UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended ~~March 31,~~June 30, 2019



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

For the transition period from to

Commission file numbers: 001-34465 and 001-31441

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its Charter)



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

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA17055

(Address of Principal Executive Offices and Zip code)

~~(717)~~ (717) 972-1100

(Registrants’ telephone number, including area code)

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



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

Indicate by check mark whether the Registrants (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~~ ýYes ☒ No o☐

Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted 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 such files). ~~Yes~~ ýYes ☒ No o☐

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



Large accelerated filerx	☒	Accelerated filero	☐
Non-accelerated filero	☐	Smaller reporting companyo	☐
		Emerging Growth Companyo	☐

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

Indicate by check mark whether the Registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting 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 filero	☐	Accelerated filero	☐
Non-accelerated filerx	☒	Smaller reporting companyo	☐
		Emerging Growth Companyo	☐

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,~~July 31, 2019, Select Medical Holdings Corporation had outstanding ~~135,416,312~~135,620,857 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.

TABLE OF CONTENTS



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	56

	Condensed consolidated statements of cash flows	78

	Notes to condensed consolidated financial statements	89

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2936

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4456

ITEM 4.	CONTROLS AND PROCEDURES	4456

PART II	OTHER INFORMATION	4557

ITEM 1.	LEGAL PROCEEDINGS	4557

ITEM 1A.	RISK FACTORS	4759

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4759

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4759

ITEM 4.	MINE SAFETY DISCLOSURES	4759

ITEM 5.	OTHER INFORMATION	4759

ITEM 6.	EXHIBITS	4860

SIGNATURES

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)


	Select Medical Holdings Corporation				Select Medical Corporation							Select Medical Holdings Corporation				Select Medical Corporation
	December 31, 2018		March 31, 2019		December 31, 2018				March 31, 2019			December 31, 2018		June 30, 2019		December 31, 2018			June 30, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	175,178	$	147,815	$	175,178			$	147,815		$	175,178	$	124,036	$	175,178		$	124,036
Accounts receivable	706,676		779,861		706,676				779,861			706,676		791,769		706,676			791,769
Prepaid income taxes	20,539		7,709		20,539				7,709			20,539		12,318		20,539			12,318
Other current assets	90,131		117,500		90,131				117,500			90,131		99,942		90,131			99,942
Total Current Assets	992,524		1,052,885		992,524				1,052,885			992,524		1,028,065		992,524			1,028,065
Operating lease right-of-use assets	—		982,616		—				982,616			—		971,385		—			971,385
Property and equipment, net	979,810		972,807		979,810				972,807			979,810		1,008,555		979,810			1,008,555
Goodwill	3,320,726		3,323,749		3,320,726				3,323,749			3,320,726		3,385,394		3,320,726			3,385,394
Identifiable intangible assets, net	437,693		426,428		437,693				426,428			437,693		419,335		437,693			419,335
Other assets	233,512		263,007		233,512				263,007			233,512		294,206		233,512			294,206
Total Assets	$	5,964,265	$	7,021,492	$	5,964,265			$	7,021,492		$	5,964,265	$	7,106,940	$	5,964,265		$	7,106,940
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	25,083	$	31,133	$	25,083			$	31,133		$	25,083	$	27,259	$	25,083		$	27,259
Current operating lease liabilities	—		205,145		—				205,145			—		202,484		—			202,484
Current portion of long-term debt and notes payable	43,865		12,329		43,865				12,329			43,865		9,012		43,865			9,012
Accounts payable	146,693		140,581		146,693				140,581			146,693		138,015		146,693			138,015
Accrued payroll	172,386		142,289		172,386				142,289			172,386		147,397		172,386			147,397
Accrued vacation	110,660		116,675		110,660				116,675			110,660		122,277		110,660			122,277
Accrued interest	12,137		22,593		12,137				22,593			12,137		10,234		12,137			10,234
Accrued other	190,691		205,535		190,691				205,535			190,691		184,247		190,691			184,247
Income taxes payable	3,671		8,657		3,671				8,657			3,671		11,767		3,671			11,767
Total Current Liabilities	705,186		884,937		705,186				884,937			705,186		852,692		705,186			852,692
Non-current operating lease liabilities	—		820,007		—				820,007			—		813,903		—			813,903
Long-term debt, net of current portion	3,249,516		3,299,103		3,249,516				3,299,103			3,249,516		3,349,702		3,249,516			3,349,702
Non-current deferred tax liability	153,895		153,863		153,895				153,863			153,895		147,716		153,895			147,716
Other non-current liabilities	158,940		105,791		158,940				105,791			158,940		102,555		158,940			102,555
Total Liabilities	4,267,537		5,263,701		4,267,537				5,263,701			4,267,537		5,266,568		4,267,537			5,266,568
Commitments and contingencies (Note 12)
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	780,488		833,241		780,488				833,241			780,488		844,422		780,488			844,422
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 135,262,866 shares issued and outstanding at 2018 and 2019, respectively	135		135		—			��	—
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,563,999 shares issued and outstanding at 2018 and 2019, respectively												135		135		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0				0			—		—		0			0
Capital in excess of par	482,556		488,303		970,156				975,903			482,556		492,569		970,156			988,333
Retained earnings (accumulated deficit)	320,351		313,593		(167,114		)		(173,872		)	320,351		353,305		(167,114		)	(142,324		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	803,042		802,031		803,042				802,031			803,042		846,009		803,042			846,009
Non-controlling interests	113,198		122,519		113,198				122,519			113,198		149,941		113,198			149,941
Total Equity	916,240		924,550		916,240				924,550			916,240		995,950		916,240			995,950
Total Liabilities and Equity	$	5,964,265	$	7,021,492	$	5,964,265			$	7,021,492		$	5,964,265	$	7,106,940	$	5,964,265		$	7,106,940

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

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Select Medical Holdings Corporation						Select Medical Corporation						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 June 30,						For the Three Months Ended June 30,
	2018			2019			2018			2019			2018			2019			2018			2019
Net operating revenues	$	1,252,964		$	1,324,631		$	1,252,964		$	1,324,631		$	1,296,210		$	1,361,364		$	1,296,210		$	1,361,364
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,065,813			1,132,092			1,065,813			1,132,092			1,094,731			1,150,150			1,094,731			1,150,150
General and administrative	31,782			28,677			31,782			28,677			29,194			31,339			29,194			31,339
Depreciation and amortization	46,771			52,138			46,771			52,138			51,724			54,993			51,724			54,993
Total costs and expenses	1,144,366			1,212,907			1,144,366			1,212,907			1,175,649			1,236,482			1,175,649			1,236,482
Income from operations	108,598			111,724			108,598			111,724			120,561			124,882			120,561			124,882
Other income and expense:
Loss on early retirement of debt	(10,255		)	—			(10,255		)	—
Equity in earnings of unconsolidated subsidiaries	4,697			4,366			4,697			4,366			4,785			7,394			4,785			7,394
Non-operating gain	399			6,532			399			6,532			6,478			—			6,478			—
Interest expense	(47,163		)	(50,811		)	(47,163		)	(50,811		)	(50,159		)	(51,464		)	(50,159		)	(51,464		)
Income before income taxes	56,276			71,811			56,276			71,811			81,665			80,812			81,665			80,812
Income tax expense	12,294			18,467			12,294			18,467			21,106			20,826			21,106			20,826
Net income	43,982			53,344			43,982			53,344			60,559			59,986			60,559			59,986
Less: Net income attributable to non-controlling interests	10,243			12,510			10,243			12,510			14,048			15,170			14,048			15,170
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	33,739		$	40,834		$	33,739		$	40,834		$	46,511		$	44,816		$	46,511		$	44,816
Earnings per common share (Note 11):
Earnings per common share (Note 12):
Basic	$	0.25		$	0.30								$	0.35		$	0.33
Diluted	$	0.25		$	0.30								$	0.35		$	0.33

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

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)



	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2018			2019			2018			2019
Net operating revenues	$	2,549,174		$	2,685,995		$	2,549,174		$	2,685,995
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	2,160,544			2,282,242			2,160,544			2,282,242
General and administrative	60,976			60,016			60,976			60,016
Depreciation and amortization	98,495			107,131			98,495			107,131
Total costs and expenses	2,320,015			2,449,389			2,320,015			2,449,389
Income from operations	229,159			236,606			229,159			236,606
Other income and expense:
Loss on early retirement of debt	(10,255		)	—			(10,255		)	—
Equity in earnings of unconsolidated subsidiaries	9,482			11,760			9,482			11,760
Non-operating gain	6,877			6,532			6,877			6,532
Interest expense	(97,322		)	(102,275		)	(97,322		)	(102,275		)
Income before income taxes	137,941			152,623			137,941			152,623
Income tax expense	33,400			39,293			33,400			39,293
Net income	104,541			113,330			104,541			113,330
Less: Net income attributable to non-controlling interests	24,291			27,680			24,291			27,680
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	80,250		$	85,650		$	80,250		$	85,650
Earnings per common share (Note 12):
Basic	$	0.60		$	0.63
Diluted	$	0.60		$	0.63

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

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


	For the Three Months Ended March 31, 2019																		For the Six Months Ended June 30, 2019

	Select Medical Holdings Corporation Stockholders																		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			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		135,266		$	135	$	482,556		$	320,351		$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Holdings Corporation							40,834			40,834						40,834										40,834			40,834						40,834
Net income attributable to non-controlling interests										—			4,810			4,810													—			4,810			4,810
Issuance of restricted stock	21		0		0					—						—			21		0		0						—						—
Forfeitures of unvested restricted stock	(24	)	0		0					—						—			(24	)	0		0						—						—
Vesting of restricted stock					5,488					5,488						5,488							5,488						5,488						5,488
Issuance of non-controlling interests										—			6,837			6,837													—			6,837			6,837
Distributions to and purchases of non-controlling interests					259					259			(2,739		)	(2,480		)					259						259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests							(47,470		)	(47,470		)				(47,470		)								(47,470		)	(47,470		)				(47,470		)
Other							(122		)	(122		)	413			291										(122		)	(122		)	413			291
Balance at March 31, 2019	135,263		$	135	$	488,303	$	313,593		$	802,031		$	122,519		$	924,550		135,263		$	135	$	488,303		$	313,593		$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Holdings Corporation																										44,816			44,816						44,816
Net income attributable to non-controlling interests																													—			3,663			3,663
Issuance of restricted stock																			187		0		0						—						—
Vesting of restricted stock																							5,591						5,591						5,591
Repurchase of common shares																			(936	)	0		(8,164		)	(5,456		)	(13,620		)				(13,620		)
Exercise of stock options																			50		0		459						459						459
Issuance of non-controlling interests																							6,366						6,366			24,761			31,127
Distributions to and purchases of non-controlling interests																							14						14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests																										270			270						270
Other																										82			82			428			510
Balance at June 30, 2019																			134,564		$	135	$	492,569		$	353,305		$	846,009		$	149,941		$	995,950


	For the Three Months Ended March 31, 2018																			For the Six Months Ended June 30, 2018

	Select Medical Holdings Corporation Stockholders																			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			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	134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604		134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Holdings Corporation								33,739			33,739						33,739										33,739			33,739						33,739
Net income attributable to non-controlling interests											—			4,500			4,500													—			4,500			4,500
Issuance of restricted stock	4		0		0						—						—			4		0		0						—						—
Forfeitures of unvested restricted stock	(88	)	0		0						—						—			(88	)	0		0						—						—
Vesting of restricted stock					4,717						4,717						4,717							4,717						4,717						4,717
Repurchase of common shares	(7	)	0		(69		)	(53		)	(122		)				(122		)	(7	)	0		(69		)	(53		)	(122		)				(122		)
Exercise of stock options	80		0		738						738						738			80		0		738						738						738
Issuance and exchange of non-controlling interests								74,341			74,341						74,341										74,341			74,341						74,341
Distributions to non-controlling interests								(83,233		)	(83,233		)	(1,094		)	(84,327		)
Distributions to and purchases of non-controlling interests																											(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests								(1,051		)	(1,051		)				(1,051		)								(1,051		)	(1,051		)				(1,051		)
Other								103			103			35			138										103			103			35			138
Balance at March 31, 2018	134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277		134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277
Net income attributable to Select Medical Holdings Corporation																											46,511			46,511						46,511
Net income attributable to non-controlling interests																														—			3,139			3,139
Issuance of restricted stock																				170		0		0						—						—
Vesting of restricted stock																								4,845						4,845						4,845
Repurchase of common shares																				(42	)	0		(421		)	(346		)	(767		)				(767		)
Exercise of stock options																				95		0		882						882						882
Issuance and exchange of non-controlling interests																								1,553						1,553			1,921			3,474
Distributions to and purchases of non-controlling interests																								(932		)	(384		)	(1,316		)	(1,958		)	(3,274		)
Redemption adjustment on non-controlling interests																											(8,500		)	(8,500		)				(8,500		)
Other																											(337		)	(337		)	677			340
Balance at June 30, 2018																				134,327		$	134	$	474,812		$	420,525		$	895,471		$	116,456		$	1,011,927

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

Condensed Consolidated Statements of Changes in Equity and Income (Continued)

(unaudited)

(in thousands)


	For the Three Months Ended March 31, 2019																	For the Six Months Ended June 30, 2019

	Select Medical Corporation Stockholders																	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			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		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								40,834			40,834						40,834
Net income attributable to non-controlling interests									—			4,810			4,810											—			4,810			4,810
Contribution related to restricted stock award issuances by Holdings				5,488					5,488						5,488						5,488					5,488						5,488
Issuance of non-controlling interests									—			6,837			6,837											—			6,837			6,837
Distributions to and purchases of non-controlling interests				259					259			(2,739		)	(2,480		)				259					259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests						(47,470		)	(47,470		)				(47,470		)						(47,470		)	(47,470		)				(47,470		)
Other						(122		)	(122		)	413			291								(122		)	(122		)	413			291
Balance at March 31, 2019	0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550		0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Corporation																							44,816			44,816						44,816
Net income attributable to non-controlling interests																										—			3,663			3,663
Additional investment by Holdings																					459					459						459
Dividends declared and paid to Holdings																							(13,620		)	(13,620		)				(13,620		)
Contribution related to restricted stock award issuances by Holdings																					5,591					5,591						5,591
Issuance of non-controlling interests																					6,366					6,366			24,761			31,127
Distributions to and purchases of non-controlling interests																					14					14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests																							270			270						270
Other																							82			82			428			510
Balance at June 30, 2019																		0	$	0	$	988,333	$	(142,324	)	$	846,009		$	149,941		$	995,950


