.



	Three Months Ended March 31, 2018
	(in thousands)
Net operating revenues	$	1,300,544
Net income attributable to the Company	34,538

The Company’s pro forma results were adjusted to ~~include the~~recognize U.S. HealthWorks acquisition costs ~~recognized by the Company during 2017 and 2018, which were approximately $5.8 million. For~~as of January 1, 2017. Accordingly, for the three months ended March 31, 2018, pro forma results were adjusted to exclude ~~approximately~~ $2.9 million of U.S. HealthWorks acquisition ~~costs which were~~costs.


4.	Sale of Businesses

The Company recognized ~~by the Company~~a non-operating gain of $6.5 million during the ~~period.~~three months ended March 31, 2019, which resulted from the sale of 22 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary.


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 states which prohibit the corporate practice of medicine, 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 its 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 receives a management fee for these services, which is based, in part, on the 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.

Based on the provisions of these agreements, Concentra has the ability to direct the activities which most significantly impact the performance of these professional corporations and associations and has an obligation to absorb losses or receive benefits which could potentially be significant to the professional corporations and associations. Accordingly, the professional corporations and associations are variable interest entities for which Concentra is the primary beneficiary.

The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2 million and $177.6 million at December 31, 2018, and March 31, 2019, respectively. The total liabilities of 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 $164.4 million and $175.8 million at December 31, 2018, and March 31, 2019, 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 critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with two, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with two, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with two, five year renewal options.

For the three months ended March 31, 2019, the Company’s total lease cost was as follows (in thousands):



	Unrelated Parties			Related Parties		Total
Operating lease cost	$	66,836		$	1,342	$	68,178
Finance lease cost:
Amortization of right-of-use assets	36			—		36
Interest on lease liabilities	97			—		97
Short-term lease cost	592			—		592
Variable lease cost	11,836			156		11,992
Sublease income	(2,488		)	—		(2,488		)
Total lease cost	$	76,909		$	1,498	$	78,407

For the three months ended March 31, 2019, supplemental cash flow information related to leases was as follows (in thousands):



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	68,352
Operating cash flows for finance leases	97
Financing cash flows for finance leases	85
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	1,080,992

_______________________________________________________________________________


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

As of March 31, 2019, supplemental balance sheet information related to leases was as follows (in thousands):



	Operating Leases
	Unrelated Parties		Related Parties		Total
Operating lease right-of-use assets	$	962,186	$	20,430	$	982,616

Current operating lease liabilities	$	200,420	$	4,725	$	205,145
Non-current operating lease liabilities	801,094		18,913		820,007
Total operating lease liabilities	$	1,001,514	$	23,638	$	1,025,152



	Finance Leases
	Unrelated Parties			Related Parties		Total
Property and equipment, gross	$	2,813		$	—	$	2,813
Accumulated depreciation	(36		)	—		(36		)
Property and equipment, net	$	2,777		$	—	$	2,777

Current portion of long-term debt and notes payable	$	167		$	—	$	167
Long-term debt, net of current portion	4,214			—		4,214
Total finance lease liabilities	$	4,381		$	—	$	4,381

As of March 31, 2019, the weighted average remaining lease terms and discount rates was as follows:



Weighted average remaining lease term (in years):
Operating leases	8.1
Finance leases	13.7
Weighted average discount rate:
Operating leases	5.9	%
Finance leases	9.0	%

As of March 31, 2019, maturities of lease liabilities were approximately as follows (in thousands):



	Operating Leases		Finance Leases		Total
2019	$	196,381	$	431	$	196,812
2020	230,500		526		231,026
2021	192,525		537		193,062
2022	151,581		548		152,129
2023	111,167		558		111,725
Thereafter	501,279		5,075		506,354
Total undiscounted cash flows	1,383,433		7,675		1,391,108
Less: Imputed interest	358,281		3,294		361,575
Total discounted lease liabilities	$	1,025,152	$	4,381	$	1,029,533

4.~~Intangible Assets~~In accordance with ASC Topic 840, Leases, and as disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties as of December 31, 2018, were approximately as follows (in thousands):



	Total
2019	$	267,846
2020	231,711
2021	193,155
2022	150,155
2023	107,759
Thereafter	484,038
	$	1,434,664


7.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the three months ended March 31, ~~2018:~~2019:



	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation			Concentra		Total
	(in thousands)
Balance as of December 31, 2018	$	1,045,220	$	416,646	$	642,422		$	1,216,438	$	3,320,726
Acquired	—		6,964		746			937		8,647
Sold	—		—		(5,624		)	—		(5,624		)
Balance as of March 31, 2019	$	1,045,220	$	423,610	$	637,544		$	1,217,375	$	3,323,749

Long Term Acute Care Inpatient Rehabilitation
Outpatient
Rehabilitation
Concentra Total
(in thousands)
Balance as of December 31, 2017 $ 1,045,220
$ 415,528
$ 647,522
$ 674,542
$ 2,782,812
Acquired —
—
345
535,595
535,940
Sold —
—
(141 ) —
(141 )
Balance as of March 31, 2018 $ 1,045,220
$ 415,528
$ 647,726
$ 1,210,137
$ 3,318,611

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

Identifiable Intangible Assets

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



	December 31, 2018							March 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,174		—			19,174		19,221		—			19,221
Accreditations	1,857		—			1,857		1,857		—			1,857
Finite-lived intangible assets:
Trademarks	5,000		(4,583		)	417		5,000		(5,000		)	—
Customer relationships	280,710		(61,900		)	218,810		283,090		(68,150		)	214,940
Favorable leasehold interests⁽¹⁾	13,553		(6,064		)	7,489		—		—			—
Non-compete agreements	29,400		(6,152		)	23,248		30,483		(6,771		)	23,712
Total identifiable intangible assets	$	516,392	$	(78,699	)	$	437,693	$	506,349	$	(79,921	)	$	426,428

_______________________________________________________________________________


(1)	Favorable leasehold interests are a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases.

December 31, 2017 March 31, 2018

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
(in thousands)
Indefinite-lived intangible assets:

Trademarks $ 166,698
$ —
$ 166,698
$ 166,698
$ —
$ 166,698
Certificates of need 19,155
—
19,155
19,159
—
19,159
Accreditations 1,895
—
1,895
1,895
—
1,895
Finite-lived intangible assets:

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

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, ~~2018,~~2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~8.9~~7.9 years, respectively.

The Company’s ~~customer relationships, non-compete agreements, and U.S. HealthWorks trademarks~~finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was ~~$4.4~~$6.4 million and ~~$6.4~~$7.1 million for the three months ended March 31, ~~2017~~2018 and ~~2018,~~2019, respectively.

The Company’s leasehold interests have finite lives and are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date.


5.8.	Long-Term Debt and Notes Payable

For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities are non-recourse to Holdings and Select.

As of March 31, ~~2018,~~2019, the Company’s long-term debt and notes payable ~~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	$	493		$	(4,162	)	$	706,331	$	711,775
Credit facilities:
Revolving facility	160,000		—			—			160,000		147,200
Term loan	1,031,068		(9,267		)	(8,827		)	1,012,974		1,024,624
Other	64,808		—			(464		)	64,344		64,344
Total Select debt	1,965,876		(8,774		)	(13,453		)	1,943,649		1,947,943
Concentra:
Credit facilities:
Term loans	1,380,297		(2,555		)	(16,877		)	1,360,865		1,373,545
Other debt, including finance leases	6,918		—			—			6,918		6,918
Total Concentra debt	1,387,215		(2,555		)	(16,877		)	1,367,783		1,380,463
Total debt	$	3,353,091	$	(11,329	)	$	(30,330	)	$	3,311,432	$	3,328,406

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

6.375% senior notes $ 710,000
$ 721
$ (6,074 ) $ 704,647
$ 720,650
Credit facilities:

Revolving facility 245,000
—
—
245,000
225,400
Term loans 1,138,500
(11,883 ) (11,946 ) 1,114,671
1,151,308
Other 43,268
—
(519 ) 42,749
42,749
Total Select debt 2,136,768
(11,162 ) (18,539 ) 2,107,067
2,140,107
Concentra:

Credit facilities:

Term loans 1,414,175
(3,498 ) (23,021 ) 1,387,656
1,427,384
Other 5,797
—
—
5,797
5,797
Total Concentra debt 1,419,972
(3,498 ) (23,021 ) 1,393,453
1,433,181
Total debt $ 3,556,740
$ (14,660 ) $ (41,560 ) $ 3,500,520
$ 3,573,288

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



	2019		2020		2021		2022		2023		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	710,000	$	—	$	—	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		160,000		—		—		160,000
Term loan	—		—		—		—		—		1,031,068		1,031,068
Other	9,262		27,211		1,781		—		—		26,554		64,808
Total Select debt	9,262		27,211		711,781		160,000		—		1,057,622		1,965,876
Concentra:
Credit facilities:
Term loans	—		—		—		1,140,298		239,999		—		1,380,297
Other debt, including finance leases	1,644		754		330		358		363		3,469		6,918
Total Concentra debt	1,644		754		330		1,140,656		240,362		3,469		1,387,215
Total debt	$	10,906	$	27,965	$	712,111	$	1,300,656	$	240,362	$	1,061,091	$	3,353,091

