Edgar Filing: SELECT MEDICAL HOLDINGS CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2015

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 Number: 001 – 34465 and 001 – 31441

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of
incorporation or organization)

20-1764048

23-2872718

(I.R.S. employer identification
number)

4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055

(Address of principal executive offices and zip code)

(717) 972-1100

(Registrants’ telephone number, including area code)

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).

YES x NO o

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

Large accelerated
filer x

Accelerated
filer o

Non-accelerated
filer o
(Do not check if a smaller
reporting company)

Smaller reporting
company o

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

Large accelerated
filer o

Accelerated
filer o

Non-accelerated
filer x
(Do not check if a smaller
reporting company)

Smaller reporting
company o

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

As of March 31, 2015, Select Medical Holdings Corporation had outstanding 131,087,980 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. References to the “Company,” “we,” “us” and “our” refer collectively to Holdings and Select.

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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	5

	Condensed consolidated statements of cash flows	6

	Notes to condensed consolidated financial statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40

ITEM 4.	CONTROLS AND PROCEDURES	40

PART II	OTHER INFORMATION	41

ITEM 1.	LEGAL PROCEEDINGS	41

ITEM 1A.	RISK FACTORS	42

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43

ITEM 4.	MINE SAFETY DISCLOSURES	43

ITEM 5.	OTHER INFORMATION	43

ITEM 6.	EXHIBITS	43

SIGNATURES

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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
	December 31,		March 31,		December 31,			March 31,
	2014		2015		2014			2015

ASSETS
Current Assets:
Cash and cash equivalents	$	3,354	$	6,588	$	3,354		$	6,588
Accounts receivable, net of allowance for doubtful accounts of $46,425 and $48,572 at 2014 and 2015, respectively	444,269		493,409		444,269			493,409
Current deferred tax asset	15,991		15,961		15,991			15,961
Prepaid income taxes	17,888		—		17,888			—
Other current assets	46,142		52,093		46,142			52,093
Total Current Assets	527,644		568,051		527,644			568,051

Property and equipment, net	542,310		553,870		542,310			553,870
Goodwill	1,642,083		1,652,005		1,642,083			1,652,005
Other identifiable intangibles	72,519		72,640		72,519			72,640
Other assets	140,253		140,485		140,253			140,485

Total Assets	$	2,924,809	$	2,987,051	$	2,924,809		$	2,987,051

LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	21,746	$	18,925	$	21,746		$	18,925
Current portion of long-term debt and notes payable	10,874		11,060		10,874			11,060
Accounts payable	108,532		101,013		108,532			101,013
Accrued payroll	97,090		80,382		97,090			80,382
Accrued vacation	63,132		65,929		63,132			65,929
Accrued interest	10,674		21,805		10,674			21,805
Accrued other	82,376		87,073		82,376			87,073
Income taxes payable	—		6,776		—			6,776
Total Current Liabilities	394,424		392,963		394,424			392,963

Long-term debt, net of current portion	1,542,102		1,569,627		1,542,102			1,569,627
Non-current deferred tax liability	109,203		106,702		109,203			106,702
Other non-current liabilities	92,855		98,245		92,855			98,245

Total Liabilities	2,138,584		2,167,537		2,138,584			2,167,537

Commitments and contingencies (Note 8)

Redeemable non-controlling interests	10,985		11,275		10,985			11,275

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,233,308 shares and 131,087,980 shares issued and outstanding at 2014 and 2015, respectively	131		131		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	413,706		418,288		885,407			889,989
Retained earnings (accumulated deficit)	325,678		347,303		(145,892		)	(124,267		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	739,515		765,722		739,515			765,722
Non-controlling interest	35,725		42,517		35,725			42,517
Total Equity	775,240		808,239		775,240			808,239

Total Liabilities and Equity	$	2,924,809	$	2,987,051	$	2,924,809		$	2,987,051

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

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Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2014			2015			2014			2015

Net operating revenues	$	762,578		$	795,343		$	762,578		$	795,343

Costs and expenses:
Cost of services	638,764			664,385			638,764			664,385
General and administrative	18,123			21,675			18,123			21,675
Bad debt expense	11,018			12,670			11,018			12,670
Depreciation and amortization	16,229			17,348			16,229			17,348
Total costs and expenses	684,134			716,078			684,134			716,078