	For the Three Months Ended March 31, 2018																	For the Six Months Ended June 30, 2018

	Select Medical Corporation Stockholders																	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			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		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									33,739			33,739						33,739
Net income attributable to non-controlling interests									—			4,500			4,500												—			4,500			4,500
Additional investment by Holdings				738					738						738						738						738						738
Dividends declared and paid to Holdings						(122		)	(122		)				(122		)							(122		)	(122		)				(122		)
Contribution related to restricted stock award issuances by Holdings				4,717					4,717						4,717						4,717						4,717						4,717
Issuance and exchange of non-controlling interests						74,341			74,341						74,341									74,341			74,341						74,341
Distributions to non-controlling interests						(83,233		)	(83,233		)	(1,094		)	(84,327		)
Distributions to and purchases of non-controlling interests																								(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests						(1,051		)	(1,051		)				(1,051		)							(1,051		)	(1,051		)				(1,051		)
Other						103			103			35			138									103			103			35			138
Balance at March 31, 2018	0	$	0	$	952,825	$	(100,225	)	$	852,600		$	112,677		$	965,277		0	$	0	$	952,825		$	(100,225	)	$	852,600		$	112,677		$	965,277
Net income attributable to Select Medical Corporation																								46,511			46,511						46,511
Net income attributable to non-controlling interests																											—			3,139			3,139
Additional investment by Holdings																					882						882						882
Dividends declared and paid to Holdings																								(767		)	(767		)				(767		)
Contribution related to restricted stock award issuances by Holdings																					4,845						4,845						4,845
Issuance and exchange of non-controlling interests																					1,553						1,553			1,921			3,474
Distributions to and purchases of non-controlling interests																					(932		)	(384		)	(1,316		)	(1,958		)	(3,274		)
Redemption adjustment on non-controlling interests																								(8,500		)	(8,500		)				(8,500		)
Other																								(337		)	(337		)	677			340
Balance at June 30, 2018																		0	$	0	$	959,173		$	(63,702	)	$	895,471		$	116,456		$	1,011,927

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

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2018			2019			2018			2019			2018			2019			2018			2019
Operating activities
Net income	$	43,982		$	53,344		$	43,982		$	53,344		$	104,541		$	113,330		$	104,541		$	113,330
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	1,364			7,872			1,364			7,872			7,830			11,148			7,830			11,148
Depreciation and amortization	46,771			52,138			46,771			52,138			98,495			107,131			98,495			107,131
Provision for bad debts	85			1,567			85			1,567			102			1,958			102			1,958
Equity in earnings of unconsolidated subsidiaries	(4,697		)	(4,366		)	(4,697		)	(4,366		)	(9,482		)	(11,760		)	(9,482		)	(11,760		)
Loss on extinguishment of debt	412			—			412			—			484			—			484			—
Gain on sale of assets and businesses	(513		)	(6,233		)	(513		)	(6,233		)	(6,980		)	(6,354		)	(6,980		)	(6,354		)
Stock compensation expense	4,927			6,255			4,927			6,255			10,911			12,613			10,911			12,613
Amortization of debt discount, premium and issuance costs	3,136			3,231			3,136			3,231			6,486			6,326			6,486			6,326
Deferred income taxes	78			(81		)	78			(81		)	(1,691		)	(6,290		)	(1,691		)	(6,290		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(45,811		)	(74,752		)	(45,811		)	(74,752		)	(5,774		)	(85,873		)	(5,774		)	(85,873		)
Other current assets	(8,945		)	(7,523		)	(8,945		)	(7,523		)	(3,011		)	(9,236		)	(3,011		)	(9,236		)
Other assets	16,633			57,319			16,633			57,319			6,684			(939		)	6,684			(939		)
Accounts payable	(6,552		)	4,324			(6,552		)	4,324			(5,462		)	2,670			(5,462		)	2,670
Accrued expenses	(11,981		)	(69,163		)	(11,981		)	(69,163		)	1,207			(18,156		)	1,207			(18,156		)
Income taxes	11,838			17,830			11,838			17,830			12,610			16,346			12,610			16,346
Net cash provided by operating activities	50,727			41,762			50,727			41,762			216,950			132,914			216,950			132,914
Investing activities
Business combinations, net of cash acquired	(515,359		)	(6,120		)	(515,359		)	(6,120		)	(517,704		)	(86,062		)	(517,704		)	(86,062		)
Purchases of property and equipment	(39,617		)	(49,073		)	(39,617		)	(49,073		)	(81,648		)	(89,285		)	(81,648		)	(89,285		)
Investment in businesses	(1,754		)	(27,608		)	(1,754		)	(27,608		)	(3,291		)	(52,257		)	(3,291		)	(52,257		)
Proceeds from sale of assets and businesses	691			2			691			2			6,672			125			6,672			125
Net cash used in investing activities	(556,039		)	(82,799		)	(556,039		)	(82,799		)	(595,971		)	(227,479		)	(595,971		)	(227,479		)
Financing activities
Borrowings on revolving facilities	165,000			360,000			165,000			360,000			265,000			635,000			265,000			635,000
Payments on revolving facilities	(150,000		)	(220,000		)	(150,000		)	(220,000		)	(345,000		)	(460,000		)	(345,000		)	(460,000		)
Proceeds from term loans	779,904			—			779,904			—			779,904			—			779,904			—
Payments on term loans	(2,875		)	(132,685		)	(2,875		)	(132,685		)	(5,750		)	(132,685		)	(5,750		)	(132,685		)
Revolving facility debt issuance costs	(1,333		)	—			(1,333		)	—			(1,333		)	—			(1,333		)	—
Borrowings of other debt	11,600			8,290			11,600			8,290			19,928			14,230			19,928			14,230
Principal payments on other debt	(5,909		)	(6,155		)	(5,909		)	(6,155		)	(11,521		)	(12,680		)	(11,521		)	(12,680		)
Repurchase of common stock	(122		)	—			—			—			(889		)	(13,620		)	—			—
Dividends paid to Holdings	—			—			(122		)	—			—			—			(889		)	(13,620		)
Proceeds from exercise of stock options	738			—			—			—			1,620			459			—			—
Equity investment by Holdings	—			—			738			—			—			—			1,620			459
Increase (decrease) in overdrafts	(7,916		)	6,050			(7,916		)	6,050			(6,171		)	2,176			(6,171		)	2,176
Proceeds from issuance of non-controlling interests	—			3,425			—			3,425			2,926			18,288			2,926			18,288
Distributions to and purchases of non-controlling interests	(286,641		)	(5,251		)	(286,641		)	(5,251		)	(301,213		)	(7,745		)	(301,213		)	(7,745		)
Net cash provided by financing activities	502,446			13,674			502,446			13,674			397,501			43,423			397,501			43,423
Net decrease in cash and cash equivalents	(2,866		)	(27,363		)	(2,866		)	(27,363		)
Net increase (decrease) in cash and cash equivalents													18,480			(51,142		)	18,480			(51,142		)
Cash and cash equivalents at beginning of period	122,549			175,178			122,549			175,178			122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	119,683		$	147,815		$	119,683		$	147,815		$	141,029		$	124,036		$	141,029		$	124,036
Supplemental Information
Cash paid for interest	$	35,233		$	37,199		$	35,233		$	37,199		$	97,338		$	97,909		$	97,338		$	97,909
Cash paid for taxes	376			718			376			718			22,480			29,241			22,480			29,241
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.

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of ~~March 31,~~June 30, 2019, and for the three and six month periods ended ~~March 31,~~June 30, 2018 and 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 and six months ended ~~March 31,~~June 30, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 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, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019.


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~~is from Medicare at both December 31, 2018, and ~~March 31, 2019, respectively.~~June 30, 2019.

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. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the sublease. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.

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

Financial Instruments

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The Company’s accounts receivable derived from contracts with customers will be subject to ASU 2016-13.

The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s accounts receivable derived from contracts with customers, the Company believes that the impact of ASU 2016-13 is unlikely to be material.

The Company’s implementation efforts are focused on the accounting processes, risk assessments, and control objectives associated with accounting for its financial instruments under the new standard.

Recently Adopted Accounting Pronouncements

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and continue to be reported in accordance with ASC Topic 840, Leases.

The Company elected the package of practical expedients, which permitted the 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 standard resulted in the recognition of 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 rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption.


3.	Redeemable Non-Controlling Interests

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 and purchases of 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
Net income attributable to redeemable non-controlling interests	10,909
Distributions to and purchases of redeemable non-controlling interests	(11,112		)
Redemption adjustment on redeemable non-controlling interests	8,500
Other	461
Balance as of June 30, 2018	$	616,232



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
Net income attributable to redeemable non-controlling interests	11,507
Distributions to and purchases of redeemable non-controlling interests	(395		)
Redemption adjustment on redeemable non-controlling interests	(270		)
Other	339
Balance as of June 30, 2019	$	844,422


4.	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, from Dignity Health Holding Corporation (“DHHC”).

Concentra acquired U.S. HealthWorks 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”) 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 estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.

The following table reconciles the fair values of 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

For the ~~period February 1, 2018 through March 31,~~three months ended June 30, 2018, U.S. HealthWorks contributed net operating revenues of ~~$89.9~~$139.4 million which is reflected in the Company’s consolidated statement of operations. For the period February 1, 2018 through June 30, 2018, U.S. HealthWorks contributed net operating revenues of $229.4 million which is reflected in the Company’s consolidated statement of operations for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Due to the integrated nature of 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. For the three and six months ended ~~March 31,~~June 30, 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		Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
	(in thousands)		(in thousands)
Net operating revenues	$	1,300,544	$	1,296,210	$	2,596,755
Net income attributable to the Company	34,538		48,563		82,365

The Company’s pro forma results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, 2017. Accordingly, for the ~~three~~six months ended ~~March 31,~~June 30, 2018, pro forma results were adjusted to exclude $2.9 million of U.S. HealthWorks acquisition costs.


4.5.	Sale of Businesses

~~The~~During the six months ended June 30, 2019, the Company recognized a non-operating gain of $6.5 million ~~during the three months ended March 31, 2019,~~ which resulted from the sale of 22 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary. During the six months ended June 30, 2018, the Company recognized a non-operating gain of $6.9 million. The non-operating gain resulted principally from the sale of 26 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary.


5.6.	Variable Interest Entities

Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, ~~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~~$193.2 million at December 31, 2018, and ~~March 31,~~June 30, 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~~$191.6 million at December 31, 2018, and ~~March 31,~~June 30, 2019, respectively.


6.7.	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 and six months ended ~~March 31,~~June 30, 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



	Three Months Ended June 30, 2019
	Unrelated Parties			Related Parties		Total
Operating lease cost	$	67,718		$	1,342	$	69,060
Finance lease cost:
Amortization of right-of-use assets	90			—		90
Interest on lease liabilities	199			—		199
Short-term lease cost	592			—		592
Variable lease cost	8,755			85		8,840
Sublease income	(2,442		)	—		(2,442		)
Total lease cost	$	74,912		$	1,427	$	76,339



	Six Months Ended June 30, 2019
	Unrelated Parties			Related Parties		Total
Operating lease cost	$	134,554		$	2,684	$	137,238
Finance lease cost:
Amortization of right-of-use assets	126			—		126
Interest on lease liabilities	296			—		296
Short-term lease cost	1,184			—		1,184
Variable lease cost	20,591			241		20,832
Sublease income	(4,930		)	—		(4,930		)
Total lease cost	$	151,821		$	2,925	$	154,746

For the ~~three~~six months ended ~~March 31,~~June 30, 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	$	136,300
Operating cash flows for finance leases	97		274
Financing cash flows for finance leases	85		142
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	1,080,992	$	1,123,793
Finance leases			9,102

_______________________________________________________________________________


(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,~~June 30, 2019, supplemental balance sheet information related to leases was as follows (in thousands):


	Operating Leases						Operating Leases
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease right-of-use assets	$	962,186	$	20,430	$	982,616	$	951,993	$	19,392	$	971,385

Current operating lease liabilities	$	200,420	$	4,725	$	205,145	$	197,660	$	4,824	$	202,484
Non-current operating lease liabilities	801,094		18,913		820,007		796,240		17,663		813,903
Total operating lease liabilities	$	1,001,514	$	23,638	$	1,025,152	$	993,900	$	22,487	$	1,016,387


	Finance Leases								Finance Leases
	Unrelated Parties			Related Parties		Total			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		$	5,099	$	—	$	5,099

Current portion of long-term debt and notes payable	$	167		$	—	$	167		$	204	$	—	$	204
Long-term debt, net of current portion	4,214			—		4,214			13,185		—		13,185
Total finance lease liabilities	$	4,381		$	—	$	4,381		$	13,389	$	—	$	13,389

As of ~~March 31,~~June 30, 2019, the weighted average remaining lease terms and discount rates ~~was~~were as follows:



Weighted average remaining lease term (in years):
Operating leases	8.1
Finance leases	~~13.7~~34.8
Weighted average discount rate:
Operating leases	5.9	%
Finance leases	~~9.0~~7.4	%

As of ~~March 31,~~June 30, 2019, maturities of lease liabilities were approximately as follows (in thousands):


	Operating Leases		Finance Leases		Total		Operating Leases		Finance Leases		Total
2019	$	196,381	$	431	$	196,812
2019 (remainder of year)							$	132,470	$	588	$	133,058
2020	230,500		526		231,026		238,479		1,182		239,661
2021	192,525		537		193,062		200,677		1,193		201,870
2022	151,581		548		152,129		159,238		1,203		160,441
2023	111,167		558		111,725		118,365		1,214		119,579
Thereafter	501,279		5,075		506,354		516,615		31,630		548,245
Total undiscounted cash flows	1,383,433		7,675		1,391,108		1,365,844		37,010		1,402,854
Less: Imputed interest	358,281		3,294		361,575		349,457		23,621		373,078
Total discounted lease liabilities	$	1,025,152	$	4,381	$	1,029,533	$	1,016,387	$	13,389	$	1,029,776

~~In accordance with ASC Topic 840,~~ ~~Leases, and as~~As disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s undiscounted future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties were approximately as follows 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


7.8.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the ~~three~~six months ended ~~March 31,~~June 30, 2019:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation			Concentra		Total			Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation			Concentra		Total
	(in thousands)												(in thousands)
Balance as of December 31, 2018	$	1,045,220	$	416,646	$	642,422		$	1,216,438	$	3,320,726		$	1,045,220	$	416,646	$	642,422		$	1,216,438	$	3,320,726
Acquired	—		6,964		746			937		8,647			30,028		14,254		7,712			18,298		70,292
Sold	—		—		(5,624		)	—		(5,624		)	—		—		(5,624		)	—		(5,624		)
Balance as of March 31, 2019	$	1,045,220	$	423,610	$	637,544		$	1,217,375	$	3,323,749
Balance as of June 30, 2019													$	1,075,248	$	430,900	$	644,510		$	1,234,736	$	3,385,394

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							December 31, 2018							June 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)														(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,174		—			19,174		19,221		—			19,221		19,174		—			19,174		17,080		—			17,080
Accreditations	1,857		—			1,857		1,857		—			1,857		1,857		—			1,857		1,857		—			1,857
Finite-lived intangible assets:
Trademarks	5,000		(4,583		)	417		5,000		(5,000		)	—		5,000		(4,583		)	417		5,000		(5,000		)	—
Customer relationships	280,710		(61,900		)	218,810		283,090		(68,150		)	214,940		280,710		(61,900		)	218,810		284,440		(74,516		)	209,924
Favorable leasehold interests⁽¹⁾	13,553		(6,064		)	7,489		—		—			—		13,553		(6,064		)	7,489		—		—			—
Non-compete agreements	29,400		(6,152		)	23,248		30,483		(6,771		)	23,712		29,400		(6,152		)	23,248		31,197		(7,421		)	23,776
Total identifiable intangible assets	$	516,392	$	(78,699	)	$	437,693	$	506,349	$	(79,921	)	$	426,428	$	516,392	$	(78,699	)	$	437,693	$	506,272	$	(86,937	)	$	419,335

_______________________________________________________________________________


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

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,~~June 30, 2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~7.9~~7.7 years, respectively.