2018 2019 2020 2021 2022 Thereafter Total
Select:

6.375% senior notes $ —
$ —
$ —
$ 710,000
$ —
$ —
$ 710,000
Credit facilities:

Revolving facility —
—
—
—
245,000
—
245,000
Term loans 8,625
11,500
11,500
11,500
11,500
1,083,875
1,138,500
Other 9,218
3,207
25,285
221
—
5,337
43,268
Total Select debt 17,843
14,707
36,785
721,721
256,500
1,089,212
2,136,768
Concentra:

Credit facilities:

Term loans —
—
5,719
12,365
1,156,091
240,000
1,414,175
Other 1,170
304
322
320
308
3,373
5,797
Total Concentra debt 1,170
304
6,041
12,685
1,156,399
243,373
1,419,972
Total debt $ 19,013
$ 15,011
$ 42,826
$ 734,406
$ 1,412,899
$ 1,332,585
$ 3,556,740

As of December 31, ~~2017,~~2018, the Company’s long-term debt and notes payable ~~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	$	550		$	(4,642	)	$	705,908	$	706,450
Credit facilities:
Revolving facility	20,000		—			—			20,000		18,400
Term loan	1,129,875		(9,690		)	(9,321		)	1,110,864		1,076,206
Other	56,415		—			(484		)	55,931		55,931
Total Select debt	1,916,290		(9,140		)	(14,447		)	1,892,703		1,856,987
Concentra:
Credit facilities:
Term loans	1,414,175		(2,765		)	(18,648		)	1,392,762		1,357,802
Other debt, including finance leases	7,916		—			—			7,916		7,916
Total Concentra debt	1,422,091		(2,765		)	(18,648		)	1,400,678		1,365,718
Total debt	$	3,338,381	$	(11,905	)	$	(33,095	)	$	3,293,381	$	3,222,705

Excess Cash Flow Payment

Principal
Outstanding

Unamortized
Premium
(Discount)

Unamortized
Issuance
Costs

Carrying
Value

Fair
Value
Select:

6.375% senior notes $ 710,000
$ 778
$ (6,553 ) $ 704,225
$ 727,750
Credit facilities:

Revolving facility 230,000
—
—
230,000
211,600
Term loans 1,141,375
(12,445 ) (12,500 ) 1,116,430
1,154,215
Other 36,877
—
(533 ) 36,344
36,344
Total Select debt 2,118,252
(11,667 ) (19,586 ) 2,086,999
2,129,909
Concentra:

Credit facilities:

Term loans 619,175
(2,257 ) (10,668 ) 606,250
625,173
Other 6,653
—
—
6,653
6,653
Total Concentra debt 625,828
(2,257 ) (10,668 ) 612,903
631,826
Total debt $ 2,744,080
$ (13,924 ) $ (30,254 ) $ 2,699,902
$ 2,761,735

During the three months ended March 31, 2019, Select ~~Credit Facilities~~

~~On March 22, 2018, Select entered into Amendment No. 1 to~~made a principal prepayment of approximately $98.8 million associated with its term loans in accordance with the ~~senior secured credit agreement (the “Select credit agreement”) dated March 6, 2017. The~~provision in the Select credit ~~agreement originally provided for $1.6 billion in senior secured credit~~ facilities ~~comprised~~that requires mandatory prepayments of ~~$1.15 billion in~~ term loans ~~(the “Select term loans”) and~~as a $450.0 million revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuanceresult of ~~standby letters of credit.~~

~~Amendment No. 1 (i) decreases the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as~~annual excess cash flow, as defined in the Select credit ~~agreement and subject to an Adjusted LIBO floor~~facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the Select term loan until maturity on March 6, 2025.

During the three months ended March 31, 2019, Concentra made a principal prepayment of ~~1.00%) plus 3.50% to~~approximately $33.9 million associated with its term loans in accordance with the ~~Adjusted LIBO Rate plus~~provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a ~~percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as~~result of annual excess cash flow, as defined in the ~~Select~~Concentra credit ~~agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus~~facilities. The principal prepayment was applied against future payments sequentially; as a ~~percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreases the applicable interest rate~~result, no further loan amortization payments will be required on the terms loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extends the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) makes certain other technical amendments to the Select credit agreement as set forth therein.

~~Concentra Credit Facilities~~

~~Concentra First Lien Credit Agreement~~

On February 1, 2018, Concentra entered into an amendment to its first lien credit agreement (the “Concentra first lien credit agreement”), dated June 1, 2015, by and among Concentra, as the borrower, Concentra Holdings, Inc., a subsidiary of Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other lenders party thereto. Concentra used borrowings under the Concentra first lien credit agreement ~~and the Concentra second lien credit agreement, as described below, together with cash~~until maturity on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement (as described in Note 3), as well as to pay fees and expenses associated with the financing.

Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

~~Concentra Second Lien Credit Agreement~~

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

The Concentra second lien credit agreement provides for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.

Concentra will be required to prepay borrowings under the Concentra second lien term loan with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.

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

The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.

~~Loss on Early Retirement of Debt~~

The amendments to the Select credit facilities and Concentra credit facilities resulted in losses on early retirement of debt totaling $10.3 million for the three months ended March 31, 2018. The losses on early retirement of debt consisted of $0.4 million of debt extinguishment losses and $9.9 million of debt modification losses during the three months ended March 31, 2018.2022.

Fair Value

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

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


9.	Segment Information

~~6. Segment Information~~

The Company identifies its operating segments according to how the chief operating decision maker evaluates financial performance and allocates resources. During the year ended December 31, 2017, the Company changed its internal segment reporting structure which is reflective of how the Company now manages its business operations, reviews operating performance, and allocates resources. The Company’s reportable segments include ~~long term acute care, inpatient~~the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra. Prior year results for the three months ended March 31, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.

Concentra segment. Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.

The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select.



		Three Months Ended March 31,
		2018			2019
	(in thousands)
Net operating revenues:
Critical illness recovery hospital		$	464,676		$	462,159
Rehabilitation hospital		174,774			188,954
Outpatient rehabilitation		257,381			277,197
Concentra		356,116			396,321
Other		17			—
Total Company		$	1,252,964		$	1,324,631
Adjusted EBITDA:
Critical illness recovery hospital		$	72,972		$	72,998
Rehabilitation hospital		26,776			25,797
Outpatient rehabilitation		30,525			28,991
Concentra		57,797			66,258
Other		(24,838		)	(23,927		)
Total Company		$	163,232		$	170,117
Total assets:
Critical illness recovery hospital		$	1,862,791		$	2,062,659
Rehabilitation hospital		877,750			1,089,391
Outpatient rehabilitation		973,122			1,250,015
Concentra		2,143,405			2,464,317
Other		111,575			155,110
Total Company		$	5,968,643		$	7,021,492
Purchases of property and equipment, net:
Critical illness recovery hospital		$	10,472		$	10,160
Rehabilitation hospital		12,917			13,183
Outpatient rehabilitation		7,338			9,040
Concentra		6,621			15,698
Other		2,269			992
Total Company		$	39,617		$	49,073

Three Months Ended March 31,
2017 2018
(in thousands)
Net operating revenues:⁽¹⁾

Long term acute care $ 445,123
$ 464,676
Inpatient rehabilitation 144,825
174,774
Outpatient rehabilitation 250,371
257,381
Concentra 250,589
356,116
Other 609
17
Total Company $ 1,091,517
$ 1,252,964
Adjusted EBITDA:

Long term acute care $ 72,337
$ 72,972
Inpatient rehabilitation 16,328
26,776
Outpatient rehabilitation 31,351
30,525
Concentra 42,592
57,797
Other (23,718 ) (24,838 )
Total Company $ 138,890
$ 163,232
Total assets:

Long term acute care $ 1,978,226
$ 1,862,791
Inpatient rehabilitation 643,994
877,750
Outpatient rehabilitation 980,261
973,122
Concentra 1,297,672
2,143,405
Other 102,784
111,575
Total Company $ 5,002,937
$ 5,968,643
Purchases of property and equipment, net:

Long term acute care $ 10,943
$ 10,472
Inpatient rehabilitation 21,414
12,917
Outpatient rehabilitation 6,673
7,338
Concentra 8,686
6,621
Other 2,937
2,269
Total Company $ 50,653
$ 39,617