Income from operations	78,444			79,265			78,444			79,265

Other income and expense:
Loss on early retirement of debt	(2,277		)	—			(2,277		)	—
Equity in earnings of unconsolidated subsidiaries	908			2,592			908			2,592
Interest expense	(20,616		)	(21,388		)	(20,616		)	(21,388		)

Income before income taxes	56,459			60,469			56,459			60,469

Income tax expense	22,092			23,184			22,092			23,184

Net income	34,367			37,285			34,367			37,285

Less: Net income attributable to non-controlling interests	1,323			2,222			1,323			2,222

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	33,044		$	35,063		$	33,044		$	35,063

Income per common share:
Basic	$	0.24		$	0.27
Diluted	$	0.24		$	0.27

Dividends paid per share	$	0.10		$	0.10

Weighted average shares outstanding:
Basic	135,540			127,565
Diluted	135,953			127,872

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

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Condensed Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

						Select Medical Holdings Corporation Stockholders
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value			Capital in Excess of Par		Retained Earnings			Non- controlling Interests
Balance at December 31, 2014			$	775,240		131,233		$	131		$	413,706	$	325,678		$	35,725
Net income	$	37,023	37,023										35,063			1,960
Net income - attributable to redeemable non-controlling interests	262
Total comprehensive income	$	37,285
Dividends paid to common stockholders			(13,129		)								(13,129		)
Issuance and vesting of restricted stock			2,384			10		0			2,384
Tax benefit from stock based awards			5								5
Stock option expense			15								15
Exercise of stock options			489			54		0			489
Distributions to non-controlling interests			(2,143		)											(2,143		)
Exchange of ownership interests with non-controlling interests			8,664								1,689					6,975
Other			(309		)	(209	)	(0		)	0		(309		)
Balance at March 31, 2015			$	808,239		131,088		$	131		$	418,288	$	347,303		$	42,517

						Select Medical Corporation Stockholders
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value			Capital in Excess of Par		Accumulated Deficit			Non- controlling Interests
Balance at December 31, 2014			$	775,240		0		$	0		$	885,407	$	(145,892	)	$	35,725
Net income	$	37,023	37,023										35,063			1,960
Net income - attributable to redeemable non-controlling interests	262
Total comprehensive income	$	37,285
Additional investment by Holdings			489								489
Dividends declared and paid to Holdings			(13,129		)								(13,129		)
Contribution related to restricted stock awards and stock option issuances by Holdings			2,399								2,399
Tax benefit from stock based awards			5								5
Distributions to non-controlling interests			(2,143		)											(2,143		)
Exchange of ownership interests with non-controlling interests			8,664								1,689					6,975
Other			(309		)								(309		)
Balance at March 31, 2015			$	808,239		0		$	0		$	889,989	$	(124,267	)	$	42,517

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

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Condensed Consolidated Statements of Cash Flows

(unaudited)
(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2014			2015			2014			2015

Operating activities
Net income	$	34,367		$	37,285		$	34,367		$	37,285
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			28			—			28
Depreciation and amortization	16,229			17,348			16,229			17,348
Provision for bad debts	11,018			12,670			11,018			12,670
Equity in earnings of unconsolidated subsidiaries	(908		)	(2,592		)	(908		)	(2,592		)
Loss on early retirement of debt	2,277			—			2,277			—
Loss from disposal of assets	121			5			121			5
Non-cash stock compensation expense	2,155			2,399			2,155			2,399
Amortization of debt discount, premium and issuance costs	2,051			1,929			2,051			1,929
Deferred income taxes	57			(2,471		)	57			(2,471		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(87,437		)	(61,810		)	(87,437		)	(61,810		)
Other current assets	(3,144		)	(5,924		)	(3,144		)	(5,924		)
Other assets	(3,938		)	1,663			(3,938		)	1,663
Accounts payable	4,732			5,332			4,732			5,332
Accrued expenses	(12,803		)	6,757			(12,803		)	6,757
Income taxes	19,223			24,916			19,223			24,916
Net cash provided by (used in) operating activities	(16,000		)	37,535			(16,000		)	37,535

Investing activities
Purchases of property and equipment	(27,299		)	(27,848		)	(27,299		)	(27,848		)
Investment in businesses	(124		)	(1,000		)	(124		)	(1,000		)
Acquisition of businesses, net of cash acquired	(375		)	(2,686		)	(375		)	(2,686		)
Net cash used in investing activities	(27,798		)	(31,534		)	(27,798		)	(31,534		)