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was ~~$6.4~~$7.8 million and ~~$7.1~~$8.9 million for the three months ended ~~March 31,~~June 30, 2018 and 2019, respectively. Amortization expense was $14.2 million and $16.0 million for the six months ended June 30, 2018 and 2019, respectively.


8.9.	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,~~June 30, 2019, the Company’s long-term debt and notes payable were as follows (in thousands):


	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value		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	$	710,000	$	436		$	(3,689	)	$	706,747	$	710,852
Credit facilities:
Revolving facility	160,000		—			—			160,000		147,200		195,000		—			—			195,000		179,400
Term loan	1,031,068		(9,267		)	(8,827		)	1,012,974		1,024,624		1,031,068		(8,879		)	(8,458		)	1,013,731		1,027,201
Other	64,808		—			(464		)	64,344		64,344
Other debt, including finance leases													74,864		—			(444		)	74,420		74,420
Total Select debt	1,965,876		(8,774		)	(13,453		)	1,943,649		1,947,943		2,010,932		(8,443		)	(12,591		)	1,989,898		1,991,873
Concentra:
Credit facilities:
Term loans	1,380,297		(2,555		)	(16,877		)	1,360,865		1,373,545		1,380,297		(2,354		)	(15,648		)	1,362,295		1,380,158
Other debt, including finance leases	6,918		—			—			6,918		6,918		6,521		—			—			6,521		6,521
Total Concentra debt	1,387,215		(2,555		)	(16,877		)	1,367,783		1,380,463		1,386,818		(2,354		)	(15,648		)	1,368,816		1,386,679
Total debt	$	3,353,091	$	(11,329	)	$	(30,330	)	$	3,311,432	$	3,328,406	$	3,397,750	$	(10,797	)	$	(28,239	)	$	3,358,714	$	3,378,552

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


	2019		2020		2021		2022		2023		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	710,000	$	—	$	—	$	—	$	710,000	$	—	$	—	$	710,000	$	—	$	—	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		160,000		—		—		160,000		—		—		—		195,000		—		—		195,000
Term loan	—		—		—		—		—		1,031,068		1,031,068		—		—		—		—		—		1,031,068		1,031,068
Other	9,262		27,211		1,781		—		—		26,554		64,808
Other debt, including finance leases															5,595		3,003		1,814		23,036		38		41,378		74,864
Total Select debt	9,262		27,211		711,781		160,000		—		1,057,622		1,965,876		5,595		3,003		711,814		218,036		38		1,072,446		2,010,932
Concentra:
Credit facilities:
Term loans	—		—		—		1,140,298		239,999		—		1,380,297		—		—		—		1,140,298		239,999		—		1,380,297
Other debt, including finance leases	1,644		754		330		358		363		3,469		6,918		807		1,194		330		358		363		3,469		6,521
Total Concentra debt	1,644		754		330		1,140,656		240,362		3,469		1,387,215		807		1,194		330		1,140,656		240,362		3,469		1,386,818
Total debt	$	10,906	$	27,965	$	712,111	$	1,300,656	$	240,362	$	1,061,091	$	3,353,091	$	6,402	$	4,197	$	712,144	$	1,358,692	$	240,400	$	1,075,915	$	3,397,750

As of December 31, 2018, the Company’s long-term debt and notes payable 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

Amendment to Concentra First Lien Credit Agreement

On April 8, 2019, Concentra entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5 extended the maturity date of the Concentra revolving credit facility from June 1, 2020 to June 1, 2021 and increased the aggregate commitments available under the Concentra revolving credit facility from $75.0 million to $100.0 million.

Excess Cash Flow Payment

~~During the three months ended March 31,~~In February 2019, Select made a principal prepayment of approximately $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit 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,~~In February 2019, Concentra made a principal prepayment of approximately $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the terms loans outstanding under the Concentra first lien credit agreement until maturity on June 1, 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.


9.10.	Segment Information

The Company’s reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and ~~certain~~employee leasing services with non-consolidating subsidiaries. During the three months ended June 30, 2019, the Company began reporting the net operating revenues and expenses associated with employee leasing services provided to its non-consolidating subsidiaries as part of the Company’s other activities. Previously, these services were reflected in the financial results of the Company’s reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to the Company’s non-consolidating ~~joint ventures and minority investments~~subsidiaries, resulting in ~~other healthcare related businesses.~~the Company’s recognition of net operating revenues equal to the actual labor costs incurred.

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. Prior year results presented herein have been changed to conform to the current presentation. The segment results of Holdings are identical to those of Select.


		Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
		2018			2019			2018			2019			2018			2019
	(in thousands)							(in thousands)
Net operating revenues:
Critical illness recovery hospital		$	464,676		$	462,159		$	442,452		$	461,143		$	907,128		$	918,677
Rehabilitation hospital		174,774			188,954			144,779			160,374			288,087			314,932
Outpatient rehabilitation		257,381			277,197			253,914			261,891			498,145			508,796
Concentra		356,116			396,321			412,823			413,451			768,939			809,772
Other		17			—			42,242			64,505			86,875			133,818
Total Company		$	1,252,964		$	1,324,631		$	1,296,210		$	1,361,364		$	2,549,174		$	2,685,995
Adjusted EBITDA:
Critical illness recovery hospital		$	72,972		$	72,998		$	60,725		$	64,138		$	133,697		$	137,136
Rehabilitation hospital		26,776			25,797			28,195			29,968			54,971			55,765
Outpatient rehabilitation		30,525			28,991			41,947			42,584			72,472			71,575
Concentra		57,797			66,258			72,568			76,087			130,365			142,345
Other		(24,838		)	(23,927		)	(25,207		)	(26,544		)	(50,045		)	(50,471		)
Total Company		$	163,232		$	170,117		$	178,228		$	186,233		$	341,460		$	356,350
Total assets:
Critical illness recovery hospital		$	1,862,791		$	2,062,659		$	1,828,038		$	2,119,574		$	1,828,038		$	2,119,574
Rehabilitation hospital		877,750			1,089,391			867,175			1,107,852			867,175			1,107,852
Outpatient rehabilitation		973,122			1,250,015			979,678			1,265,487			979,678			1,265,487
Concentra		2,143,405			2,464,317			2,174,931			2,447,387			2,174,931			2,447,387
Other		111,575			155,110			114,978			166,640			114,978			166,640
Total Company		$	5,968,643		$	7,021,492		$	5,964,800		$	7,106,940		$	5,964,800		$	7,106,940
Purchases of property and equipment, net:
Purchases of property and equipment:
Critical illness recovery hospital		$	10,472		$	10,160		$	12,849		$	14,488		$	23,321		$	24,648
Rehabilitation hospital		12,917			13,183			8,080			5,356			20,997			18,539
Outpatient rehabilitation		7,338			9,040			8,018			6,705			15,356			15,745
Concentra		6,621			15,698			10,121			12,240			16,742			27,938
Other		2,269			992			2,963			1,423			5,232			2,415
Total Company		$	39,617		$	49,073		$	42,031		$	40,212		$	81,648		$	89,285

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


	Three Months Ended March 31, 2018																		Three Months Ended June 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			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	)				$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)
Depreciation and amortization	(11,058		)	(5,722		)	(6,637		)	(21,147		)	(2,207		)				(11,952		)	(6,015		)	(6,704		)	(24,697		)	(2,356		)
Stock compensation expense	—			—			—			(211		)	(4,716		)				—			—			—			(1,138		)	(4,846		)
U.S. HealthWorks acquisition costs	—			—			—			(2,936		)	—						—			—			—			41			—
Income (loss) from operations	$	61,914		$	21,054		$	23,888		$	33,503		$	(31,761	)	$	108,598		$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																4,697																		4,785
Non-operating gain																399																		6,478
Interest expense																(47,163		)																(50,159		)
Income before income taxes																$	56,276																	$	81,665


	Three Months Ended March 31, 2019																		Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)				$	64,138		$	29,968		$	42,584		$	76,087		$	(26,544	)
Depreciation and amortization	(11,451		)	(6,402		)	(7,032		)	(24,904		)	(2,349		)				(14,495		)	(6,696		)	(6,991		)	(24,479		)	(2,332		)
Stock compensation expense	—			—			—			(767		)	(5,488		)				—			—			—			(767		)	(5,591		)
Income (loss) from operations	$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724		$	49,643		$	23,272		$	35,593		$	50,841		$	(34,467	)	$	124,882
Equity in earnings of unconsolidated subsidiaries																4,366																		7,394
Non-operating gain																6,532
Interest expense																(50,811		)																(51,464		)
Income before income taxes																$	71,811																	$	80,812



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



	Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	137,136		$	55,765		$	71,575		$	142,345		$	(50,471	)
Depreciation and amortization	(25,946		)	(13,098		)	(14,023		)	(49,383		)	(4,681		)
Stock compensation expense	—			—			—			(1,534		)	(11,079		)
Income (loss) from operations	$	111,190		$	42,667		$	57,552		$	91,428		$	(66,231	)	$	236,606
Equity in earnings of unconsolidated subsidiaries																11,760
Non-operating gain																6,532
Interest expense																(102,275		)
Income before income taxes																$	152,623


~~10.~~11.	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 for the three and six months ended ~~March 31,~~June 30, 2018 and 2019:


	Three Months Ended March 31, 2018								Three Months Ended June 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)								(in thousands)
Patient service revenues:
Medicare	$	240,992	$	72,841	$	38,190	$	628	$	225,857	$	73,054	$	41,475	$	517	$	—	$	340,903
Non-Medicare	220,006		61,902		188,900		353,252		213,083		62,387		194,611		409,922		—		880,003
Total patient services revenues	460,998		134,743		227,090		353,880		438,940		135,441		236,086		410,439		—		1,220,906
Other revenues(1)	3,678		40,031		30,291		2,236		3,512		9,338		17,828		2,384		42,242		75,304
Total net operating revenues	$	464,676	$	174,774	$	257,381	$	356,116	$	442,452	$	144,779	$	253,914	$	412,823	$	42,242	$	1,296,210



	Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	223,688	$	77,260	$	43,869	$	474	$	—	$	345,291
Non-Medicare	234,616		73,972		198,241		410,277		—		917,106
Total patient services revenues	458,304		151,232		242,110		410,751		—		1,262,397
Other revenues	2,839		9,142		19,781		2,700		64,505		98,967
Total net operating revenues	$	461,143	$	160,374	$	261,891	$	413,451	$	64,505	$	1,361,364



	Six Months Ended June 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	466,849	$	145,895	$	79,665	$	1,145	$	—	$	693,554
Non-Medicare	433,089		124,289		383,511		763,174		—		1,704,063
Total patient services revenues	899,938		270,184		463,176		764,319		—		2,397,617
Other revenues⁽¹⁾	7,190		17,903		34,969		4,620		86,875		151,557
Total net operating revenues	$	907,128	$	288,087	$	498,145	$	768,939	$	86,875	$	2,549,174


	Three Months Ended March 31, 2019								Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)								(in thousands)
Patient service revenues:
Medicare	$	238,169	$	74,579	$	40,278	$	555	$	461,857	$	151,839	$	84,147	$	1,029	$	—	$	698,872
Non-Medicare	216,959		70,642		187,914		393,236		451,575		144,614		386,155		803,513		—		1,785,857
Total patient services revenues	455,128		145,221		228,192		393,791		913,432		296,453		470,302		804,542		—		2,484,729
Other revenues	7,031		43,733		49,005		2,530		5,245		18,479		38,494		5,230		133,818		201,266
Total net operating revenues	$	462,159	$	188,954	$	277,197	$	396,321	$	918,677	$	314,932	$	508,796	$	809,772	$	133,818	$	2,685,995


(1)	For the three and six months ended June 30, 2018, the financial results of the Company’s reportable segments have been changed to remove the net operating revenues associated with employee leasing services provided to the Company’s non-consolidating subsidiaries. These results are now reported as part of the Company’s other activities.


~~11.~~12.	Earnings per Share

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is 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 and six months ended ~~March 31,~~June 30, 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 net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.