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


	Three Months Ended March 31, 2017																		Three Months Ended March 31, 2018
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	72,337		$	16,328		$	31,351		$	42,592		$	(23,718	)				$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)
Depreciation and amortization	(13,042		)	(5,458		)	(6,340		)	(16,123		)	(1,576		)				(11,058		)	(5,722		)	(6,637		)	(21,147		)	(2,207		)
Stock compensation expense	—			—			—			(306		)	(4,280		)				—			—			—			(211		)	(4,716		)
U.S. HealthWorks acquisition costs																			—			—			—			(2,936		)	—
Income (loss) from operations	$	59,295		$	10,870		$	25,011		$	26,163		$	(29,574	)	$	91,765		$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598
Loss on early retirement of debt																(19,719		)																(10,255		)
Equity in earnings of unconsolidated subsidiaries																5,521																		4,697
Non-operating loss																(49		)
Non-operating gain																																		399
Interest expense																(40,853		)																(47,163		)
Income before income taxes																$	36,665																	$	56,276


	Three Months Ended March 31, 2018																		Three Months Ended March 31, 2019
	Long Term Acute Care			Inpatient Rehabilitation			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	72,972		$	26,776		$	30,525		$	57,797		$	(24,838	)				$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)
Depreciation and amortization	(11,058		)	(5,722		)	(6,637		)	(21,147		)	(2,207		)				(11,451		)	(6,402		)	(7,032		)	(24,904		)	(2,349		)
Stock compensation expense	—			—			—			(211		)	(4,716		)				—			—			—			(767		)	(5,488		)
U.S. HealthWorks acquisition costs	—			—			—			(2,936		)	—
Income (loss) from operations	$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598		$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																4,697																		4,366
Non-operating gain																399																		6,532
Interest expense																(47,163		)																(50,811		)
Income before income taxes																$	56,276																	$	71,811

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

~~7. Revenue from Contracts with Customers~~

Net operating revenues consist primarily of patient service revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues ~~by operating segment~~ for the three months ended March 31, ~~2017~~2018 and ~~2018:~~2019:



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

Three Months Ended March 31, 2017

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

Three Months Ended March 31, 2018

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

~~Patient Services Revenue~~

Patient services revenue is recognized when obligations under the terms of the contract are satisfied; generally, this occurs as the Company provides healthcare services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. These amounts are due from patients; third-party payors, including health insurers and government programs; and other payors.

~~Medicare~~: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end stage renal disease. Amounts we receive for treatment of patients covered by the Medicare program are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided.

~~Non-Medicare~~: The Company is reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these payors using a variety of payment methodologies and the amounts the Company receives are generally less than the standard billing rates.

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

In the outpatient rehabilitation and Concentra segments, the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. The Company performs provision testing, using internally developed systems, whereby the Company monitors a payors’ historical reimbursement rates and compares them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to determine the amount of revenue to be recognized for services rendered.

The Company is subject to potential retrospective adjustments to net operating revenues in future periods for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.



	Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra
	(in thousands)
Patient service revenues:
Medicare	$	238,169	$	74,579	$	40,278	$	555
Non-Medicare	216,959		70,642		187,914		393,236
Total patient services revenues	455,128		145,221		228,192		393,791
Other revenues	7,031		43,733		49,005		2,530
Total net operating revenues	$	462,159	$	188,954	$	277,197	$	396,321

~~Other Revenues~~

The Company recognizes revenue for services provided to healthcare institutions, principally management and employee leasing services, under contractual arrangements with related parties affiliated through the Company’s equity investments and other third-party healthcare institutions. Revenue is recognized when obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.


8.11.	~~Income Taxes~~Earnings per Share

~~In December 2017,~~The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law which made significant changes to the Internal Revenue Code. These changes included a corporate tax rate decrease from 35.0% to 21.0% effective after December 31, 2017. Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:

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

~~9. Income per Common Share~~

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


(i)	Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were no dividends declared or contractual dividends paid for the three months ended March 31, 2018 and 2019.


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


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

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

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

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

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

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



	Basic EPS				Diluted EPS
	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2019		2018		2019
	(in thousands)
Net income	$	43,982	$	53,344	$	43,982	$	53,344
Less: net income attributable to non-controlling interests	10,243		12,510		10,243		12,510
Net income attributable to the Company	33,739		40,834		33,739		40,834
Less: net income attributable to participating securities	1,111		1,343		1,110		1,343
Net income attributable to common shares	$	32,628	$	39,491	$	32,629	$	39,491

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



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

~~10. Commitments and Contingencies~~



	Three Months Ended March 31, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	32,628	129,691	$	0.25	$	32,629	129,816	$	0.25
Participating securities	1,111		4,416	$	0.25	1,110		4,416	$	0.25
Total Company	$	33,739				$	33,739

_______________________________________________________________________________

(1) Represents the weighted average share count outstanding during the period.


12.	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 ~~$35.0~~up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

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

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

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

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators ~~have~~ appealed this decision to the ~~District Judge.~~

~~The Company intends to vigorously defend this action, but at this time~~district judge who, in March 2019, affirmed 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 violationsdecision of the ~~federal False Claims Act~~magistrate judge regarding the geographic 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 sometemporal scope 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~~but ruled that the ~~first‑to‑file bar precludes all but one~~question 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 Appealsstatistical sampling is not ripe for the Sixth Circuit. Then, on October 11, 2016, the plaintiff‑relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff‑relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff‑relator to supplement his Complaint, but the District Court denied such request. In December 2017, the Court of Appeals, relying on the public disclosure bar, denied the appeal of the plaintiff‑relator and affirmed the judgment of the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018.review.

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

Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the ~~defendant’s~~defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.

In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.

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

Contract Therapy ~~Subpoena~~

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

~~Northern District of Alabama Investigation~~

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

~~11. Condensed Consolidating Financial Information~~


13.	Condensed Consolidating Financial Information

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

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra.

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

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

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, ~~2018~~2019

(unaudited)


	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																		(in thousands)
Assets
ASSETS
Current Assets:
Cash and cash equivalents	$	73		$	5,502	$	3,749		$	110,359		$	—			$	119,683		$	78		$	7,454	$	3,353		$	136,930	$	—			$	147,815
Accounts receivable	—			474,559		139,693			192,139			—				806,391			—			444,580		132,312			202,969		—				779,861
Intercompany receivables	—			1,575,611		58,914			—			(1,634,525		)	(a)	—			—			1,723,869		91,005			—		(1,814,874		)	(a)	—
Prepaid income taxes	18,382			—		—			2,888			—				21,270			399			5,132		—			2,833		(655		)	(f)	7,709
Other current assets	18,732			30,119		12,389			32,757			—				93,997			30,152			33,973		10,025			43,350		—				117,500
Total Current Assets	37,187			2,085,791		214,745			338,143			(1,634,525		)		1,041,341			30,629			2,215,008		236,695			386,082		(1,815,529		)		1,052,885
Operating lease right-of-use assets																			34,992			451,905		496,144			305,795		(306,220		)	(a)	982,616
Property and equipment, net	37,668			622,253		82,697			230,865			—				973,483			28,774			622,323		107,147			214,563		—				972,807
Investment in affiliates	4,534,700			130,556		—			—			(4,665,256		)	(b)(c)	—			4,491,439			138,297		—			—		(4,629,736		)	(b)(c)	—
Goodwill	—			2,108,474		—			1,210,137			—				3,318,611			—			2,106,374		—			1,217,375		—				3,323,749
Identifiable intangible assets, net	3			103,335		5,192			316,117			—				424,647			3			99,884		5,108			321,433		—				426,428
Other assets	33,702			104,140		34,907			48,143			(10,331		)	(e)	210,561			36,974			208,431		33,207			19,069		(34,674		)	(a)(e)	263,007
Total Assets	$	4,643,260		$	5,154,549	$	337,541		$	2,143,405		$	(6,310,112	)		$	5,968,643		$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492
Liabilities and Equity
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	21,547		$	—	$	—		$	—		$	—			$	21,547		$	31,133		$	—	$	—		$	—	$	—			$	31,133
Current operating lease liabilities																			6,298			105,809		36,663			67,347		(10,972		)	(a)	205,145
Current portion of long-term debt and notes payable	19,372			623		1,298			1,206			—				22,499			8,656			498		896			2,279		—				12,329
Accounts payable	13,235			81,563		16,998			26,640			—				138,436			12,198			77,245		23,396			27,742		—				140,581
Intercompany payables	1,575,611			58,914		—			—			(1,634,525		)	(a)	—			1,723,869			91,005		—			—		(1,814,874		)	(a)	—
Accrued payroll	5,248			81,902		2,338			46,073			—				135,561			4,080			87,957		2,744			47,508		—				142,289
Accrued vacation	4,368			60,577		13,363			27,017			—				105,325			4,855			64,878		14,953			31,989		—				116,675
Accrued interest	16,594			7		13			11,974			—				28,588			16,915			26		4			5,648		—				22,593
Accrued other	39,010			61,671		14,262			48,198			—				163,141			65,968			60,930		15,355			63,282		—				205,535
Income taxes payable	2,417			—		—			8,217			—				10,634			—			4,197		170			4,945		(655		)	(f)	8,657
Total Current Liabilities	1,697,402			345,257		48,272			169,325			(1,634,525		)		625,731			1,873,972			492,545		94,181			250,740		(1,826,501		)		884,937
Non-current operating lease liabilities																			31,902			370,579		465,664			247,673		(295,811		)	(a)	820,007
Long-term debt, net of current portion	2,055,664			108		30,002			1,392,247			—				3,478,021			1,882,471			37		51,091			1,365,504		—				3,299,103
Non-current deferred tax liability	—			89,619		774			44,958			(10,331		)	(e)	125,020			—			103,314		1,329			58,130		(8,910		)	(e)	153,863
Other non-current liabilities	37,594			58,098		8,584			62,844			—				167,120			32,435			60,464		2,959			35,134		(25,201		)	(a)	105,791
Total Liabilities	3,790,660			493,082		87,632			1,669,374			(1,644,856		)		4,395,892			3,820,780			1,026,939		615,224			1,957,181		(2,156,423		)		5,263,701
Redeemable non-controlling interests	—			—		—			19,619			587,855			(d)	607,474			—			—		—			17,283		815,958			(d)	833,241
Stockholders’ Equity:
Common stock	0			—		—			—			—				0			0			—		—			—		—				0
Capital in excess of par	952,825			—		—			—			—				952,825			975,903			—		—			—		—				975,903
Retained earnings (accumulated deficit)	(100,225		)	1,441,767		(27,180		)	(4,059		)	(1,410,528		)	(c)(d)	(100,225		)	(173,872		)	1,575,968		(28,082		)	24,837		(1,572,723		)	(c)(d)	(173,872		)
Subsidiary investment	—			3,219,700		277,089			454,301			(3,951,090		)	(b)(d)	—			—			3,239,315		291,159			459,625		(3,990,099		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	852,600			4,661,467		249,909			450,242			(5,361,618		)		852,600			802,031			4,815,283		263,077			484,462		(5,562,822		)		802,031
Non-controlling interests	—			—		—			4,170			108,507			(d)	112,677			—			—		—			5,391		117,128			(d)	122,519
Total Equity	852,600			4,661,467		249,909			454,412			(5,253,111		)		965,277			802,031			4,815,283		263,077			489,853		(5,445,694		)		924,550
Total Liabilities and Equity	$	4,643,260		$	5,154,549	$	337,541		$	2,143,405		$	(6,310,112	)		$	5,968,643		$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, ~~2018~~2019