Financing activities
Borrowings on revolving credit facility	285,000			215,000			285,000			215,000
Payments on revolving credit facility	(200,000		)	(175,000		)	(200,000		)	(175,000		)
Payments on credit facility term loans	(33,994		)	(26,884		)	(33,994		)	(26,884		)
Issuance of 6.375% senior notes, includes premium	111,650			—			111,650			—
Borrowings of other debt	6,111			6,582			6,111			6,582
Principal payments on other debt	(3,067		)	(4,584		)	(3,067		)	(4,584		)
Debt issuance costs	(4,434		)	—			(4,434		)	—
Dividends paid to common stockholders	(14,056		)	(13,129		)	—			—
Dividends paid to Holdings	—			—			(123,556		)	(13,129		)
Repurchase of common stock	(109,500		)	—			—			—
Proceeds from issuance of common stock	1,943			489			—			—
Equity investment by Holdings	—			—			1,943			489
Proceeds from (repayments of) bank overdrafts	5,970			(2,821		)	5,970			(2,821		)
Tax benefit from stock based awards	—			5			—			5
Distributions to non-controlling interests	(1,452		)	(2,425		)	(1,452		)	(2,425		)
Net cash provided by (used in) financing activities	44,171			(2,767		)	44,171			(2,767		)

Net increase in cash and cash equivalents	373			3,234			373			3,234

Cash and cash equivalents at beginning of period	4,319			3,354			4,319			3,354
Cash and cash equivalents at end of period	$	4,692		$	6,588		$	4,692		$	6,588

Supplemental Cash Flow Information
Cash paid for interest	$	14,407		$	8,735		$	14,407		$	8,735
Cash paid for taxes	$	2,812		$	733		$	2,812		$	733

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

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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”) and Select Medical Corporation (“Select”) as of March 31, 2015 and for the three month periods ended March 31, 2014 and 2015 have been prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2015. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed consolidated financial statements of Holdings include the accounts of its wholly-owned subsidiary Select. Holdings conducts substantially all of its business through Select and its subsidiaries.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2014 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2015.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

3. Intangible Assets

The gross carrying amounts of the Company’s indefinite-lived intangible assets consist of the following:

	December 31, 2014		March 31, 2015
	(in thousands)

Goodwill	$	1,642,083	$	1,652,005
Trademarks	57,709		57,709
Certificates of need	12,727		12,848
Accreditations	2,083		2,083
Total	$	1,714,602	$	1,724,645

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The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At March 31, 2015, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 5.2 years, respectively.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the three months ended March 31, 2015 are as follows:

	Specialty Hospitals		Outpatient Rehabilitation		Total
	(in thousands)
Balance as of December 31, 2014	$	1,335,460	$	306,623	$	1,642,083
Goodwill acquired during the period	9,922		—		9,922
Balance as of March 31, 2015	$	1,345,382	$	306,623	$	1,652,005

4. Indebtedness

The components of long-term debt and notes payable are as follows:

	December 31, 2014		March 31, 2015
	(in thousands)

6.375% senior notes (1)	$	711,465	$	711,408
Senior secured credit facilities:
Revolving loan	60,000		100,000
Term loans (2)	775,996		749,490
Other	5,515		19,789
Total debt	1,552,976		1,580,687
Less: current maturities	10,874		11,060
Total long-term debt	$	1,542,102	$	1,569,627

(1) Includes unamortized premium of $1.5 million and $1.4 million at December 31, 2014 and March 31, 2015, respectively.

(2) Includes unamortized discounts of $4.2 million and $3.8 million at December 31, 2014 and March 31, 2015, respectively.

Excess Cash Flow Payment

On March 4, 2015, Select made a principal prepayment of $26.9 million associated with its term loans in accordance with the provision in its senior secured credit facilities agreement that requires mandatory prepayments of term loans resulting from excess cash flow as defined in the senior secured credit facilities.