	Basic EPS				Diluted EPS
	Three Months Ended June 30,				Three Months Ended June 30,
	2018		2019		2018		2019
	(in thousands)
Net income	$	60,559	$	59,986	$	60,559	$	59,986
Less: net income attributable to non-controlling interests	14,048		15,170		14,048		15,170
Net income attributable to the Company	46,511		44,816		46,511		44,816
Less: net income attributable to participating securities	1,517		1,484		1,517		1,484
Net income attributable to common shares	$	44,994	$	43,332	$	44,994	$	43,332



	Basic EPS				Diluted EPS
	Six Months Ended June 30,				Six Months Ended June 30,
	2018		2019		2018		2019
	(in thousands)
Net income	$	104,541	$	113,330	$	104,541	$	113,330
Less: net income attributable to non-controlling interests	24,291		27,680		24,291		27,680
Net income attributable to the Company	80,250		85,650		80,250		85,650
Less: net income attributable to participating securities	2,630		2,827		2,628		2,826
Net income attributable to common shares	$	77,620	$	82,823	$	77,622	$	82,824

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										Three Months Ended June 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS		Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)										(in thousands, except for per share amounts)
Common shares	$	39,491	130,821	$	0.30	$	39,491	130,861	$	0.30	$	44,994	129,830	$	0.35	$	44,994	129,924	$	0.35
Participating securities	1,343		4,449	$	0.30	1,343		4,449	$	0.30	1,517		4,379	$	0.35	1,517		4,379	$	0.35
Total Company	$	40,834				$	40,834				$	46,511				$	46,511

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

~~_______________________________________________________________________________~~



	Three Months Ended June 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	43,332	130,525	$	0.33	$	43,332	130,562	$	0.33
Participating securities	1,484		4,471	$	0.33	1,484		4,471	$	0.33
Total Company	$	44,816				$	44,816



	Six Months Ended June 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	77,620	129,761	$	0.60	$	77,622	129,871	$	0.60
Participating securities	2,630		4,397	$	0.60	2,628		4,397	$	0.60
Total Company	$	80,250				$	80,250



	Six Months Ended June 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)
Common shares	$	82,823	130,672	$	0.63	$	82,824	130,711	$	0.63
Participating securities	2,827		4,460	$	0.63	2,826		4,460	$	0.63
Total Company	$	85,650				$	85,650

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


~~12.~~13.	Commitments and Contingencies

Litigation

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

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has 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 appealed this decision to the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for 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 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. 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.


~~13.~~14.	Subsequent Events

Issuance and Sale of Senior Notes

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of senior notes due August 15, 2026. Select intends to use a portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described below), to redeem in full Select’s $710 million 6.375% senior notes due 2021, to repay in full the outstanding borrowings under Select’s revolving credit facility, and pay related fees and expenses associated with the financing.

Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.

Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.

Amendment to Select Credit Facilities

On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Among other things, the amendment (i) provided for an additional $500.0 million in term loans that, along with the existing Select term loan, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving credit facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.


15.	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, “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,~~June 30, 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
Current Assets:
Cash and cash equivalents	$	78		$	7,454	$	3,353		$	136,930	$	—			$	147,815		$	78		$	7,576	$	3,256		$	113,126	$	—			$	124,036
Accounts receivable	—			444,580		132,312			202,969		—				779,861			—			445,484		129,946			216,339		—				791,769
Intercompany receivables	—			1,723,869		91,005			—		(1,814,874		)	(a)	—			—			1,702,313		147,990			—		(1,850,303		)	(a)	—
Prepaid income taxes	399			5,132		—			2,833		(655		)	(f)	7,709			142			5,936		8			6,838		(606		)	(f)	12,318
Other current assets	30,152			33,973		10,025			43,350		—				117,500			29,306			32,072		9,923			28,641		—				99,942
Total Current Assets	30,629			2,215,008		236,695			386,082		(1,815,529		)		1,052,885			29,526			2,193,381		291,123			364,944		(1,850,909		)		1,028,065
Operating lease right-of-use assets	34,992			451,905		496,144			305,795		(306,220		)	(a)	982,616			33,568			441,710		513,796			307,623		(325,312		)	(a)	971,385
Property and equipment, net	28,774			622,323		107,147			214,563		—				972,807			28,578			658,686		114,256			207,035		—				1,008,555
Investment in affiliates	4,491,439			138,297		—			—		(4,629,736		)	(b)(c)	—			4,543,196			175,551		—			—		(4,718,747		)	(b)(c)	—
Goodwill	—			2,106,374		—			1,217,375		—				3,323,749			—			2,150,658		—			1,234,736		—				3,385,394
Identifiable intangible assets, net	3			99,884		5,108			321,433		—				426,428			3			98,033		4,676			316,623		—				419,335
Other assets	36,974			208,431		33,207			19,069		(34,674		)	(a)(e)	263,007			34,285			236,642		16,524			16,426		(9,671		)	(e)	294,206
Total Assets	$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492		$	4,669,156		$	5,954,661	$	940,375		$	2,447,387	$	(6,904,639	)		$	7,106,940
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	31,133		$	—	$	—		$	—	$	—			$	31,133		$	27,259		$	—	$	—		$	—	$	—			$	27,259
Current operating lease liabilities	6,298			105,809		36,663			67,347		(10,972		)	(a)	205,145			6,419			102,709		39,896			67,155		(13,695		)	(a)	202,484
Current portion of long-term debt and notes payable	8,656			498		896			2,279		—				12,329			6,376			524		192			1,920		—				9,012
Accounts payable	12,198			77,245		23,396			27,742		—				140,581			14,227			80,569		22,931			20,288		—				138,015
Intercompany payables	1,723,869			91,005		—			—		(1,814,874		)	(a)	—			1,702,313			147,990		—			—		(1,850,303		)	(a)	—
Accrued payroll	4,080			87,957		2,744			47,508		—				142,289			7,498			95,373		4,579			39,947		—				147,397
Accrued vacation	4,855			64,878		14,953			31,989		—				116,675			5,086			67,198		15,767			34,226		—				122,277
Accrued interest	16,915			26		4			5,648		—				22,593			5,282			35		6			4,911		—				10,234
Accrued other	65,968			60,930		15,355			63,282		—				205,535			63,952			64,262		14,735			41,298		—				184,247
Income taxes payable	—			4,197		170			4,945		(655		)	(f)	8,657			8,333			3,082		47			911		(606		)	(f)	11,767
Total Current Liabilities	1,873,972			492,545		94,181			250,740		(1,826,501		)		884,937			1,846,745			561,742		98,153			210,656		(1,864,604		)		852,692
Non-current operating lease liabilities	31,902			370,579		465,664			247,673		(295,811		)	(a)	820,007			30,244			363,883		455,165			251,521		(286,910		)	(a)	813,903
Long-term debt, net of current portion	1,882,471			37		51,091			1,365,504		—				3,299,103			1,918,283			9,473		55,050			1,366,896		—				3,349,702
Non-current deferred tax liability	—			103,314		1,329			58,130		(8,910		)	(e)	153,863			—			100,310		1,359			55,718		(9,671		)	(e)	147,716
Other non-current liabilities	32,435			60,464		2,959			35,134		(25,201		)	(a)	105,791			27,875			63,035		3,235			33,117		(24,707		)	(a)	102,555
Total Liabilities	3,820,780			1,026,939		615,224			1,957,181		(2,156,423		)		5,263,701			3,823,147			1,098,443		612,962			1,917,908		(2,185,892		)		5,266,568
Redeemable non-controlling interests	—			—		—			17,283		815,958			(d)	833,241			—			—		—			17,432		826,990			(d)	844,422
Stockholders’ Equity:
Common stock	0			—		—			—		—				0			0			—		—			—		—				0
Capital in excess of par	975,903			—		—			—		—				975,903			988,333			—		—			—		—				988,333
Retained earnings (accumulated deficit)	(173,872		)	1,575,968		(28,082		)	24,837		(1,572,723		)	(c)(d)	(173,872		)	(142,324		)	1,613,283		(24,651		)	45,806		(1,634,438		)	(c)(d)	(142,324		)
Subsidiary investment	—			3,239,315		291,159			459,625		(3,990,099		)	(b)(d)	—			—			3,242,935		352,064			460,757		(4,055,756		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	802,031			4,815,283		263,077			484,462		(5,562,822		)		802,031			846,009			4,856,218		327,413			506,563		(5,690,194		)		846,009
Non-controlling interests	—			—		—			5,391		117,128			(d)	122,519			—			—		—			5,484		144,457			(d)	149,941
Total Equity	802,031			4,815,283		263,077			489,853		(5,445,694		)		924,550			846,009			4,856,218		327,413			512,047		(5,545,737		)		995,950
Total Liabilities and Equity	$	4,622,811		$	5,842,222	$	878,301		$	2,464,317	$	(6,786,159	)		$	7,021,492		$	4,669,156		$	5,954,661	$	940,375		$	2,447,387	$	(6,904,639	)		$	7,106,940


(a)	Elimination of intercompany balances.


(b)	Elimination of investments in consolidated subsidiaries.


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


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


(e)	Reclassification 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.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended ~~March 31,~~June 30, 2019

(unaudited)

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Net operating revenues $ —
$ 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 (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	—		$	734,359		$	213,554		$	413,451		$	—			$	1,361,364
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	796			629,118			182,105			338,131			—				1,150,150
General and administrative	31,865			(526		)	—			—			—				31,339
Depreciation and amortization	2,213			22,866			5,435			24,479			—				54,993
Total costs and expenses	34,874			651,458			187,540			362,610			—				1,236,482
Income (loss) from operations	(34,874		)	82,901			26,014			50,841			—				124,882
Other income and expense:
Intercompany interest and royalty fees	4,705			(2,128		)	(2,204		)	(373		)	—				—
Intercompany management fees	57,738			(42,503		)	(15,235		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			7,370			24			—			—				7,394
Interest income (expense)	(29,109		)	8			(219		)	(22,144		)	—				(51,464		)
Income (loss) before income taxes	(1,540		)	45,648			8,380			28,324			—				80,812
Income tax expense	1,140			13,021			138			6,527			—				20,826
Equity in earnings of consolidated subsidiaries	47,496			4,687			—			—			(52,183		)	(a)	—
Net income	44,816			37,314			8,242			21,797			(52,183		)		59,986
Less: Net income attributable to non-controlling interests	—			—			3,555			11,615			—				15,170
Net income attributable to Select Medical Corporation	$	44,816		$	37,314		$	4,687		$	10,182		$	(52,183	)		$	44,816


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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2019

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	—		$	1,454,189		$	422,034		$	809,772		$	—			$	2,685,995
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,535			1,253,593			358,153			668,961			—				2,282,242
General and administrative	60,562			(546		)	—			—			—				60,016
Depreciation and amortization	4,444			43,400			9,904			49,383			—				107,131
Total costs and expenses	66,541			1,296,447			368,057			718,344			—				2,449,389
Income (loss) from operations	(66,541		)	157,742			53,977			91,428			—				236,606
Other income and expense:
Intercompany interest and royalty fees	8,813			(3,230		)	(4,847		)	(736		)	—				—
Intercompany management fees	119,210			(91,273		)	(27,937		)	—			—				—
Equity in earnings of unconsolidated subsidiaries	—			11,713			47			—			—				11,760
Non-operating gain	—			6,532			—			—			—				6,532
Interest income (expense)	(57,309		)	128			(440		)	(44,654		)	—				(102,275		)
Income before income taxes	4,173			81,612			20,800			46,038			—				152,623
Income tax expense	1,197			27,246			545			10,305			—				39,293
Equity in earnings of consolidated subsidiaries	82,674			11,898			—			—			(94,572		)	(a)	—
Net income	85,650			66,264			20,255			35,733			(94,572		)		113,330
Less: Net income attributable to non-controlling interests	—			—			8,357			19,323			—				27,680
Net income attributable to Select Medical Corporation	$	85,650		$	66,264		$	11,898		$	16,410		$	(94,572	)		$	85,650

_______________________________________________________________________________


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 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)
Operating activities
Net income	$	40,834		$	28,950		$	12,013		$	13,936		$	(42,389	)	(a)	$	53,344		$	85,650		$	66,264		$	20,255		$	35,733		$	(94,572	)	(a)	$	113,330
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	—			7,865			7			—			—				7,872			—			11,140			8			—			—				11,148
Depreciation and amortization	2,231			20,534			4,469			24,904			—				52,138			4,444			43,400			9,904			49,383			—				107,131
Provision for bad debts	—			21			1,532			14			—				1,567			—			28			1,735			195			—				1,958
Equity in earnings of unconsolidated subsidiaries	—			(4,343		)	(23		)	—			—				(4,366		)	—			(11,713		)	(47		)	—			—				(11,760		)
Equity in earnings of consolidated subsidiaries	(35,178		)	(7,211		)	—			—			42,389			(a)	—			(82,674		)	(11,898		)	—			—			94,572			(a)	—
Loss (gain) on sale of assets and businesses	300			(6,533		)	—			—			—				(6,233		)	300			(6,617		)	(37		)	—			—				(6,354		)
Stock compensation expense	5,488			—			—			767			—				6,255			11,079			—			—			1,534			—				12,613
Amortization of debt discount, premium and issuance costs	1,286			—			—			1,945			—				3,231			3,226			—			—			3,100			—				6,326
Deferred income taxes	(364		)	2,190			335			(2,242		)	—				(81		)	(2,338		)	(401		)	366			(3,917		)	—				(6,290		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(46,927		)	(15,161		)	(12,664		)	—				(74,752		)	—			(47,838		)	(12,998		)	(25,037		)	—				(85,873		)
Other current assets	(7,386		)	(1,991		)	2,219			(365		)	—				(7,523		)	(10,868		)	558			2,624			(1,550		)	—				(9,236		)
Other assets	1,674			28,412			13,292			17,909			(3,968		)	(b)	57,319			(167		)	(1,019		)	(3,152		)	3,734			(335		)	(b)	(939		)
Accounts payable	(1,785		)	926			2,745			2,438			—				4,324			(46		)	4,192			2,491			(3,967		)	—				2,670
Accrued expenses	(480		)	(34,475		)	(14,477		)	(22,999		)	3,268			(b)	(69,163		)	(8,649		)	9,546			(773		)	(18,615		)	335			(b)	(18,156		)
Income taxes	9,819			2,410			(20		)	5,621			—				17,830			18,425			491			(151		)	(2,419		)	—				16,346
Net cash provided by (used in) operating activities	16,439			(10,172		)	6,931			29,264			(700		)		41,762
Net cash provided by operating activities																				18,382			56,133			20,225			38,174			—				132,914
Investing activities
Business combinations, net of cash acquired	—			(3,905		)	(410		)	(1,805		)	—				(6,120		)	—			(61,861		)	(3,974		)	(20,227		)	—				(86,062		)
Purchases of property and equipment	(953		)	(23,309		)	(9,113		)	(15,698		)	—				(49,073		)	(2,415		)	(36,648		)	(22,284		)	(27,938		)	—				(89,285		)
Investment in businesses	—			(27,608		)	—			—			—				(27,608		)	—			(52,057		)	(200		)	—			—				(52,257		)
Proceeds from sale of assets and businesses	—			2			—			—			—				2			—			88			37			—			—				125
Net cash used in investing activities	(953		)	(54,820		)	(9,523		)	(17,503		)	—				(82,799		)	(2,415		)	(150,478		)	(26,421		)	(48,165		)	—				(227,479		)
Financing activities
Borrowings on revolving facilities	360,000			—			—			—			—				360,000			635,000			—			—			—			—				635,000
Payments on revolving facilities	(220,000		)	—			—			—			—				(220,000		)	(460,000		)	—			—			—			—				(460,000		)
Payments on term loans	(98,807		)	—			—			(33,878		)	—				(132,685		)	(98,807		)	—			—			(33,878		)	—				(132,685		)
Borrowings of other debt	5,612			—			2,678			—			—				8,290			5,613			—			8,617			—			—				14,230
Principal payments on other debt	(3,140		)	(161		)	(1,113		)	(1,741		)	—				(6,155		)	(6,103		)	(245		)	(3,818		)	(2,514		)	—				(12,680		)
Dividends paid to Holdings																				(13,620		)	—			—			—			—				(13,620		)
Equity investment by Holdings																				459			—			—			—			—				459
Intercompany	(65,200		)	67,956			(3,456		)	—			700			(b)	—			(80,684		)	94,742			(14,058		)	—			—				—
Increase in overdrafts	6,050			—			—			—			—				6,050			2,176			—			—			—			—				2,176
Proceeds from issuance of non-controlling interests	—			—			3,425			—			—				3,425			—			—			18,288			—			—				18,288
Distributions to and purchases of non-controlling interests	—			(2,923		)	—			(2,328		)	—				(5,251		)	—			(150		)	(3,988		)	(3,607		)	—				(7,745		)
Net cash provided by (used in) financing activities	(15,485		)	64,872			1,534			(37,947		)	700				13,674			(15,966		)	94,347			5,041			(39,999		)	—				43,423
Net increase (decrease) in cash and cash equivalents	1			(120		)	(1,058		)	(26,186		)	—				(27,363		)	1			2			(1,155		)	(49,990		)	—				(51,142		)
Cash and cash equivalents at beginning of period	77			7,574			4,411			163,116			—				175,178			77			7,574			4,411			163,116			—				175,178
Cash and cash equivalents at end of period	$	78		$	7,454		$	3,353		$	136,930		$	—			$	147,815		$	78		$	7,576		$	3,256		$	113,126		$	—			$	124,036


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


(b)	Elimination of intercompany balances.