	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	$	—		$	719,830		$	208,480		$	396,321		$	—			$	1,324,631
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	739			624,475			176,048			330,830			—				1,132,092
General and administrative	28,697			(20		)	—			—			—				28,677
Depreciation and amortization	2,231			20,534			4,469			24,904			—				52,138
Total costs and expenses	31,667			644,989			180,517			355,734			—				1,212,907
Income (loss) from operations	(31,667		)	74,841			27,963			40,587			—				111,724
Other income and expense:
Intercompany interest and royalty fees	4,108			(1,102		)	(2,643		)	(363		)	—				—
Intercompany management fees	61,472			(48,770		)	(12,702		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			4,343			23			—			—				4,366
Non-operating gain	—			6,532			—			—			—				6,532
Interest income (expense)	(28,200		)	120			(221		)	(22,510		)	—				(50,811		)
Income before income taxes	5,713			35,964			12,420			17,714			—				71,811
Income tax expense	57			14,225			407			3,778			—				18,467
Equity in earnings of consolidated subsidiaries	35,178			7,211			—			—			(42,389		)	(a)	—
Net income	40,834			28,950			12,013			13,936			(42,389		)		53,344
Less: Net income attributable to non-controlling interests	—			—			4,802			7,708			—				12,510
Net income attributable to Select Medical Corporation	$	40,834		$	28,950		$	7,211		$	6,228		$	(42,389	)		$	40,834

_______________________________________________________________________________

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, ~~2018~~2019

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, ~~2017~~2018

Select Medical Corporation

Condensed Consolidating Statement of Operations

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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

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


	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)																			(in thousands)
Operating activities
Net income	$	15,870		$	22,737		$	6,859		$	11,828		$	(33,831	)	(a)	$	23,463		$	33,739		$	26,429		$	12,864		$	9,658		$	(38,708	)	(a)	$	43,982
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	—			4,893			18			—			—				4,911			—			1,334			30			—			—				1,364
Depreciation and amortization	1,575			21,340			3,501			16,123			—				42,539			2,207			19,447			3,970			21,147			—				46,771
Provision for bad debts	—			770			—			11			—				781			—			42			—			43			—				85
Equity in earnings of unconsolidated subsidiaries	—			(5,493		)	(28		)	—			—				(5,521		)	—			(4,684		)	(13		)	—			—				(4,697		)
Equity in earnings of consolidated subsidiaries	(28,256		)	(5,575		)	—			—			33,831			(a)	—			(30,425		)	(8,283		)	—			—			38,708			(a)	—
Loss on extinguishment of debt	6,527			—			—			—			—				6,527			115			—			—			297			—				412
Loss (gain) on sale of assets and businesses	—			62			(4,671		)	—			—				(4,609		)	—			(516		)	—			3			—				(513		)
Stock compensation expense	4,280			—			—			306			—				4,586			4,716			—			—			211			—				4,927
Amortization of debt discount, premium and issuance costs	2,590			—			—			832			—				3,422			1,837			—			—			1,299			—				3,136
Deferred income taxes	1,005			—			—			(4,430		)	—				(3,425		)	(503		)	1,383			(5		)	(797		)	—				78
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(83,078		)	(23,563		)	(11,628		)	—				(118,269		)	—			(28,475		)	(13,600		)	(3,736		)	—				(45,811		)
Other current assets	(5,761		)	(1,126		)	(1,514		)	780			—				(7,621		)	(5,890		)	(569		)	1,301			(3,787		)	—				(8,945		)
Other assets	(3,753		)	(11,531		)	15,072			164			—				(48		)	3,788			(562		)	599			12,808			—				16,633
Accounts payable	2,574			764			(5,480		)	2,554			—				412			731			(3,435		)	(985		)	(2,863		)	—				(6,552		)
Accrued expenses	(13,406		)	(5,075		)	5,342			(5,290		)	—				(18,429		)	(10,370		)	(2,667		)	735			321			—				(11,981		)
Income taxes	4,256			—			—			11,164			—				15,420			6,897			4,513			(111		)	539			—				11,838
Net cash provided by (used in) operating activities	(12,499		)	(61,312		)	(4,464		)	22,414			—				(55,861		)
Net cash provided by operating activities																				6,842			3,957			4,785			35,143			—				50,727
Investing activities
Business combinations, net of cash acquired	—			(445		)	—			(9,121		)	—				(9,566		)	—			(321		)	(22		)	(515,016		)	—				(515,359		)
Purchases of property and equipment	(2,937		)	(29,325		)	(9,705		)	(8,686		)	—				(50,653		)	(2,269		)	(23,912		)	(6,815		)	(6,621		)	—				(39,617		)
Investment in businesses	—			(500		)	—			—			—				(500		)	—			(1,749		)	—			(5		)	—				(1,754		)
Proceeds from sale of assets and businesses	—			7			19,505			—			—				19,512			—			691			—			—			—				691
Net cash provided by (used in) investing activities	(2,937		)	(30,263		)	9,800			(17,807		)	—				(41,207		)
Net cash used in investing activities																				(2,269		)	(25,291		)	(6,837		)	(521,642		)	—				(556,039		)
Financing activities
Borrowings on revolving facilities	530,000			—			—			—			—				530,000			165,000			—			—			—			—				165,000
Payments on revolving facilities	(415,000		)	—			—			—			—				(415,000		)	(150,000		)	—			—			—			—				(150,000		)
Proceeds from term loans	1,139,822			—			—			—			—				1,139,822
Proceeds from term loans (financing costs)																				(11		)	—			—			779,915			—				779,904
Payments on term loans	(1,147,752		)	—			—			(23,065		)	—				(1,170,817		)	(2,875		)	—			—			—			—				(2,875		)
Revolving facility debt issuance costs	(3,887		)	—			—			—			—				(3,887		)	(837		)	—			—			(496		)	—				(1,333		)
Borrowings of other debt	6,571			—			—			—			—				6,571			5,549			—			5,326			725			—				11,600
Principal payments on other debt	(3,704		)	(80		)	(695		)	(796		)	—				(5,275		)	(3,226		)	(145		)	(957		)	(1,581		)	—				(5,909		)
Dividends paid to Holdings	(156		)	—			—			—			—				(156		)	(122		)	—			—			—			—				(122		)
Equity investment by Holdings	617			—			—			—			—				617			738			—			—			—			—				738
Intercompany	(85,012		)	92,074			(7,062		)	—			—				—			(10,873		)	22,125			(1,863		)	(9,389		)	—				—
Decrease in overdrafts	(17,062		)	—			—			—			—				(17,062		)	(7,916		)	—			—			—			—				(7,916		)
Proceeds from issuance of non-controlling interests	—			—			2,094			—			—				2,094
Distributions to non-controlling interests	—			(50		)	(1,324		)	(2,283		)	—				(3,657		)	—			—			(1,266		)	(285,375		)	—				(286,641		)
Net cash provided by (used in) financing activities	4,437			91,944			(6,987		)	(26,144		)	—				63,250			(4,573		)	21,980			1,240			483,799			—				502,446
Net increase (decrease) in cash and cash equivalents	(10,999		)	369			(1,651		)	(21,537		)	—				(33,818		)	—			646			(812		)	(2,700		)	—				(2,866		)
Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—				99,029			73			4,856			4,561			113,059			—				122,549
Cash and cash equivalents at end of period	$	72		$	6,836		$	3,405		$	54,898		$	—			$	65,211		$	73		$	5,502		$	3,749		$	110,359		$	—			$	119,683

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

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

Forward-Looking Statements

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

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

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;

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.