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Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt for the period from April 1, 2015 through December 31, 2015 and the years after 2015 are approximately as follows and are presented including the discounts on the senior secured credit facility term loans and premium on the senior notes (in thousands):

April 1, 2015 — December 31, 2015	$	8,805
2016	281,913
2017	6,444
2018	570,713
2019	2,489
2020 and beyond	710,323

Loss on Early Retirement of Debt

On March 4, 2014, Select amended its term loans under its senior secured credit facilities. During the three months ended March 31, 2014, the Company recognized a loss of $2.3 million for unamortized debt issuance costs, unamortized original issue discount, and certain fees incurred related to term loan modifications.

5. Fair Value

Financial instruments include cash and cash equivalents, notes payable and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

The carrying value of Select’s senior secured credit facilities was $836.0 million and $849.5 million at December 31, 2014 and March 31, 2015, respectively. The fair value of Select’s senior secured credit facilities was $816.6 million and $846.1 million at December 31, 2014 and March 31, 2015, respectively. The fair value of Select’s senior secured credit facilities was based on quoted market prices for this debt in the syndicated loan market.

The carrying value of Select’s 6.375% senior notes was $711.5 million and $711.4 million at December 31, 2014 and March 31, 2015, respectively. The fair value of Select’s 6.375% senior notes was $722.4 million and $701.1 million at December 31, 2014 and March 31, 2015, respectively. The fair value of this debt was based on quoted market prices.

The Company considers the inputs in the valuation process of its senior secured credit facility and 6.375% senior notes to be Level 2 in the fair value hierarchy. 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.

6. Segment Information

The Company’s reportable segments consist of (i) specialty hospitals and (ii) outpatient rehabilitation. Other activities include the Company’s corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The outpatient rehabilitation reportable segment has two operating segments: outpatient rehabilitation clinics and contract therapy. These operating segments are aggregated for reporting purposes as they have common economic characteristics and provide a similar service to a similar patient base. The accounting policies of the segments are the same as those described

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in the summary of significant accounting policies. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries and other income (expense).

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

	Three Months Ended March 31, 2014
	Specialty Hospitals		Outpatient Rehabilitation		Other			Total
	(in thousands)

Net operating revenues	$	564,625	$	197,850	$	103		$	762,578
Adjusted EBITDA	92,150		20,989		(16,311		)	96,828
Total assets	2,290,655		525,040		100,031			2,915,726
Capital expenditures	21,498		3,630		2,171			27,299

	Three Months Ended March 31, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Other			Total
	(in thousands)

Net operating revenues	$	598,781	$	196,443	$	119		$	795,343
Adjusted EBITDA	96,472		22,133		(19,665		)	98,940
Total assets	2,332,591		540,473		113,987			2,987,051
Capital expenditures	22,793		3,922		1,133			27,848

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

	Three Months Ended March 31, 2014
	Specialty Hospitals			Outpatient Rehabilitation			Other			Total
	(in thousands)
Adjusted EBITDA	$	92,150		$	20,989		$	(16,311	)
Depreciation and amortization	(12,095		)	(3,212		)	(922		)
Stock compensation expense	—			—			(2,155		)
Income (loss) from operations	$	80,055		$	17,777		$	(19,388	)	$	78,444
Loss on early retirement of debt										(2,277		)
Equity in earnings of unconsolidated subsidiaries										908
Interest expense										(20,616		)
Income before income taxes										$	56,459

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	Three Months Ended March 31, 2015
	Specialty Hospitals			Outpatient Rehabilitation			Other			Total
	(in thousands)
Adjusted EBITDA	$	96,472		$	22,133		$	(19,665	)
Depreciation and amortization	(13,223		)	(3,140		)	(985		)
Stock compensation expense	—			—			(2,327		)
Income (loss) from operations	$	83,249		$	18,993		$	(22,977	)	$	79,265
Equity in earnings of unconsolidated subsidiaries										2,592
Interest expense										(21,388		)
Income before income taxes										$	60,469

7. Income per Common Share

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings. The following table sets forth for the periods indicated the calculation of income per common share in Holdings’ consolidated statement of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted income per common share, respectively:

	For the Three Months Ended March 31,
	2014		2015
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	33,044	$	35,063
Less: Earnings allocated to unvested restricted stockholders	770		973
Net income available to common stockholders	$	32,274	$	34,090

Denominator:
Weighted average shares — basic	135,540		127,565
Effect of dilutive securities:
Stock options	413		307
Weighted average shares — diluted	135,953		127,872

Basic income per common share	$	0.24	$	0.27
Diluted income per common share	$	0.24	$	0.27

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8. 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 operations of the Company’s specialty hospitals and outpatient rehabilitation facilities, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. 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.