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2018

(unaudited)



	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	77		$	7,574	$	4,411		$	163,116	$	—			$	175,178
Accounts receivable	—			397,674		118,683			190,319		—				706,676
Intercompany receivables	—			1,787,184		83,230			—		(1,870,414		)	(a)	—
Prepaid income taxes	10,205			5,711		—			4,623		—				20,539
Other current assets	17,866			31,181		14,048			27,036		—				90,131
Total Current Assets	28,148			2,229,324		220,372			385,094		(1,870,414		)		992,524
Property and equipment, net	30,103			625,947		103,006			220,754		—				979,810
Investment in affiliates	4,497,167			127,036		—			—		(4,624,203		)	(b)(c)	—
Goodwill	—			2,104,288		—			1,216,438		—				3,320,726
Identifiable intangible assets, net	3			102,120		5,020			330,550		—				437,693
Other assets	37,281			145,467		33,417			26,032		(8,685		)	(e)	233,512
Total Assets	$	4,592,702		$	5,334,182	$	361,815		$	2,178,868	$	(6,503,302	)		$	5,964,265
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	25,083		$	—	$	—		$	—	$	—			$	25,083
Current portion of long-term debt and notes payable	4,363			248		2,001			37,253		—				43,865
Accounts payable	14,033			84,343		20,956			27,361		—				146,693
Intercompany payables	1,787,184			83,230		—			—		(1,870,414		)	(a)	—
Accrued payroll	15,533			99,803		5,936			51,114		—				172,386
Accrued vacation	4,613			60,989		13,942			31,116		—				110,660
Accrued interest	5,996			22		3			6,116		—				12,137
Accrued other	60,056			61,226		17,098			52,311		—				190,691
Income taxes payable	—			2,366		190			1,115		—				3,671
Total Current Liabilities	1,916,861			392,227		60,126			206,386		(1,870,414		)		705,186
Long-term debt, net of current portion	1,837,241			448		48,402			1,363,425		—				3,249,516
Non-current deferred tax liability	—			101,214		994			60,372		(8,685		)	(e)	153,895
Other non-current liabilities	35,558			59,901		9,194			54,287		—				158,940
Total Liabilities	3,789,660			553,790		118,716			1,684,470		(1,879,099		)		4,267,537
Redeemable non-controlling interests	—			—		—			18,525		761,963			(d)	780,488
Stockholders’ Equity:
Common stock	0			—		—			—		—				0
Capital in excess of par	970,156			—		—			—		—				970,156
Retained earnings (accumulated deficit)	(167,114		)	1,547,018		(29,553		)	12,355		(1,529,820		)	(c)(d)	(167,114		)
Subsidiary investment	—			3,233,374		272,652			457,974		(3,964,000		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	803,042			4,780,392		243,099			470,329		(5,493,820		)		803,042
Non-controlling interests	—			—		—			5,544		107,654			(d)	113,198
Total Equity	803,042			4,780,392		243,099			475,873		(5,386,166		)		916,240
Total Liabilities and Equity	$	4,592,702		$	5,334,182	$	361,815		$	2,178,868	$	(6,503,302	)		$	5,964,265


(a)	Elimination of intercompany balances.


(b)	Elimination of investments in consolidated subsidiaries.


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


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


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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended ~~March 31,~~June 30, 2018

(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)
Net operating revenues	$	17		$	706,412		$	190,419		$	356,116		$	—			$	1,252,964		$	(17	)	$	690,766		$	192,638		$	412,823		$	—			$	1,296,210
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	726			608,026			158,531			298,530			—				1,065,813			799			589,707			162,832			341,393			—				1,094,731
General and administrative	28,807			39			—			2,936			—				31,782			29,208			27			—			(41		)	—				29,194
Depreciation and amortization	2,207			19,447			3,970			21,147			—				46,771			2,355			20,535			4,137			24,697			—				51,724
Total costs and expenses	31,740			627,512			162,501			322,613			—				1,144,366			32,362			610,269			166,969			366,049			—				1,175,649
Income (loss) from operations	(31,723		)	78,900			27,918			33,503			—				108,598			(32,379		)	80,497			25,669			46,774			—				120,561
Other income and expense:
Intercompany interest and royalty fees	8,119			(4,295		)	(3,631		)	(193		)	—				—			7,553			(3,629		)	(3,609		)	(315		)	—				—
Intercompany management fees	60,732			(49,540		)	(11,192		)	—			—				—			55,416			(43,931		)	(11,485		)	—			—				—
Loss on early retirement of debt	(2,229		)	—			—			(8,026		)	—				(10,255		)
Equity in earnings of unconsolidated subsidiaries	—			4,684			13			—			—				4,697			—			4,776			9			—			—				4,785
Non-operating gain	—			399			—			—			—				399			1,654			4,824			—			—			—				6,478
Interest expense	(31,071		)	(67		)	(151		)	(15,874		)	—				(47,163		)
Interest income (expense)																				(29,412		)	188			(186		)	(20,749		)	—				(50,159		)
Income before income taxes	3,828			30,081			12,957			9,410			—				56,276			2,832			42,725			10,398			25,710			—				81,665
Income tax expense (benefit)	514			11,935			93			(248		)	—				12,294
Income tax expense																				831			14,254			145			5,876			—				21,106
Equity in earnings of consolidated subsidiaries	30,425			8,283			—			—			(38,708		)	(a)	—			44,510			6,840			—			—			(51,350		)	(a)	—
Net income	33,739			26,429			12,864			9,658			(38,708		)		43,982			46,511			35,311			10,253			19,834			(51,350		)		60,559
Less: Net income attributable to non-controlling interests	—			85			4,581			5,577			—				10,243			—			12			3,413			10,623			—				14,048
Net income attributable to Select Medical Corporation	$	33,739		$	26,344		$	8,283		$	4,081		$	(38,708	)		$	33,739		$	46,511		$	35,299		$	6,840		$	9,211		$	(51,350	)		$	46,511


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

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2018

(unaudited)



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


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

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2018

(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)
Operating activities
Net income	$	33,739		$	26,429		$	12,864		$	9,658		$	(38,708	)	(a)	$	43,982		$	80,250		$	61,740		$	23,117		$	29,492		$	(90,058	)	(a)	$	104,541
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	—			1,334			30			—			—				1,364			—			7,800			30			—			—				7,830
Depreciation and amortization	2,207			19,447			3,970			21,147			—				46,771			4,562			39,982			8,107			45,844			—				98,495
Provision for bad debts	—			42			—			43			—				85			—			41			—			61			—				102
Equity in earnings of unconsolidated subsidiaries	—			(4,684		)	(13		)	—			—				(4,697		)	—			(9,460		)	(22		)	—			—				(9,482		)
Equity in earnings of consolidated subsidiaries	(30,425		)	(8,283		)	—			—			38,708			(a)	—			(74,935		)	(15,123		)	—			—			90,058			(a)	—
Loss on extinguishment of debt	115			—			—			297			—				412			115			—			—			369			—				484
Loss (gain) on sale of assets and businesses	—			(516		)	—			3			—				(513		)
Gain on sale of assets and businesses																				(1,642		)	(5,338		)	—			—			—				(6,980		)
Stock compensation expense	4,716			—			—			211			—				4,927			9,562			—			—			1,349			—				10,911
Amortization of debt discount, premium and issuance costs	1,837			—			—			1,299			—				3,136			3,553			—			—			2,933			—				6,486
Deferred income taxes	(503		)	1,383			(5		)	(797		)	—				78			664			1,056			40			(3,451		)	—				(1,691		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(28,475		)	(13,600		)	(3,736		)	—				(45,811		)	—			9,838			(6,857		)	(8,755		)	—				(5,774		)
Other current assets	(5,890		)	(569		)	1,301			(3,787		)	—				(8,945		)	(876		)	1,927			2,956			(7,018		)	—				(3,011		)
Other assets	3,788			(562		)	599			12,808			—				16,633			945			(9,261		)	1,110			13,890			—				6,684
Accounts payable	731			(3,435		)	(985		)	(2,863		)	—				(6,552		)	(1,470		)	(7,516		)	1,864			1,660			—				(5,462		)
Accrued expenses	(10,370		)	(2,667		)	735			321			—				(11,981		)	(15,020		)	14,589			4,914			(3,276		)	—				1,207
Income taxes	6,897			4,513			(111		)	539			—				11,838			14,757			4,401			1			(6,549		)	—				12,610
Net cash provided by operating activities	6,842			3,957			4,785			35,143			—				50,727			20,465			94,676			35,260			66,549			—				216,950
Investing activities
Business combinations, net of cash acquired	—			(321		)	(22		)	(515,016		)	—				(515,359		)	—			(2,666		)	(22		)	(515,016		)	—				(517,704		)
Purchases of property and equipment	(2,269		)	(23,912		)	(6,815		)	(6,621		)	—				(39,617		)	(5,232		)	(44,865		)	(14,809		)	(16,742		)	—				(81,648		)
Investment in businesses	—			(1,749		)	—			(5		)	—				(1,754		)	—			(3,286		)	—			(5		)	—				(3,291		)
Proceeds from sale of assets and businesses	—			691			—			—			—				691			1,655			5,017			—			—			—				6,672
Net cash used in investing activities	(2,269		)	(25,291		)	(6,837		)	(521,642		)	—				(556,039		)	(3,577		)	(45,800		)	(14,831		)	(531,763		)	—				(595,971		)
Financing activities
Borrowings on revolving facilities	165,000			—			—			—			—				165,000			265,000			—			—			—			—				265,000
Payments on revolving facilities	(150,000		)	—			—			—			—				(150,000		)	(345,000		)	—			—			—			—				(345,000		)
Proceeds from term loans (financing costs)	(11		)	—			—			779,915			—				779,904			(11		)	—			—			779,915			—				779,904
Payments on term loans	(2,875		)	—			—			—			—				(2,875		)	(5,750		)	—			—			—			—				(5,750		)
Revolving facility debt issuance costs	(837		)	—			—			(496		)	—				(1,333		)	(837		)	—			—			(496		)	—				(1,333		)
Borrowings of other debt	5,549			—			5,326			725			—				11,600			5,549			—			9,820			4,559			—				19,928
Principal payments on other debt	(3,226		)	(145		)	(957		)	(1,581		)	—				(5,909		)	(5,987		)	(261		)	(2,400		)	(2,873		)	—				(11,521		)
Dividends paid to Holdings	(122		)	—			—			—			—				(122		)	(889		)	—			—			—			—				(889		)
Equity investment by Holdings	738			—			—			—			—				738			1,620			—			—			—			—				1,620
Intercompany	(10,873		)	22,125			(1,863		)	(9,389		)	—				—			90,589			(45,661		)	(27,290		)	(17,638		)	—				—
Decrease in overdrafts	(7,916		)	—			—			—			—				(7,916		)	(6,171		)	—			—			—			—				(6,171		)
Proceeds from issuance of non-controlling interests																				—			—			957			1,969			—				2,926
Distributions to non-controlling interests	—			—			(1,266		)	(285,375		)	—				(286,641		)	—			(1,450		)	(1,681		)	(298,082		)	—				(301,213		)
Net cash provided by (used in) financing activities	(4,573		)	21,980			1,240			483,799			—				502,446			(1,887		)	(47,372		)	(20,594		)	467,354			—				397,501
Net increase (decrease) in cash and cash equivalents	—			646			(812		)	(2,700		)	—				(2,866		)	15,001			1,504			(165		)	2,140			—				18,480
Cash and cash equivalents at beginning of period	73			4,856			4,561			113,059			—				122,549			73			4,856			4,561			113,059			—				122,549
Cash and cash equivalents at end of period	$	73		$	5,502		$	3,749		$	110,359		$	—			$	119,683		$	15,074		$	6,360		$	4,396		$	115,199		$	—			$	141,029

_______________________________________________________________________________


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

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

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

Forward-Looking Statements

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

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

changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

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


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

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

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

our plans and expectations related to our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;

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

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

shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;

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

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

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

a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and

other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as such risk factors may be updated from time to time in our periodic filings with the SEC.

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

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

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of ~~March 31,~~June 30, 2019, we had operations in 47 states and the District of Columbia. We operated 97100 critical illness recovery hospitals in 28 states, 2728 rehabilitation hospitals in 1112 states, and ~~1,684~~1,695 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated ~~525~~526 occupational health centers in 41 states as of ~~March 31,~~June 30, 2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenues of ~~$1,324.6~~$2,686.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019. Of this total, we earned approximately ~~35%~~34% of our net operating revenues from our critical illness recovery hospital segment, approximately ~~14%~~12% from our rehabilitation hospital segment, approximately ~~21%~~19% from our outpatient rehabilitation segment, and approximately 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 our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. 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 consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.