We began operations in 1997 and, ~~have grown to be~~based on number of facilities, are one of the largest operators of ~~long term acute care~~critical illness recovery hospitals, ~~(“LTCHs”), inpatient~~ rehabilitation ~~facilities (“IRFs”),~~hospitals, outpatient rehabilitation clinics and occupational health centers in the United ~~States based on the number of facilities.~~States. As of March 31, ~~2018,~~2019, we ~~operated 99 LTCHs~~had operations in ~~27 states, 24 IRFs in 10~~47 states and ~~1,617~~the District of Columbia. We operated 97 critical illness recovery hospitals in 28 states, 27 rehabilitation hospitals in 11 states, and 1,684 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, ~~which is operated through~~ a joint venture subsidiary, operated ~~531~~525 occupational health centers in 41 states as of March 31, ~~2018 after giving effect to the closing of the acquisition of U.S. HealthWorks on February 1, 2018.~~2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics ~~or “CBOCs.” As of March 31, 2018, we had operations in 47 states and the District of Columbia.~~(“CBOCs”).

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

Concentra segment. We had net operating revenues of ~~$1,253.0~~$1,324.6 million for the three months ended March 31, ~~2018.~~2019. Of this total, we earned approximately ~~37%~~35% of our net operating revenues from our ~~long term acute care~~critical illness recovery hospital segment, approximately 14% from our ~~inpatient~~ rehabilitation hospital segment, approximately 21% from our outpatient rehabilitation segment, and approximately ~~28%~~30% 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 ~~the Company’s LTCHs~~our critical illness recovery hospitals and ~~IRFs~~rehabilitation hospitals from general acute care hospitals. ~~These patients have specialized needs, with serious and often complex medical conditions.~~ Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and ~~contract~~consumer health services ~~provided~~as well as onsite clinics located at employer worksites that deliver occupational medicine ~~physical therapy, and consumer health~~ services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.

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

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

Summary Financial Results

Three Months Ended March 31, ~~2018~~2019

For the three months ended March 31, ~~2018,~~2019, our net operating revenues increased ~~14.8%~~5.7% to ~~$1,253.0~~$1,324.6 million, compared to ~~$1,091.5~~$1,253.0 million for the three months ended March 31, ~~2017.~~2018. Income from operations increased ~~18.3%~~2.9% to $111.7 million for the three months ended March 31, 2019, compared to $108.6 million for the three months ended March 31, ~~2018, compared~~2018.

Net income increased 21.3% to ~~$91.8~~$53.3 million for the three months ended March 31, ~~2017.~~

~~Net income increased 87.5%~~2019, compared to $44.0 million for the three months ended March 31, ~~2018, compared to $23.5~~2018. Net income included a pre-tax non-operating gain of $6.5 million for the three months ended March 31, ~~2017.~~2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, a pre-tax non-operating gain of $0.4 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the three months ended March 31, ~~2018 included a pre-tax loss on early retirement of debt of $10.3 million. Net income~~2018.

Adjusted EBITDA increased 4.2% to $170.1 million for the three months ended March 31, ~~2017 included a pre-tax loss on early retirement of debt of $19.7 million.~~

~~Adjusted EBITDA increased 17.5%~~2019, compared to $163.2 million for the three months ended March 31, ~~2018, compared to $138.9 million~~2018. Our Adjusted EBITDA margin was 12.8% for the three months ended March 31, ~~2017. Our Adjusted EBITDA margin was~~2019, compared to 13.0% for the three months ended March 31, ~~2018, compared to 12.7% for the three months ended March 31, 2017.~~2018.

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

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



	Three Months Ended March 31, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	462,159		$	188,954		$	277,197		$	396,321		$	—		$	1,324,631
Operating expenses	389,161			163,157			248,206			330,830			29,415			1,160,769
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138
Income (loss) from operations	$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138
Stock compensation expense	—			—			—			767			5,488			6,255
Adjusted EBITDA	$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)	$	170,117
Adjusted EBITDA margin	15.8		%	13.7		%	10.5		%	16.7		%	N/M			12.8		%

~~N/M — Not Meaningful.~~

The following table ~~provides the change~~summarizes changes in segment performance measures for the three months ended March 31, ~~2018,~~2019, compared to the three months ended March 31, ~~2017:~~2018:

N/M—M — Not ~~Meaningful.~~meaningful.

~~Significant Events~~

~~Acquisition of U.S. HealthWorks~~

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

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

Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC, to finance the redemption and reorganization transactions executed under the Purchase Agreement, and to pay fees and expenses associated with the financing.

~~Amendment to the Concentra Credit Facilities~~

On February 1, 2018, in connection with the transactions executed under the Purchase Agreement, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

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

~~Amendment to the Select Credit Facilities~~

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

Our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on February ~~22, 2018,~~21, 2019, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately ~~28%~~27% of our net operating revenues for both the three months ended March 31, ~~2018,~~2019, and ~~30% of our net operating revenues~~ for the year ended December 31, ~~2017.~~2018.

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

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

The following is a summary of significant changes to ~~the Medicare prospective payment system for LTCHs~~LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.

~~Fiscal Year 2017~~. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed‑loss amount for high cost outlier cases paid under LTCH‑PPS was set at $21,943, an increase from the fixed‑loss amount in the 2016 fiscal year of $16,423. The fixed‑loss amount for high cost outlier cases paid under the site‑neutral payment rate was set at $23,573, an increase from the fixed‑loss amount in the 2016 fiscal year of $22,538.

Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ~~ACA.~~Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further impacted ~~further~~ by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

Fiscal Year 2019. On ~~April 24,~~August 17, 2018, CMS ~~released an advanced copy of~~published the ~~proposed~~final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate ~~would be~~was set at ~~$41,483,~~$41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 ~~if adopted, includes~~included a market basket increase of ~~2.7%~~2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate ~~if adopted,~~ also ~~includes a proposed~~included an area wage budget neutrality factor of ~~0.999713~~0.999215 and a ~~proposed~~temporary, one-time ~~permanent~~ budget neutrality adjustment of ~~0.990535~~0.990878 in connection with the ~~proposed~~ elimination of the 25 Percent Rule (discussed ~~further below)~~herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS ~~if adopted, would be~~was set at ~~$30,639, which is an increase~~$27,121, a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate ~~if adopted, would be~~was set at ~~$27,545, an increase~~$25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.

Fiscal Year 2020. On April 23, 2019, CMS released an advanced copy of the proposed policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard federal rate would be set at $42,951, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020, if adopted, includes a market basket increase of 3.2%, less a productivity adjustment of 0.5%. The standard federal rate also includes an area wage budget neutrality factor of 1.0064747 and a temporary, one-time budget neutrality adjustment of 0.999856 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS, if adopted, would be set at $29,997, which is an increase from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate, if adopted, would be set at $26,994, an increase from the fixed-loss amount in the 2019 fiscal year of $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.

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

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

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

For fiscal year 2019 and thereafter, CMS ~~is proposing to eliminate~~eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral ~~manner. CMS intends to accomplish this~~manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments ~~in fiscal year 2019~~ would equal the projection of aggregate LTCH payments ~~in fiscal year 2019~~ that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. ~~Under this proposal, the LTCH-PPS standard federal payment rate is adjusted downward by~~As a ~~factor of 0.990535 to maintain aggregate LTCH-PPS payments at the estimated levels they would be in absence of this proposed change. As proposed,~~result, the elimination of the 25 Percent Rule ~~would be accomplished through~~includes a temporary, one-time ~~permanent~~ adjustment to the fiscal year 2019 LTCH-PPS standard federal payment ~~rate. CMS has requested public comments on the proposal to permanently eliminate the 25 Percent Rule in~~rate, a ~~budget neutral manner, or, in the alternative, the adoption of an additional one year delay on the implementation of the 25 Percent Rule with a budget neutrality adjustment.~~

~~Short Stay Outlier Policy~~

CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five‑sixths of the geometric average length of stay for that particular Medicare severity long-term care diagnosis-related group (“MS-LTC-DRG”), referred to as a short stay outlier, or “SSO.” For discharges before October 1, 2017, SSO cases were paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.