During the three months ended June 30, 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”). 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 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:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2019			2018			2019			2018			2019
	(in thousands)						(in thousands)
Net income	$	43,982		$	53,344		$	60,559		$	59,986		$	104,541		$	113,330
Income tax expense	12,294			18,467			21,106			20,826			33,400			39,293
Interest expense	47,163			50,811			50,159			51,464			97,322			102,275
Non-operating gain	(399		)	(6,532		)	(6,478		)	—			(6,877		)	(6,532		)
Equity in earnings of unconsolidated subsidiaries	(4,697		)	(4,366		)	(4,785		)	(7,394		)	(9,482		)	(11,760		)
Loss on early retirement of debt	10,255			—			—			—			10,255			—
Income from operations	108,598			111,724			120,561			124,882			229,159			236,606
Stock compensation expense:
Included in general and administrative	3,990			4,748			4,047			4,796			8,037			9,544
Included in cost of services	937			1,507			1,937			1,562			2,874			3,069
Depreciation and amortization	46,771			52,138			51,724			54,993			98,495			107,131
U.S. HealthWorks acquisition costs	2,936			—			(41		)	—			2,895			—
Adjusted EBITDA	$	163,232		$	170,117		$	178,228		$	186,233		$	341,460		$	356,350

Summary Financial Results

Three Months Ended ~~March 31,~~June 30, 2019

For the three months ended ~~March 31,~~June 30, 2019, our net operating revenues increased ~~5.7%~~5.0% to ~~$1,324.6~~$1,361.4 million, compared to ~~$1,253.0~~$1,296.2 million for the three months ended ~~March 31,~~June 30, 2018. Income from operations increased ~~2.9%~~3.6% to ~~$111.7~~$124.9 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~$108.6~~$120.6 million for the three months ended ~~March 31,~~June 30, 2018.

Net income ~~increased 21.3% to $53.3~~was $60.0 million for the three months ended ~~March 31,~~June 30, 2019, compared to ~~$44.0~~$60.6 million for the three months ended ~~March 31,~~June 30, 2018. Net income included a pre-tax non-operating gain of $6.5 million for the three months ended ~~March 31, 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~~June 30, 2018.

Adjusted EBITDA increased 4.5% to $186.2 million for the three months ended ~~March 31, 2018.~~

~~Adjusted EBITDA increased 4.2%~~June 30, 2019, compared to ~~$170.1~~$178.2 million for the three months ended ~~March 31, 2019, compared to $163.2 million for the three months ended March 31,~~June 30, 2018. Our Adjusted EBITDA margin was ~~12.8%~~13.7% for both the three months ended ~~March 31,~~June 30, 2019 ~~compared to 13.0% for the three months ended March 31,~~and 2018.

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


	Three Months Ended March 31, 2019																		Three Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues	$	462,159		$	188,954		$	277,197		$	396,321		$	—		$	1,324,631		$	461,143		$	160,374		$	261,891		$	413,451		$	64,505		$	1,361,364
Operating expenses	389,161			163,157			248,206			330,830			29,415			1,160,769			397,005			130,406			219,307			338,131			96,640			1,181,489
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138			14,495			6,696			6,991			24,479			2,332			54,993
Income (loss) from operations	$	61,547		$	19,395		$	21,959		$	40,587		$	(31,764	)	$	111,724		$	49,643		$	23,272		$	35,593		$	50,841		$	(34,467	)	$	124,882
Depreciation and amortization	11,451			6,402			7,032			24,904			2,349			52,138			14,495			6,696			6,991			24,479			2,332			54,993
Stock compensation expense	—			—			—			767			5,488			6,255			—			—			—			767			5,591			6,358
Adjusted EBITDA	$	72,998		$	25,797		$	28,991		$	66,258		$	(23,927	)	$	170,117		$	64,138		$	29,968		$	42,584		$	76,087		$	(26,544	)	$	186,233
Adjusted EBITDA margin	15.8		%	13.7		%	10.5		%	16.7		%	N/M			12.8		%	13.9		%	18.7		%	16.3		%	18.4		%	N/M			13.7		%

Three Months Ended March 31, 2018
Critical Illness Recovery Hospital Rehabilitation Hospital
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 June 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues⁽¹⁾	$	442,452		$	144,779		$	253,914		$	412,823		$	42,242		$	1,296,210
Operating expenses⁽¹⁾	381,727			116,584			211,967			341,352			72,295			1,123,925
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724
Income (loss) from operations	$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724
Stock compensation expense	—			—			—			1,138			4,846			5,984
U.S. HealthWorks acquisition costs	—			—			—			(41		)	—			(41		)
Adjusted EBITDA	$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)	$	178,228
Adjusted EBITDA margin	13.7		%	19.5		%	16.5		%	17.6		%	N/M			13.7		%

The following table summarizes changes in segment performance measures for the three months ended ~~March 31,~~June 30, 2019, compared to the three months ended ~~March 31,~~June 30, 2018:



	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	4.2	%	10.8	%	3.1	%	0.2	%	52.7	%	5.0	%
Change in income from operations	1.8	%	4.9	%	1.0	%	8.7	%	(6.4	)%	3.6	%
Change in Adjusted EBITDA	5.6	%	6.3	%	1.5	%	4.8	%	(5.3	)%	4.5	%

_______________________________________________________________________________

Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
Change in net operating revenues (0.5 )% 8.1 % 7.7 % 11.3 % N/M
5.7 %
Change in income from operations (0.6 )% (7.9 )% (8.1 )% 21.1 % (0.0 )% 2.9 %
Change in Adjusted EBITDA 0.0 % (3.7 )% (5.0 )% 14.6 % 3.7 % 4.2 %

N/M — Not meaningful.


(1)	For the three months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Six Months Ended June 30, 2019

For the six months ended June 30, 2019, our net operating revenues increased 5.4% to $2,686.0 million, compared to $2,549.2 million for the six months ended June 30, 2018. Income from operations increased 3.2% to $236.6 million for the six months ended June 30, 2019, compared to $229.2 million for the six months ended June 30, 2018.

Net income increased 8.4% to $113.3 million for the six months ended June 30, 2019, compared to $104.5 million for the six months ended June 30, 2018. Net income included a pre-tax non-operating gain of $6.5 million for the six months ended June 30, 2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, pre-tax non-operating gains of $6.9 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the six months ended June 30, 2018.

Adjusted EBITDA increased 4.4% to $356.4 million for the six months ended June 30, 2019, compared to $341.5 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin was 13.3% for the six months ended June 30, 2019, compared to 13.4% for the six months ended June 30, 2018.

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



	Six Months Ended June 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues	$	918,677		$	314,932		$	508,796		$	809,772		$	133,818		$	2,685,995
Operating expenses	781,541			259,167			437,221			668,961			195,368			2,342,258
Depreciation and amortization	25,946			13,098			14,023			49,383			4,681			107,131
Income (loss) from operations	$	111,190		$	42,667		$	57,552		$	91,428		$	(66,231	)	$	236,606
Depreciation and amortization	25,946			13,098			14,023			49,383			4,681			107,131
Stock compensation expense	—			—			—			1,534			11,079			12,613
Adjusted EBITDA	$	137,136		$	55,765		$	71,575		$	142,345		$	(50,471	)	$	356,350
Adjusted EBITDA margin	14.9		%	17.7		%	14.1		%	17.6		%	N/M			13.3		%



	Six Months Ended June 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Net operating revenues⁽¹⁾	$	907,128		$	288,087		$	498,145		$	768,939		$	86,875		$	2,549,174
Operating expenses⁽¹⁾	773,431			233,116			425,673			642,818			146,482			2,221,520
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495
Income (loss) from operations	$	110,687		$	43,234		$	59,131		$	80,277		$	(64,170	)	$	229,159
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495
Stock compensation expense	—			—			—			1,349			9,562			10,911
U.S. HealthWorks acquisition costs	—			—			—			2,895			—			2,895
Adjusted EBITDA	$	133,697		$	54,971		$	72,472		$	130,365		$	(50,045	)	$	341,460
Adjusted EBITDA margin	14.7		%	19.1		%	14.5		%	17.0		%	N/M			13.4		%

The following table summarizes changes in segment performance measures for the six months ended June 30, 2019, compared to the six months ended June 30, 2018:



	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	1.3	%	9.3	%	2.1	%	5.3	%	54.0	%	5.4	%
Change in income from operations	0.5	%	(1.3	)%	(2.7	)%	13.9	%	(3.2	)%	3.2	%
Change in Adjusted EBITDA	2.6	%	1.4	%	(1.2	)%	9.2	%	(0.9	)%	4.4	%

_______________________________________________________________________________

N/M — Not meaningful.


(1)	For the six months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 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 ~~27%~~26% of our net operating revenues for ~~both~~ the ~~three~~six months ended ~~March 31,~~June 30, 2019, and 27% of our net operating revenues for the year ended December 31, 2018.

Medicare Reimbursement of LTCH Services

There have been significant regulatory changes affecting 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 critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”).

The following is a summary of significant changes to 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 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 Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further impacted 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 August 17, 2018, CMS published the 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 was set at $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 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. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $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 was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.

Fiscal Year 2020. On ~~April 23,~~May 3, 2019, CMS ~~released an advanced copy of~~published 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.

25 Percent Rule

The “25 Percent Rule” was a downward payment adjustment that 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 with the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period.

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.

For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a temporary, one-time adjustment to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-time adjustment to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.

Medicare Reimbursement of 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 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.

Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 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 by the Medicare Access and CHIP Reauthorization Act of 2015, which 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 August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 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 increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.

Fiscal Year 2020. On ~~April 17,~~July 31, 2019, CMS released an advanced copy of the ~~proposed~~final rule updating 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~~was set at ~~$16,573,~~$16,489, 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~~included a market basket increase of ~~3.0%~~2.9%, less a productivity adjustment of ~~0.5%~~0.4%. CMS ~~proposed to increase~~increased 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 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 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 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 clinician’s payment for a year. Each year from 2019 through 2024 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.

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

In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning on January 1, 2022.

Operating Statistics

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

Three Months Ended March 31,
2018 2019
Critical illness recovery hospital data:

Number of hospitals owned—start of period 99
96
Number of hospital start-ups 1
—
Number of hospitals closed/sold (1 ) —
Number of hospitals owned—end of period 99
96
Number of hospitals managed—end of period —
1
Total number of hospitals (all)—end of period 99
97
Available licensed beds⁽¹⁾
4,158
4,071
Admissions⁽¹⁾
9,833
9,456
Patient days⁽¹⁾
265,840
258,129
Average length of stay (days)⁽¹⁾
27
28
Net revenue per patient day⁽¹⁾⁽²⁾
$ 1,730
$ 1,759
Occupancy rate⁽¹⁾
71 % 71 %
Percent patient days—Medicare⁽¹⁾
53 % 53 %
Rehabilitation hospital data:
Number of hospitals owned—start of period 16
17
Number of hospitals acquired —
1
Number of hospitals owned—end of period 16
18
Number of hospitals managed—end of period 8
9
Total number of hospitals (all)—end of period 24
27
Available licensed beds⁽¹⁾
1,133
1,239
Admissions⁽¹⁾
5,394
5,836
Patient days⁽¹⁾
76,890
82,816
Average length of stay (days)⁽¹⁾
14
14
Net revenue per patient day⁽¹⁾⁽²⁾
$ 1,623
$ 1,633
Occupancy rate⁽¹⁾
75 % 76 %
Percent patient days—Medicare⁽¹⁾
54 % 52 %
Outpatient rehabilitation data:
Number of clinics owned—start of period 1,447
1,423
Number of clinics acquired 3
4
Number of clinic start-ups 8
11
Number of clinics closed/sold (9 ) (31 )
Number of clinics owned—end of period 1,449
1,407
Number of clinics managed—end of period 168
277
Total number of clinics (all)—end of period 1,617
1,684
Number of visits⁽¹⁾
2,067,465
2,054,483
Net revenue per visit⁽¹⁾⁽³⁾
$ 103
$ 103
Concentra data:

Number of centers owned—start of period 312
524
Number of centers acquired 219
1
Number of centers owned—end of period 531
525
Number of onsite clinics operated—end of period 124
129
Number of CBOCs owned—end of period 32
31
Number of visits⁽¹⁾
2,596,059
2,911,607
Net revenue per visit⁽¹⁾⁽³⁾
$ 124
$ 124



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2019			2018			2019
Critical illness recovery hospital data:
Number of hospitals owned—start of period	99			96			99			96
Number of hospitals acquired	—			3			—			3
Number of hospital start-ups	—			—			1			—
Number of hospitals closed/sold	(1		)	—			(2		)	—
Number of hospitals owned—end of period	98			99			98			99
Number of hospitals managed—end of period	—			1			—			1
Total number of hospitals (all)—end of period	98			100			98			100
Available licensed beds⁽¹⁾	4,124			4,230			4,124			4,230
Admissions⁽¹⁾	9,121			9,172			18,954			18,628
Patient days⁽¹⁾	256,132			262,860			521,972			520,989
Average length of stay (days)⁽¹⁾	28			28			28			28
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,710		$	1,739		$	1,721		$	1,749
Occupancy rate⁽¹⁾	68		%	69		%	69		%	70		%
Percent patient days—Medicare⁽¹⁾	53		%	50		%	53		%	52		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	16			18			16			17
Number of hospitals start-ups	1			1			1			2
Number of hospitals owned—end of period	17			19			17			19
Number of hospitals managed—end of period	9			9			9			9
Total number of hospitals (all)—end of period	26			28			26			28
Available licensed beds⁽¹⁾	1,189			1,299			1,189			1,299
Admissions⁽¹⁾	5,455			6,017			10,849			11,853
Patient days⁽¹⁾	77,415			86,525			154,305			169,341
Average length of stay (days)⁽¹⁾	14			14			14			14
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,608		$	1,635		$	1,615		$	1,634
Occupancy rate⁽¹⁾	73		%	75		%	74		%	76		%
Percent patient days—Medicare⁽¹⁾	54		%	50		%	54		%	51		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,449			1,407			1,447			1,423
Number of clinics acquired	11			10			14			14
Number of clinic start-ups	10			11			18			22
Number of clinics closed/sold	(35		)	(9		)	(44		)	(40		)
Number of clinics owned—end of period	1,435			1,419			1,435			1,419
Number of clinics managed—end of period	203			276			203			276
Total number of clinics (all)—end of period	1,638			1,695			1,638			1,695
Number of visits⁽¹⁾	2,144,655			2,203,505			4,212,120			4,257,988
Net revenue per visit⁽¹⁾⁽³⁾	$	103		$	102		$	103		$	103
Concentra data:
Number of centers owned—start of period	531			525			312			524
Number of centers acquired	—			4			219			5
Number of centers closed/sold	(4		)	(3		)	(4		)	(3		)
Number of centers owned—end of period	527			526			527			526
Number of onsite clinics operated—end of period	123			129			123			129
Number of CBOCs owned—end of period	31			33			31			33
Number of visits⁽¹⁾	3,024,121			3,103,089			5,620,180			6,014,696
Net revenue per visit⁽¹⁾⁽³⁾	$	125		$	121		$	125		$	122


(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.

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 June 30,				Six Months Ended June 30,
	2018		2019		2018		2019		2018		2019
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services, exclusive of depreciation and amortization⁽¹⁾	85.1		85.5		84.5		84.5		84.8		85.0
General and administrative	2.5		2.2		2.3		2.3		2.4		2.2
Depreciation and amortization	3.7		3.9		3.9		4.0		3.8		4.0
Income from operations	8.7		8.4		9.3		9.2		9.0		8.8
Loss on early retirement of debt	(0.8	)	—		—		—		(0.4	)	—
Equity in earnings of unconsolidated subsidiaries	0.4		0.3		0.4		0.5		0.4		0.5
Non-operating gain	0.0		0.5		0.5		—		0.2		0.2
Interest expense	(3.8	)	(3.8	)	(3.9	)	(3.8	)	(3.8	)	(3.8	)
Income before income taxes	4.5		5.4		6.3		5.9		5.4		5.7
Income tax expense	1.0		1.4		1.6		1.5		1.3		1.5
Net income	3.5		4.0		4.7		4.4		4.1		4.2
Net income attributable to non-controlling interests	0.8		0.9		1.1		1.1		1.0		1.0
Net income attributable to Holdings and Select	2.7	%	3.1	%	3.6	%	3.3	%	3.1	%	3.2	%

_______________________________________________________________________________


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

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


	Three Months Ended March 31,								Three Months Ended June 30,								Six Months Ended June 30,
	2018			2019			% Change		2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change
	(in thousands)								(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	464,676		$	462,159		(0.5	)%	$	442,452		$	461,143		4.2	%	$	907,128		$	918,677		1.3	%
Rehabilitation hospital	174,774			188,954			8.1		144,779			160,374			10.8		288,087			314,932			9.3
Outpatient rehabilitation	257,381			277,197			7.7		253,914			261,891			3.1		498,145			508,796			2.1
Concentra	356,116			396,321			11.3		412,823			413,451			0.2		768,939			809,772			5.3
Other⁽¹⁾	17			—			N/M		42,242			64,505			52.7		86,875			133,818			54.0
Total Company	$	1,252,964		$	1,324,631		5.7	%	$	1,296,210		$	1,361,364		5.0	%	$	2,549,174		$	2,685,995		5.4	%
Income (loss) from operations:
Critical illness recovery hospital	$	61,914		$	61,547		(0.6	)%	$	48,773		$	49,643		1.8	%	$	110,687		$	111,190		0.5	%
Rehabilitation hospital	21,054			19,395			(7.9	)	22,180			23,272			4.9		43,234			42,667			(1.3	)
Outpatient rehabilitation	23,888			21,959			(8.1	)	35,243			35,593			1.0		59,131			57,552			(2.7	)
Concentra	33,503			40,587			21.1		46,774			50,841			8.7		80,277			91,428			13.9
Other⁽¹⁾	(31,761		)	(31,764		)	(0.0	)	(32,409		)	(34,467		)	(6.4	)	(64,170		)	(66,231		)	(3.2	)
Total Company	$	108,598		$	111,724		2.9	%	$	120,561		$	124,882		3.6	%	$	229,159		$	236,606		3.2	%
Adjusted EBITDA:
Critical illness recovery hospital	$	72,972		$	72,998		0.0	%	$	60,725		$	64,138		5.6	%	$	133,697		$	137,136		2.6	%
Rehabilitation hospital	26,776			25,797			(3.7	)	28,195			29,968			6.3		54,971			55,765			1.4
Outpatient rehabilitation	30,525			28,991			(5.0	)	41,947			42,584			1.5		72,472			71,575			(1.2	)
Concentra	57,797			66,258			14.6		72,568			76,087			4.8		130,365			142,345			9.2
Other⁽¹⁾	(24,838		)	(23,927		)	3.7		(25,207		)	(26,544		)	(5.3	)	(50,045		)	(50,471		)	(0.9	)
Total Company	$	163,232		$	170,117		4.2	%	$	178,228		$	186,233		4.5	%	$	341,460		$	356,350		4.4	%
Adjusted EBITDA margins:
Critical illness recovery hospital	15.7		%	15.8		%			13.7		%	13.9		%			14.7		%	14.9		%
Rehabilitation hospital	15.3			13.7					19.5			18.7					19.1			17.7
Outpatient rehabilitation	11.9			10.5					16.5			16.3					14.5			14.1
Concentra	16.2			16.7					17.6			18.4					17.0			17.6
Other⁽¹⁾	N/M			N/M					N/M			N/M					N/M			N/M
Total Company	13.0		%	12.8		%			13.7		%	13.7		%			13.4		%	13.3		%
Total assets:
Critical illness recovery hospital	$	1,862,791		$	2,062,659				$	1,828,038		$	2,119,574				$	1,828,038		$	2,119,574
Rehabilitation hospital	877,750			1,089,391					867,175			1,107,852					867,175			1,107,852
Outpatient rehabilitation	973,122			1,250,015					979,678			1,265,487					979,678			1,265,487
Concentra	2,143,405			2,464,317					2,174,931			2,447,387					2,174,931			2,447,387
Other⁽¹⁾	111,575			155,110					114,978			166,640					114,978			166,640
Total Company	$	5,968,643		$	7,021,492				$	5,964,800		$	7,106,940				$	5,964,800		$	7,106,940
Purchases of property and equipment, net:
Purchases of property and equipment:
Critical illness recovery hospital	$	10,472		$	10,160				$	12,849		$	14,488				$	23,321		$	24,648
Rehabilitation hospital	12,917			13,183					8,080			5,356					20,997			18,539
Outpatient rehabilitation	7,338			9,040					8,018			6,705					15,356			15,745
Concentra	6,621			15,698					10,121			12,240					16,742			27,938
Other⁽¹⁾	2,269			992					2,963			1,423					5,232			2,415
Total Company	$	39,617		$	49,073				$	42,031		$	40,212				$	81,648		$	89,285


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


(2)	For the three and six months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

N/M — Not meaningful.

Three Months Ended ~~March 31,~~June 30, 2019, Compared to Three Months Ended ~~March 31,~~June 30, 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, 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 5.0% to $1,361.4 million for the three months ended June 30, 2019, compared to $1,296.2 million for the three months ended June 30, 2018.

Critical Illness Recovery Hospital Segment. Net operating revenues increased 4.2% to $461.1 million for the three months ended June 30, 2019, compared to $442.5 million for the three months ended June 30, 2018. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 2.6% to 262,860 days for the three months ended June 30, 2019, compared to 256,132 days for the three months ended June 30, 2018. The increase in patient days was principally due to the acquisition of three hospitals during the three months ended June 30, 2019, offset in part by a decrease in patient days from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. For the three months ended June 30, 2019, our net revenue per patient day increased 1.7% to $1,739, as compared to $1,710 for the three months ended June 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased 10.8% to $160.4 million for the three months ended June 30, 2019, compared to $144.8 million for the three months ended June 30, 2018. Our patient days increased 11.8% to 86,525 days for the three months ended June 30, 2019, compared to 77,415 days for the three months ended June 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced an increase in patient days within our existing hospitals. Our net revenue per patient day increased 1.7% to $1,635 for the three months ended June 30, 2019, compared to $1,608 for the three months ended June 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 3.1% to $261.9 million for the three months ended June 30, 2019, compared to $253.9 million for the three months ended June 30, 2018. The increase in net operating revenues was principally attributable to an increase in visits, which increased 2.7% to 2,203,505 for the three months ended June 30, 2019, compared to 2,144,655 visits for the three months ended June 30, 2018. The increase in visits was due to growth within both our existing clinics and new outpatient rehabilitation clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since June 30, 2018. These clinics contributed 69,295 visits during the three months ended June 30, 2018. During the three months ended June 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $102 for the three months ended June 30, 2019, compared to $103 for the three months ended June 30, 2018.

Concentra Segment. Net operating revenues increased to $413.5 million for the three months ended June 30, 2019, compared to $412.8 million for the three months ended June 30, 2018. Visits in our centers increased 2.6% to 3,103,089 visits for the three months ended June 30, 2019, compared to 3,024,121 visits for the three months ended June 30, 2018. Net revenue per visit was $121 for the three months ended June 30, 2019, compared to $125 for the three months ended June 30, 2018. The decrease in net revenue per visit was principally due to an increased proportion of employer service visits, which yield lower per visit rates.

Other. Net operating revenues increased to $64.5 million for the three months ended June 30, 2019, compared to $42.2 million for the three months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net operating revenues was due to both new employee leasing arrangements entered into since June 30, 2018, as well as increased services provided under existing employee leasing arrangements.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,181.5 million, or 86.8% of net operating revenues, for the three months ended June 30, 2019, compared to $1,123.9 million, or 86.8% of net operating revenues, for the three months ended June 30, 2018. Our cost of services, a major component of which is labor expense, was $1,150.2 million, or 84.5% of net operating revenues, for the three months ended June 30, 2019, compared to $1,094.7 million, or 84.5% of net operating revenues, for the three months ended June 30, 2018. Our operating expenses, relative to our net operating revenues, were adversely impacted by an increase in expenses incurred by our start-up rehabilitation hospitals during the three months ended June 30, 2019. General and administrative expenses were $31.3 million, or 2.3% of net operating revenues, for the three months ended June 30, 2019, compared to $29.2 million, or 2.3% of net operating revenues, for the three months ended June 30, 2018.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 5.6% to $64.1 million for the three months ended June 30, 2019, compared to $60.7 million for the three months ended June 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 13.9% for the three months ended June 30, 2019, compared to 13.7% for the three months ended June 30, 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.”

Rehabilitation Hospital Segment. Adjusted EBITDA increased 6.3% to $30.0 million for the three months ended June 30, 2019, compared to $28.2 million for the three months ended June 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 18.7% for the three months ended June 30, 2019, compared to 19.5% for the three months ended June 30, 2018. The increase in Adjusted EBITDA was primarily attributable to an increase in patient volume at several of our existing hospitals. Our Adjusted EBITDA and Adjusted EBITDA margins were adversely impacted by Adjusted EBITDA losses in our start-up hospitals. Adjusted EBITDA start-up losses were $6.0 million for the three months ended June 30, 2019, compared to $2.1 million for the three months ended June 30, 2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA increased 1.5% to $42.6 million for the three months ended June 30, 2019, compared to $41.9 million for the three months ended June 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 16.3% for the three months ended June 30, 2019, compared to 16.5% for the three months ended June 30, 2018. For the three months ended June 30, 2019, our Adjusted EBITDA increased as a result of newly acquired and developed clinics. Our Adjusted EBITDA margin was adversely impacted by increases in employee costs relative to our net operating revenues during the three months ended June 30, 2019.

Concentra Segment. Adjusted EBITDA increased 4.8% to $76.1 million for the three months ended June 30, 2019, compared to $72.6 million for the three months ended June 30, 2018. Our Adjusted EBITDA margin for the Concentra segment was 18.4% for the three months ended June 30, 2019, compared to 17.6% for the three months ended June 30, 2018. The increases in Adjusted EBITDA and 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 $26.5 million for the three months ended June 30, 2019, compared to an Adjusted EBITDA loss of $25.2 million for the three months ended June 30, 2018. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was $55.0 million for the three months ended June 30, 2019, compared to $51.7 million for the three months ended June 30, 2018. The increase principally occurred within our critical illness recovery hospital segment. During the three months ended June 30, 2019, certificate of need regulations were repealed in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the three months ended June 30, 2019.

Income from Operations

For the three months ended June 30, 2019, we had income from operations of $124.9 million, compared to $120.6 million for the three months ended June 30, 2018. The increase in income from operations resulted principally from our Concentra segment.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended June 30, 2019, we had equity in earnings of unconsolidated subsidiaries of $7.4 million, compared to $4.8 million for the three months ended June 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.

Non-Operating Gain

We recognized a non-operating gain of $6.5 million during the three months ended June 30, 2018. The non-operating gain was principally attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.

Interest Expense

Interest expense was $51.5 million for the three months ended June 30, 2019, compared to $50.2 million for the three months ended June 30, 2018. The increase in interest expense was principally due to an increase in the variable interest rates associated with the Concentra credit facilities.

Income Taxes

We recorded income tax expense of $20.8 million for the three months ended June 30, 2019, which represented an effective tax rate of 25.8%. We recorded income tax expense of $21.1 million for the three months ended June 30, 2018, which represented an effective tax rate of 25.8%.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was $15.2 million for the three months ended June 30, 2019, compared to $14.0 million for the three months ended June 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment.

Six Months Ended June 30, 2019, Compared to Six Months Ended June 30, 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 ~~5.7%~~5.4% to ~~$1,324.6~~$2,686.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$1,253.0~~$2,549.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Critical Illness Recovery Hospital Segment. Net operating revenues ~~were $462.2~~increased 1.3% to $918.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$464.7~~$907.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. ~~Our patient days were 258,129 days for the three months ended March 31, 2019, compared to 265,840 days for the three months ended March 31, 2018.~~ The ~~decline in patient days, which was the~~ primary cause of the ~~decrease~~increase in net operating revenues was ~~principally attributable~~due to ~~three hospitals that have closed since March 31, 2018, as well as the temporary closure of~~increases in both 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 inMedicare and non-Medicare net revenue per patient day. Net revenue per patient day increased ~~1.7%~~1.6% to ~~$1,759~~$1,749 for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$1,730~~$1,721 for the ~~three~~six months ended ~~March 31,~~June 30, 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~~Our patient days were 520,989 days for the ~~three~~six months ended ~~March 31, 2019.~~June 30, 2019, compared to 521,972 days for the six months ended June 30, 2018.