The SSO rule also had a category referred to as a “very short stay outlier,” which applied to cases with a length of stay that is less than the average length of stay plus one standard deviation for the same Medicare severity diagnosis-related group (“MS-DRG”) under IPPS, referred to as the so-called “IPPS comparable threshold.” The LTCH payment for very short stay outlier cases was equivalenttemporary, one-time adjustment to the ~~general acute care hospital IPPS per diem rate.~~

~~For~~ fiscal year 2018, CMS adopted changes to the SSO policy such that all SSO cases discharged on or after October 1, 2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS (i.e., the fourth option under the prior policy). Under this policy, as the length of stay of a SSO case increases, the percentage of the per diem payment amounts based on the full MS-LTCH-DRG2020 LTCH-PPS standard federal payment rate, ~~increases~~ and a permanent, one-time adjustment to the ~~percentage of the~~LTCH-PPS standard federal payment ~~based on the IPPS comparable amount decreases. In addition, the very short stay outlier category was eliminated.~~

rate in fiscal years 2021 and subsequent years.

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

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

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

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

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

Fiscal Year 2019. On ~~April 27,~~August 6, 2018, CMS ~~released an advanced copy of~~published the ~~proposed~~final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 ~~would be~~was set at ~~$16,020,~~$16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 ~~if adopted, would include~~included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS ~~proposed to increase~~increased the outlier threshold amount for fiscal year 2019 to ~~$10,509~~$9,402 from $8,679 established in the final rule for fiscal year 2018.

Fiscal Year 2020. On April 17, 2019, CMS released an advanced copy of the proposed policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 would be set at $16,573, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020, if adopted, would include a market basket increase of 3.0%, less a productivity adjustment of 0.5%. CMS proposed to increase the outlier threshold amount for fiscal year 2020 to $9,935 from $9,402 established in the final rule for fiscal year 2019.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update ~~will be~~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”). 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~~an eligible clinician’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the ~~professional’s~~clinician’s payment for a year. Each year from 2019 through 2024 ~~professionals~~eligible clinicians who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. ~~The specifics~~

Modifiers to Identify Services of ~~the MIPS and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and comment rule‑making.~~Physical Therapy Assistants or Occupational Therapy Assistants

~~Outpatient therapy providers reimbursed under~~In the Medicare ~~physician fee schedule have been subject to annual limits~~Physician Fee Schedule final rule for ~~therapy expenses. For example, for the~~ calendar year ~~beginning January 1, 2017, the annual limit on outpatient~~2019, CMS established two new modifiers to identify services furnished in whole or in part by physical therapy ~~services was $1,980 for combined physical and speech language pathology services and $1,980 for~~assistants (“PTAs”) or occupational therapy ~~services. The~~assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, ~~repealed the annual limits on~~which requires that claims for outpatient ~~therapy.~~

~~The annual limits for~~ therapy ~~expenses historically did not apply to~~ services furnished ~~and billed~~in whole or part by ~~outpatient hospital departments. However,~~therapy assistants on or after January 1, 2020 include the Medicare Access and CHIP Reauthorization Act of 2015, and prior legislation, extended the annual limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limitsappropriate modifier. CMS intends to ~~hospital outpatient department settings sunset on December 31, 2017.~~

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

~~Critical Accounting Matters~~

~~Revenue Adjustments~~

Net operating revenues include amounts estimated by us to be reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided. Additionally, we are reimbursed for healthcarewould reimburse services provided ~~from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies~~by PTAs and ~~employers, as well as patients. We are reimbursed by these payors using a variety~~OTAs at 85% of ~~payment methodologies.~~

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

In the long term acute care and inpatient rehabilitation segments, we derive our contractual allowances based on known contractual provisions associated with the specific payor or, where we have a relatively homogeneous patient population, we will monitor individual payors’ historical reimbursement rates to derive a per diem rate. The per diem rate is used to derive the contractual allowance recognized in the period services are rendered. In the outpatient rehabilitation and Concentra segments, we derive our contractual allowances based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. We estimate our contractual allowances using internally developed systems in which we monitor a payors’ historical reimbursement rates and compare them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is used to derive the contractual allowance recognized in the period services are rendered. In each of our segments, estimates for potential retrospective adjustments are recognized as an additional contractual allowance during the period services are rendered.2022.

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:

Available licensed beds⁽¹⁾

Patient days⁽¹⁾

Average length of stay (days)⁽¹⁾

Net revenue per patient day^(1)(2)(4)

Net revenue per patient day⁽¹⁾⁽²⁾

Occupancy rate⁽¹⁾

Percent patient days—Medicare⁽¹⁾

Available licensed beds⁽¹⁾

Patient days⁽¹⁾

Average length of stay (days)⁽¹⁾

Net revenue per patient day^(1)(2)(4)

Net revenue per patient day⁽¹⁾⁽²⁾

Occupancy rate⁽¹⁾

Percent patient days—Medicare⁽¹⁾

Number of visits⁽¹⁾

Net revenue per visit^(1)(3)(4)

Net revenue per visit⁽¹⁾⁽³⁾

Number of visits⁽¹⁾

Net revenue per visit⁽¹⁾⁽³⁾

Number of visits⁽¹⁾

Net revenue per visit^(1)(3)(4)

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

Results of Operations

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


	Three Months Ended March 31,				Three Months Ended March 31,
	2017		2018		2018		2019
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services⁽¹⁾	85.2		85.1
Cost of services, exclusive of depreciation and amortization⁽¹⁾					85.1		85.5
General and administrative	2.6		2.5		2.5		2.2
Depreciation and amortization	3.8		3.7		3.7		3.9
Income from operations	8.4		8.7		8.7		8.4
Loss on early retirement of debt	(1.8	)	(0.8	)	(0.8	)	—
Equity in earnings of unconsolidated subsidiaries	0.5		0.4		0.4		0.3
Non-operating gain (loss)	(0.0	)	0.0
Non-operating gain					0.0		0.5
Interest expense	(3.7	)	(3.8	)	(3.8	)	(3.8	)
Income before income taxes	3.4		4.5		4.5		5.4
Income tax expense	1.3		1.0		1.0		1.4
Net income	2.1		3.5		3.5		4.0
Net income attributable to non-controlling interests	0.6		0.8		0.8		0.9
Net income attributable to Holdings and Select	1.5	%	2.7	%	2.7	%	3.1	%

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

Net operating revenues:⁽²⁾

~~N/M—Not Meaningful.~~

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

N/M — Not meaningful.

Three Months Ended March 31, ~~2018,~~2019, Compared to Three Months Ended March 31, ~~2017~~2018

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

Net Operating Revenues

Our net operating revenues increased ~~14.8%~~5.7% to $1,324.6 million for the three months ended March 31, 2019, compared to $1,253.0 million for the three months ended March 31, ~~2018, compared to $1,091.5~~2018.

Critical Illness Recovery Hospital Segment. Net operating revenues were $462.2 million for the three months ended March 31, ~~2017.~~

~~Long Term Acute Care Segment.~~ ~~Net operating revenues increased 4.4%~~2019, compared to $464.7 million for the three months ended March 31, ~~2018,~~2018. Our patient days were 258,129 days for the three months ended March 31, 2019, compared to ~~$445.1~~265,840 days for the three months ended March 31, 2018. The decline in patient days, which was the primary cause of the decrease in net operating revenues, was principally attributable to three hospitals that have closed since March 31, 2018, as well as the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. This decrease in net operating revenues from these closures was offset in part by an increase in net revenue per patient day. Net revenue per patient day increased 1.7% to $1,759 for the three months ended March 31, 2019, compared to $1,730 for the three months ended March 31, 2018. We also experienced an increase in net operating revenues related to contracted labor services provided to an entity in which we have made an equity investment during the three months ended March 31, 2019.

Rehabilitation Hospital Segment. Net operating revenues increased 8.1% to $189.0 million for the three months ended March 31, ~~2017.~~2019, compared to $174.8 million for the three months ended March 31, 2018. The increase in net operating revenues ~~was principally due to~~resulted primarily from an increase in patient volumes during the three months ended March 31, ~~2018.~~2019. Our patient days increased ~~4.2%~~7.7% to ~~265,840~~82,816 days for the three months ended March 31, ~~2018,~~2019, compared to ~~255,097~~76,890 days for the three months ended March 31, ~~2017. Additionally,~~2018. The increase in patient days occurred within our ~~occupancy~~two new rehabilitation hospitals, which commenced operations after March 31, 2018, and within our existing hospitals. Our net revenue per patient day increased 0.6% to ~~71%~~$1,633 for the three months ended March 31, ~~2018,~~2019, compared to ~~68%~~$1,623 for the three months ended March 31, ~~2017. Our net revenue per patient day was $1,730 for~~2018. During the three months ended March 31, ~~2018, compared~~2019, we also experienced an increase in net operating revenues related to ~~$1,731 for the three months ended March 31, 2017.~~contracted labor services provided to entities in which we have made equity investments.