Rehabilitation Hospital Segment. Net operating revenues increased ~~8.1%~~9.3% to ~~$189.0~~$314.9 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$174.8~~$288.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in net operating revenues resulted primarily from an increase in patient volumes during the ~~three~~six months ended ~~March 31,~~June 30, 2019. Our patient days increased ~~7.7%~~9.7% to ~~82,816~~169,341 days for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~76,890~~154,305 days for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in patient days ~~occurred within~~was principally driven by our ~~two new~~ rehabilitation hospitals which recently commenced ~~operations after March 31, 2018, and within~~operations. We also experienced an increase in patient days in our existing hospitals. Our net revenue per patient day increased ~~0.6%~~1.2% to ~~$1,633~~$1,634 for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$1,623~~$1,615 for the ~~three~~six months ended ~~March 31,~~June 30, 2018. During the three months ended March 31, 2019, we also experienced an increase in net operating revenues related to contracted labor services provided to entities in which we have made equity investments.

Outpatient Rehabilitation Segment. Net operating revenues increased ~~7.7%~~2.1% to ~~$277.2~~$508.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$257.4~~$498.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in net operating revenues was principally ~~attributable~~due to an increase in ~~contracted labor services provided~~visits, which increased 1.1% to ~~entities~~4,257,988 for the six months ended June 30, 2019, compared to 4,212,120 visits for the six months ended June 30, 2018. The increase in ~~which~~visits was due to growth within both our existing clinics and new outpatient rehabilitation clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since June 30, 2018. These clinics contributed 168,003 visits during the six months ended June 30, 2018. During the six months ended June 30, 2019, we ~~have made equity investments and~~also experienced an increase in management fee ~~revenues.~~revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the ~~three~~six months ended ~~March 31,~~June 30, 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.

Concentra Segment. Net operating revenues increased ~~11.3%~~5.3% to ~~$396.3~~$809.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$356.1~~$768.9 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Visits in our centers increased ~~12.2%~~7.0% to ~~2,911,607~~6,014,696 for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~2,596,059~~5,620,180 visits for the ~~three~~six months ended ~~March 31,~~June 30, 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 was ~~$124~~$122 for ~~both~~ the ~~three~~six months ended ~~March 31,~~June 30, 2019, ~~and~~compared to $125 for the six months ended June 30, 2018. The decrease in net revenue per visit was principally due to an increased proportion of employer service visits, which yield lower per visit rates.

Other. Net operating revenues increased to $133.8 million for the six months ended June 30, 2019, compared to $86.9 million for the six months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net operating revenues was due to both new employee leasing arrangements entered into since June 30, 2018, as well as increased services provided under existing employee leasing arrangements.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were ~~$1,160.8~~$2,342.3 million, or ~~87.7%~~87.2% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$1,097.6~~$2,221.5 million, or ~~87.6%~~87.2% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Our cost of services, a major component of which is labor expense, was ~~$1,132.1~~$2,282.2 million, or ~~85.5%~~85.0% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$1,065.8~~$2,160.5 million, or ~~85.1%~~84.8% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Our operating expenses, relative to our net operating revenues, were adversely 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.hospitals. General and administrative expenses were ~~$28.7~~$60.0 million, or 2.2% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2019. General and administrative expenses were ~~$31.8~~$61.0 million, or ~~2.5%~~2.4% of net operating revenues, for the ~~three~~six months ended ~~March 31,~~June 30, 2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA ~~was $73.0~~increased 2.6% to $137.1 million f~~or both~~for the ~~three~~six months ended ~~March 31,~~June 30, 2019, ~~and March 31,~~compared to $133.7 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~15.8%~~14.9% for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~15.7%~~14.7% for the ~~three~~six months ended ~~March 31,~~June 30, 2018. ~~Our~~The increase in Adjusted EBITDA for our critical illness recovery hospital segment ~~experienced a decrease~~was primarily driven by an increase in ~~Adjusted EBITDA of $1.6 million during the three months ended March 31, 2019,~~net revenue per patient day, as compared to the three months ended March 31, 2018, as a result of the temporary closure of our hospital located in Panama City, Florida. The temporary closure resulted from damage sustained from Hurricane Michael in October 2018.discussed above under “Net Operating Revenues.”

Rehabilitation Hospital Segment. Adjusted EBITDA ~~was $25.8~~increased 1.4% to $55.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$26.8~~$55.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was ~~13.7%~~17.7% for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~15.3%~~19.1% for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The ~~decreases~~increase in Adjusted EBITDA ~~and~~was primarily attributable to an increase in patient volume at several of our existing hospitals. The decrease in Adjusted EBITDA margin for our rehabilitation hospital segment ~~were~~was primarily driven by ~~an increase 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~~six months ended ~~March 31, 2019, as described above under “Operating Expenses~~.”June 30, 2019. Adjusted EBITDA start-up losses were ~~$2.8~~$8.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$0.8~~$3.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA was ~~$29.0~~$71.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$30.5~~$72.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~10.5%~~14.1% for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~11.9%~~14.5% for the ~~three~~six months ended ~~March 31,~~June 30, 2018. For the ~~three~~six months ended ~~March 31,~~June 30, 2019, our Adjusted EBITDA and Adjusted EBITDA margin were adversely 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 an increase in our contracted labor services, which we provide at cost.~~

Concentra Segment. Adjusted EBITDA increased ~~14.6%~~9.2% to ~~$66.3~~$142.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$57.8~~$130.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was ~~16.7%~~17.6% for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~16.2%~~17.0% for the ~~three~~six months ended ~~March 31, 2018.The increase~~June 30, 2018. The increases in Adjusted EBITDA and 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~~$50.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to an Adjusted EBITDA loss of ~~$24.8~~$50.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Depreciation and Amortization

Depreciation and amortization expense was ~~$52.1~~$107.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$46.8~~$98.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in our Concentra segment was principally due to the acquisition of U.S. HealthWorks, which we acquired on February 1, 2018. The increase in our critical illness recovery hospital segment was principally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the six months ended June 30, 2019.

Income from Operations

For the ~~three~~six months ended ~~March 31,~~June 30, 2019, we had income from operations of ~~$111.7~~$236.6 million, compared to ~~$108.6~~$229.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in income from operations resulted principally from our Concentra segment.

Loss on Early Retirement of Debt

During the ~~three~~six months ended ~~March 31,~~June 30, 2018, we amended both Select’s senior secured credit facilities and Concentra’s first lien credit agreement which resulted in losses on early retirement of debt of $10.3 million during the ~~three~~six months ended ~~March 31,~~June 30, 2018.

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~~six months ended ~~March 31,~~June 30, 2019, we had equity in earnings of unconsolidated subsidiaries of ~~$4.4~~$11.8 million, compared to ~~$4.7~~$9.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.

Non-Operating Gain

We recognized a non-operating ~~gain~~gains of $6.5 million and $6.9 million during the ~~three~~six months ended ~~March 31, 2019.~~June 30, 2019 and 2018, respectively. The non-operating ~~gain was~~gains were principally attributable to ~~the sale~~sales of outpatient rehabilitation clinics to a non-consolidating ~~subsidiary.~~subsidiaries.

Interest Expense

Interest expense was ~~$50.8~~$102.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$47.2~~$97.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase in interest expense was principally due an increase in variable interest rates associated with the Concentra credit facilities. We also experienced an increase in interest expense due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks on February 1, 2018.

Income Taxes

We recorded income tax expense of ~~$18.5~~$39.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, which represented an effective tax rate of 25.7%. We recorded income tax expense of ~~$12.3~~$33.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018, which represented an effective tax rate of ~~21.8%~~24.2%. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, the lower effective tax rate resulted principally from the discrete tax benefits realized from certain equity interests redeemed at our Concentra subsidiary and completed in connection with the closing of the U.S. HealthWorks ~~acquisition.~~acquisition on February 1, 2018.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$12.5~~$27.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$10.2~~$24.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment. During the ~~three~~six months ended ~~March 31,~~June 30, 2018, Concentra incurred costs associated with the acquisition of U.S. HealthWorks and the amendment of Concentra’s first lien credit agreement.

Liquidity and Capital Resources

Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2019 and ~~Three~~Six Months Ended ~~March 31,~~June 30, 2018

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


	Three Months Ended March 31,						Six Months Ended June 30,
	2018			2019			2018			2019
	(in thousands)						(in thousands)
Cash flows provided by operating activities	$	50,727		$	41,762		$	216,950		$	132,914
Cash flows used in investing activities	(556,039		)	(82,799		)	(595,971		)	(227,479		)
Net cash provided by financing activities	502,446			13,674			397,501			43,423
Net decrease in cash and cash equivalents	(2,866		)	(27,363		)
Net increase (decrease) in cash and cash equivalents							18,480			(51,142		)
Cash and cash equivalents at beginning of period	122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	119,683		$	147,815		$	141,029		$	124,036

Operating activities provided ~~$41.8~~$132.9 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to ~~$50.7~~$217.0 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The ~~decrease in~~lower operating cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2019, compared to the ~~three~~six months ended ~~March 31,~~June 30, 2018, was principally driven by the change in our accounts receivable. We experienced an increase in days sales outstanding to 53 days at ~~March 31,~~June 30, 2019, compared to 51 days at December 31, 2018. We experienced a decline in days sales outstanding to 5654 days at ~~March 31,~~June 30, 2018, compared to 58 days at December 31, 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at ~~March 31,~~June 30, 2019 and December 31, 2018.

Investing activities used ~~$82.8~~$227.5 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2019. The principal uses of cash were ~~$49.1~~$89.3 million for purchases of property and equipment and ~~$33.7~~$138.3 million for investments in and acquisitions of businesses. Investing activities used ~~$556.0~~$596.0 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and ~~$39.6~~$81.6 million for purchases of property and equipment.

Financing activities provided ~~$13.7~~$43.4 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2019. The principal source of cash was net borrowings of ~~$140.0~~$175.0 million onunder the Select revolving facility. This was offset in ~~party~~part by $98.8 million and $33.9 million for mandatory prepayments of term loans under the Select credit facilities and Concentra credit facilities, respectively.

Financing activities provided ~~$502.4~~$397.5 million of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018. The principal ~~sources~~source of cash ~~were~~was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 ~~million and $15.0 million of net borrowings under the Select revolving facility.~~million. This was offset in part by ~~$286.6~~$301.2 million of distributions to non-controlling interests, of which ~~$285.4~~$294.9 million related to the redemption and reorganization transactions executed in connection with the acquisition of U.S. ~~HealthWorks.~~HealthWorks, and $80.0 million of net repayments under the Select revolving facility.

Capital Resources

Working capital. We had net working capital of ~~$167.9~~$175.4 million at ~~March 31,~~June 30, 2019, compared to $287.3 million at December 31, 2018. The decrease in net working capital was principally due to the recognition of current operating lease liabilities upon the adoption of ASC Topic 842, Leases, on January 1, 2019.

Select credit facilities.

~~During the three months ended March 31,~~In February 2019, Select made a principal prepayment of $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.

At ~~March 31,~~June 30, 2019, Select had outstanding borrowings under the Select credit facilities consisting of $1,031.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of ~~$18.1~~$17.3 million) and borrowings of ~~$160.0~~$195.0 million (excluding letters of credit) under the Select revolving facility. At ~~March 31,~~June 30, 2019, Select had ~~$251.6~~$216.6 million of availability under the Select revolving facility after giving effect to $38.4 million of outstanding letters of credit.

Select senior notes.

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of senior notes due August 15, 2026. Select intends to use a portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above), to redeem in full Select’s $710 million 6.375% senior notes due 2021, to repay in full the outstanding borrowings under Select’s revolving credit facility, and pay related fees and expenses associated with the financing.

Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated financial statements.

~~During the three months ended March 31,~~In February 2019, Concentra made a principal prepayment of $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

At ~~March 31,~~June 30, 2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$19.4~~$18.0 million). Concentra did not have any borrowings under the Concentra revolving facility. At ~~March 31,~~June 30, 2019, Concentra had ~~$62.3~~$87.3 million of availability under its revolving facility after giving effect to $12.7 million of outstanding letters of credit.

On April 8, 2019, Concentra entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5 extends the maturity date of the Concentra revolving credit facility from June 1, 2020 to June 1, 2021 and increases the aggregate commitments available under the Concentra revolving credit facility from $75.0 million to $100.0 million.

Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2019, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. ~~Holdings did not repurchase shares during~~During the ~~three~~six months ended ~~March 31, 2019.~~June 30, 2019, Holdings repurchased 902,313 shares at a cost of approximately $13.1 million, an average cost per share of $14.55, which includes transaction costs. Since the inception of the program through ~~March 31,~~June 30, 2019, Holdings has repurchased ~~35,924,128~~36,826,441 shares at a cost of approximately ~~$314.7~~$327.9 million, or ~~$8.76~~$8.90 per share, which includes transaction costs.

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

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

Recent Accounting Pronouncements

Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At ~~March 31,~~June 30, 2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$19.4~~$18.0 million), which bear interest at variable rates. Concentra did not have any borrowings under the Concentra revolving facility.

As of ~~March 31,~~June 30, 2019, each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra’s variable rate debt by ~~$6.4~~$6.5 million per annum.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of ~~March 31,~~June 30, 2019, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the ~~first~~second quarter ended ~~March 31,~~June 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

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.

ITEM 1A. RISK FACTORS

There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, 2019, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. ~~During~~

The following table provides information regarding repurchases of our common stock during the three months ended ~~March 31, 2019, Holdings did not repurchase shares under the authorized common stock repurchase program. The common stock repurchase program has available capacity of $185.2 million as of March 31,~~June 30, 2019.



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2019	33,939	$	14.58	—	$	185,249,408
May 1 - May 31, 2019	731,703	14.62		731,703	174,548,606
June 1 - June 30, 2019	170,610	14.21		170,610	172,124,038
Total	936,252	$	14.55	902,313	$	172,124,038


(1)	Includes share repurchases under our common stock repurchase program and common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not ~~applicable~~applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Number		Description
~~99.1~~10.1		Amendment No. 2,5, dated ~~January 4,~~April 8, 2019, to the ~~Select Medical~~First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative and Collateral Agent, as amended by Amendment No. 1, dated as of September 26, 2016, ~~Equity Incentive Plan~~Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, and Amendment No. 4, dated as of October 26, 2018 (incorporated by reference to Exhibit ~~99.1~~10.1 of the Current Report on Form 8-K, filed on ~~January 4,~~April 11, 2019).
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.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.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.
104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

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



	SELECT MEDICAL CORPORATION


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

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

Dated: ~~May 2,~~August 1, 2019



	SELECT MEDICAL HOLDINGS CORPORATION


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

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

Dated: ~~May 2,~~August 1, 2019

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