~~Inpatient~~Outpatient Rehabilitation Segment. Net operating revenues increased ~~20.7%~~7.7% to ~~$174.8~~$277.2 million for the three months ended March 31, ~~2018,~~2019, compared to ~~$144.8~~$257.4 million for the three months ended March 31, ~~2017.~~2018. The increase in net operating revenues was principally attributable to an increase in ~~patient volumes~~contracted labor services provided to entities in which we have made equity investments and an increase in management fee revenues. Our net revenue per visit was $103 for both the three months ended March 31, 2019 and 2018. Our visits were 2,054,483 for the three months ended March 31, 2019, compared to 2,067,465 visits for the three months ended March 31, 2018. The decrease in visits was principally due to the sales of outpatient rehabilitation clinics to non-consolidating subsidiaries since March 31, 2018. These clinics contributed 99,766 visits during the three months ended March 31, 2018. Our patient days increased 23.5% to 76,890 days for the three months ended March 31, 2018, compared to 62,268 days for the three months ended March 31, 2017. The increases in net operating revenues and patient days were principally due to the maturation of our inpatient rehabilitation hospitals which commenced operations during 2016 and 2017. Additionally, occupancy increased to 75% for the three months ended March 31, 2018, compared to 70% for the three months ended March 31, 2017. Our net revenue per patient day increased 7.0% to $1,623 for the three months ended March 31, 2018, compared to $1,517 for the three months ended March 31, 2017. This increase was principally attributable to an increase in reimbursement rates with our commercial payors.

~~Outpatient Rehabilitation~~Concentra Segment. Net operating revenues increased ~~2.8%~~11.3% to ~~$257.4~~$396.3 million for the three months ended March 31, ~~2018,~~2019, compared to $250.4 million for the three months ended March 31, 2017. The increase in net operating revenues was principally attributable to an increase in our net revenue per visit, which increased 4.0% to $103 for the three months ended March 31, 2018, compared to $99 for the three months ended March 31, 2017. The increase in our net revenue per visit was primarily due to reimbursement rate increases related to contract renewals with some of our payors. Visits were 2,067,465 for the three months ended March 31, 2018, compared to 2,075,790 visits for the three months ended March 31, 2017. The decrease in visits occurred primarily within regions impacted by severe winter weather conditions.

~~Concentra Segment.~~ ~~Net operating revenues increased 42.1%~~ to $356.1 million for the three months ended March 31, ~~2018, compared~~2018. Visits in our centers increased 12.2% to ~~$250.6 million~~2,911,607 for the three months ended March 31, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $89.9 million of net operating revenues during the quarter. Visits in our centers increased 37.6% to 2,596,059 for the three months ended March 31, 2018,2019, compared to ~~1,886,815~~2,596,059 visits for the three months ended March 31, ~~2017.~~2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018. Net revenue per visit ~~increased 6.9% to~~was $124 for both the three months ended March 31, 2018, compared to $116 for the three months ended March 31, 2017. The increase in net revenue per visit was driven principally by U.S. HealthWorks, which yield higher per visit rates, as well as an increase in workers’ compensation reimbursement rates in our existing Concentra centers.2019 and 2018.

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,160.8 million, or 87.7% of net operating revenues, for the three months ended March 31, 2019, compared to $1,097.6 million, or 87.6% of net operating revenues, for the three months ended March 31, ~~2018, compared to $957.2 million, or 87.8% of net operating revenues, for the three months ended March 31, 2017.~~2018. Our cost of services, a major component of which is labor expense, was $1,132.1 million, or 85.5% of net operating revenues, for the three months ended March 31, 2019, compared to $1,065.8 million, or 85.1% of net operating revenues, for the three months ended March 31, ~~2018, compared~~2018. Our operating expenses, relative to ~~$929.1~~our net operating revenues, were impacted by an increase in expenses incurred by our start-up rehabilitation hospitals and the recognition of approximately $1.5 million of bad debt expense, which is included in cost of services, by our rehabilitation hospital segment during the three months ended March 31, 2019. General and administrative expenses were $28.7 million, or ~~85.2%~~2.2% of net operating revenues, for the three months ended March 31, 2017. The decrease in our operating expenses relative to our net operating revenues was principally due to improved operating performance in our inpatient rehabilitation segment. Facility rent expense, a component of cost of services, was $64.4 million for the three months ended March 31, 2018, compared to $56.5 million for the three months ended March 31, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks.2019. General and administrative expenses were $31.8 million, or 2.5% of net operating revenues, for the three months ended March 31, ~~2018, compared to $28.1 million, or 2.6% of net operating revenues, for the three months ended March 31, 2017.~~2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the three months ended March 31, 2018.

Rehabilitation Hospital Segment. Adjusted EBITDA was $25.8 million for the three months ended March 31, ~~2018,~~2019, compared to $72.3 million for the three months ended March 31, 2017. Our Adjusted EBITDA margin for the long term acute care segment was 15.7% for the three months ended March 31, 2018, compared to 16.3% for the three months ended March 31, 2017. Our Adjusted EBITDA increased as a result of increased patient volume, as discussed above under “~~Net Operating Revenues.”~~ Additionally, for the three months ended March 31, 2017, our Adjusted EBITDA and Adjusted EBITDA margin were positively impacted by gains which resulted from closed hospitals which did not recur in the three months ended March 31, 2018.

~~Inpatient Rehabilitation Segment.~~ ~~Adjusted EBITDA increased 64.0%~~ to $26.8 million for the three months ended March 31, ~~2018, compared to $16.3 million~~2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 13.7% for the three months ended March 31, ~~2017. Our Adjusted EBITDA margin for the inpatient rehabilitation segment was~~2019, compared to 15.3% for the three months ended March 31, ~~2018, compared to 11.3% for the three months ended March 31, 2017.~~2018. The ~~increases~~decreases in Adjusted EBITDA and Adjusted EBITDA margin for our ~~inpatient~~ rehabilitation hospital segment were primarily driven by ~~increased patient volume, as discussed above under “Net Operating Revenues.” Additionally, our inpatient rehabilitation facilities which commenced operations during 2016 and 2017 have continued to~~an increase ~~their occupancy, allowing our facilities to operate at lower relative costs compared to the prior period.~~in Adjusted EBITDA losses in our start-up hospitals and the write-off of uncollectible accounts in one of our joint venture subsidiaries during the three months ended March 31, 2019, as described above under “Operating Expenses.” Adjusted EBITDA start-up losses were $2.8 million for the three months ended March 31, 2019, compared to $0.8 million for the three months ended March 31, ~~2018, compared to $2.0~~2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA was $29.0 million orfor the three months ended March 31, ~~2017.~~

~~Outpatient Rehabilitation Segment.~~ ~~Adjusted EBITDA was~~2019, compared to $30.5 million for the three months ended March 31, ~~2018, compared to $31.4 million for the three months ended March 31, 2017.~~2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.5% for the three months ended March 31, 2019, compared to 11.9% for the three months ended March 31, ~~2018, compared to 12.5% for the three months ended March 31, 2017.~~2018. For the three months ended March 31, ~~2018,~~2019, our Adjusted EBITDA and Adjusted EBITDA margin were impacted by increases in employee costs relative to our net operating revenues. We also experienced a decrease in Adjusted EBITDA margin as a result of ~~a decline~~an increase in ~~patient visits in regions impacted by severe winter weather conditions, as discussed above under “Net Operating Revenues,” without a corresponding reduction in costs.~~our contracted labor services, which we provide at cost.

Concentra Segment. Adjusted EBITDA increased ~~35.7%~~14.6% to $66.3 million for the three months ended March 31, 2019, compared to $57.8 million for the three months ended March 31, 2018, ~~compared to $42.6 million for~~which included the ~~three months ended March 31, 2017. The increase in Adjusted EBITDA was principally due to an increase in net~~ operating ~~revenues resulting from the acquisition~~results of U.S. ~~HealthWorks.~~HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 16.7% for the three months ended March 31, 2019, compared to 16.2% for the three months ended March 31, ~~2018, compared to 17.0%~~2018.The increase in Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

Other. The Adjusted EBITDA loss was $23.9 million for the three months ended March 31, 2017. The decrease in Adjusted EBITDA margin was the result of U.S. HealthWorks centers operating at lower margins than Concentra’s existing occupational health centers as well as incremental costs associated with the integration of U.S. HealthWorks.

~~Other.~~ ~~The~~2019, compared to an Adjusted EBITDA loss ~~was~~of $24.8 million for the three months ended March 31, 2018, compared to an Adjusted EBITDA loss of $23.7 million for the three months ended March 31, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.2018.

Depreciation and Amortization

Depreciation and amortization expense was $52.1 million for the three months ended March 31, 2019, compared to $46.8 million for the three months ended March 31, ~~2018, compared to $42.5 million for the three months ended March 31, 2017.~~2018. The increase principally occurred within our Concentra segment due to the acquisition of U.S. ~~HealthWorks.~~HealthWorks, which we acquired on February 1, 2018.

Income from Operations

For the three months ended March 31, ~~2018,~~2019, we had income from operations of ~~$108.6~~$111.7 million, compared to ~~$91.8~~$108.6 million for the three months ended March 31, ~~2017.~~2018. The increase in income from operations resulted principally from ~~the improved performance of~~ our ~~inpatient rehabilitation and~~ Concentra ~~segments, as discussed above.~~segment.

Loss on Early Retirement of Debt

During the three months ended March 31, 2018, we amended both ~~Select~~Select’s senior secured credit facilities and Concentra’s first lien credit ~~facilities, as discussed above under “Significant Events~~,”agreement which resulted in losses on early retirement of debt of $10.3 million during the three months ended March 31, 2018.

During the three months ended March 31, 2017, we refinanced Select’s senior secured credit facilities which resulted in a loss on early retirement of debt of $19.7 million during the three months ended March 31, 2017.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries ~~principally~~ relates to ~~rehabilitation~~ businesses in which we are a minority owner. For the three months ended March 31, ~~2018,~~2019, we had equity in earnings of unconsolidated subsidiaries of ~~$4.7~~$4.4 million, compared to ~~$5.5~~$4.7 million for the three months ended March 31, ~~2017.~~2018.

We recognized a non-operating gain of $6.5 million during the three months ended March 31, 2019. The non-operating gain was attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.

Interest expense was $50.8 million for the three months ended March 31, 2019, compared to $47.2 million for the three months ended March 31, ~~2018, compared to $40.9 million for the three months ended March 31, 2017.~~2018. The increase in interest expense was principally due to ~~increases~~an increase in our indebtedness as a result of the acquisition of U.S. ~~HealthWorks.~~HealthWorks on February 1, 2018.

We recorded income tax expense of $18.5 million for the three months ended March 31, 2019, which represented an effective tax rate of 25.7%. We recorded income tax expense of $12.3 million for the three months ended March 31, 2018, which represented an effective tax rate of 21.8%. ~~We recorded income tax expense of $13.2 million for the three months ended March 31, 2017, which represented an effective tax rate of 36.0%. The lower effective tax rate for~~For the three months ended March 31, 2018, the lower effective tax rate resulted principally from ~~the effects resulting from the federal tax reform legislation enacted on December 22, 2017 and~~ the discrete tax benefits realized from certain equity interests redeemed ~~as part of~~at our Concentra subsidiary and completed in connection with the closing of the U.S. HealthWorks ~~transaction.~~acquisition.

Net Income Attributable to Non-Controlling Interests



Delaware Delaware		20-1764048 23-2872718
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)



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)



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	5

	Condensed consolidated statements of cash flows	6

	~~Notes to condensed consolidated financial statements~~	7

	~~ITEM 2.~~Notes to condensed consolidated financial statements	8

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

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4.	CONTROLS AND PROCEDURES	44

PART II	OTHER INFORMATION	45

ITEM 1.	LEGAL PROCEEDINGS	45

ITEM 1A.	RISK FACTORS	47

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

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	48

~~ITEM 4.~~		~~CONTROLS AND PROCEDURES~~	49

~~PART II~~	~~OTHER INFORMATION~~	50

~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~	50

~~ITEM 1A.~~	~~RISK FACTORS~~	52

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

~~ITEM 3.~~	~~DEFAULTS UPON SENIOR SECURITIES~~	53

~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~	53

~~ITEM 5.~~	~~OTHER INFORMATION~~	53

~~ITEM 6.~~	~~EXHIBITS~~	54

SIGNATURES



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


				Select Medical Holdings Corporation Stockholders																			For the Three Months Ended March 31, 2019
	Redeemable Non-controlling Interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	$	640,818		134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
																							Select Medical Holdings Corporation Stockholders
																							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											33,739			33,739						33,739									40,834			40,834						40,834
Net income attributable to non-controlling interests	5,743													—			4,500			4,500												—			4,810			4,810
Issuance of restricted stock				4		0		0						—						—			21		0		0					—						—
Forfeitures of unvested restricted stock				(88	)	0		0						—						—			(24	)	0		0					—						—
Vesting of restricted stock								4,717						4,717						4,717							5,488					5,488						5,488
Repurchase of common shares				(7	)	0		(69		)	(53		)	(122		)				(122		)
Exercise of stock options				80		0		738						738						738
Exchange of interests	163,659										74,341			74,341						74,341
Distributions to non-controlling interests	(203,972		)								(83,233		)	(83,233		)	(1,094		)	(84,327		)
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	1,051										(1,051		)	(1,051		)				(1,051		)							(47,470		)	(47,470		)				(47,470		)
Other	175										103			103			35			138									(122		)	(122		)	413			291
Balance at March 31, 2018	$	607,474		134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277
Balance at March 31, 2019																							135,263		$	135	$	488,303	$	313,593		$	802,031		$	122,519		$	924,550



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

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



	December 31, 2017
	As Reported		As Adjusted		Adoption Impact
	(in thousands)
Condensed Consolidated Balance Sheets
Accounts receivable	$	767,276	$	691,732	$	(75,544	)
Allowance for doubtful accounts	75,544		—		(75,544		)
Accounts receivable	$	691,732	$	691,732	$	—



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



	December 31, 2017							March 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,155		—			19,155		19,159		—			19,159
Accreditations	1,895		—			1,895		1,895		—			1,895
Finite-lived intangible assets:
Trademarks	—		—			—		5,000		(417		)	4,583
Customer relationships	143,953		(38,281		)	105,672		243,969		(43,886		)	200,083
Favorable leasehold interests	13,295		(4,319		)	8,976		13,279		(4,742		)	8,537
Non-compete agreements	28,023		(3,900		)	24,123		28,130		(4,438		)	23,692
Total identifiable intangible assets	$	373,019	$	(46,500	)	$	326,519	$	478,130	$	(53,483	)	$	424,647


~~(1)~~10.	~~Net operating revenues were retrospectively conformed to reflect the adoption Topic 606,~~ Revenue from Contracts with ~~Customers.~~ Customers



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


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


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


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


(f)	Reclassification to report prepaid income taxes and income taxes payable by tax jurisdiction in consolidation.


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


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


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


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


~~(4)~~	~~Net revenue per patient day and net revenue per visit were retrospectively conformed to reflect the impact of Topic 606,~~ ~~Revenue from Contracts with Customers.~~


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


(1)	Other includes our corporate ~~services~~administration and shared services. Total assets include certain ~~other~~ non-consolidating joint ventures and minority investments in other healthcare related businesses.


~~(2)~~	~~Net operating revenues were retrospectively conformed to reflect the adoption Topic 606,~~ ~~Revenue from Contracts with Customers.~~



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



Number		Description
~~10.1~~99.1		~~Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, LLC,~~Amendment No. 2, dated ~~February 1, 2018, by and among Concentra Group Holdings Parent, LLC,~~January 4, 2019, to the Select Medical Holdings Corporation ~~Welsh, Carson, Anderson & Stowe XII, L.P., Dignity Health Holding Corporation, Cressey & Company IV LP, and the other members named therein, incorporated herein~~2016 Equity Incentive Plan (incorporated by reference to Exhibit ~~10.1~~99.1 of the Current Report on Form 8-K, ~~of Select Medical Holdings Corporation and Select Medical Corporation~~ filed ~~February 2, 2018 (Reg. Nos. 001-34465 and 001-31441).~~
~~10.2~~		Amendment No. 3, dated February 1, 2018, to the First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Inc., MJ Acquisition Corporation, Concentra Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, incorporated herein by reference to Exhibit 10.2 of the Current Report on ~~Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and 001-31441)~~January 4, 2019).
~~10.3~~		Second Lien Credit Agreement, dated February 1, 2018, by and among Concentra Inc., Concentra Holdings, Inc., the Lenders party thereto and Wells Fargo Bank, National Association, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and 001-31441).
~~10.4~~		Amendment No. 1, dated March 22, 2018, to the Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed March 23, 2018 (Reg Nos. 001-34465 and 001-31441).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101~~101.INS		~~The following financial information from~~XBRL Instance Document - the ~~Registrant’s Quarterly Report on Form 10-Q for~~instance document does not appear in the ~~quarter ended March 31, 2018 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 months ended March 31, 2017 and 2018, (ii) Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2018, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the three months ended March 31, 2018 and (v) Notes to Condensed Consolidated Financial Statements.Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.



	SELECT MEDICAL CORPORATION


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

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