On January 8, 2013, a federal magistrate judge unsealed an Amended Complaint in United States of America and the State of Indiana, ex rel. Doe I, Doe II and Doe III v. Select Medical Corporation, Select Specialty Hospital- Evansville, Evansville Physician Investment Corporation, Dr. Richard Sloan and Dr. Jeffrey Selby. The Amended Complaint, which was served on the Company on February 15, 2013, is a civil action filed under seal on September 28, 2012 in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States and the State of Indiana under the federal False Claims Act and Indiana False Claims and Whistleblower Protection Act. Although the Amended Complaint identified the relators by fictitious pseudonyms, on March 28, 2013, the relators filed a Notice identifying themselves as the former CEO at the Company’s long term acute care hospital in Evansville, Indiana (“SSH-Evansville”) and two former case managers at SSH-Evansville. The named defendants include the Company, SSH-Evansville, and two physicians who have practiced at SSH-Evansville. On March 26, 2013, the defendants, relators and the United States filed a joint motion seeking a stay of the proceedings, in which the United States notified the court that its investigation has not been completed and therefore it is not yet able to decide whether or not to intervene, and on March 29, 2013, the magistrate judge granted the motion and stayed all deadlines in the case for 90 days. The court has subsequently granted additional motions filed by the United States to continue the stay, and the current stay extends through May 15, 2015.

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As previously disclosed, the Company and SSH-Evansville produced documents in response to various government subpoenas and demands relating to SSH-Evansville. In September 2014, representatives of the United States Attorney’s Office for the Southern District of Indiana and the Department of Justice informed the Company that, while the United States has not yet decided whether to intervene in the case, its investigation is continuing concerning the allegation that SSH-Evansville admitted patients for whom long-term acute care was not medically necessary. The Company intends to fully cooperate with this governmental investigation and is involved in ongoing discussions with the government regarding this matter. At this time, the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At March 31, 2015, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately $67.5 million.

Pending Concentra Acquisition

The Company announced on March 23, 2015 that MJ Acquisition Corporation, a joint venture that the Company has created with Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), has entered into a stock purchase agreement, dated as of March 22, 2015 (the “Purchase Agreement”), as buyer with Concentra Inc. (“Concentra”) and Humana Inc. (“Humana”) to acquire all of the issued and outstanding equity securities of Concentra from Humana. Concentra, a subsidiary of Humana, is a national health care company that delivers a wide range of medical services to employers and patients, including urgent care, occupational medicine, physical therapy, primary care, and wellness programs. According to a Concentra press release, Concentra operates more than 300 medical centers and 170 onsite clinics in 40 states.

For all of the outstanding stock of Concentra, MJ Acquisition Corporation has agreed to pay a purchase price of $1.055 billion, subject to adjustments for net working capital and net debt on the closing date. Should the Purchase Agreement be terminated by Humana under specified conditions, including circumstances where MJ Acquisition Corporation is required to close the transactions under the Purchase Agreement and there is a failure of the debt financing to be funded in accordance with its terms, a reverse termination fee of $60.0 million would be payable to Humana. The Company would be responsible for its pro rata share of the termination fee, based on its ownership interest in MJ Acquisition Corporation. The Company and WCAS own 50.1% and 49.9% common equity interest, respectively, in MJ Acquisition Corporation. The transaction, which is expected to close in the second quarter of 2015, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

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9. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes

Select’s 6.375% senior notes are fully and unconditionally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly-owned subsidiaries (the “Subsidiary Guarantors”) which is defined as a subsidiary 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”).

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31, 2014 and March 31, 2015 and for the three months ended March 31, 2014 and 2015.

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.

During the year ended December 31, 2014, the Company purchased the remaining outstanding non-controlling interest in a specialty hospital business changing the entity from a non-guarantor subsidiary to a guarantor subsidiary. The three months ended March 31, 2014 have been retrospectively revised based on the guarantor structure that existed at December 31, 2014.

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	Select Medical Corporation
	Condensed Consolidating Balance Sheet
	March 31, 2015
	(unaudited)
	Select Medical Corporation (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	3,071		$	3,011		$	506	$	—		$	6,588
Accounts receivable, net	—			415,657			77,752		—			493,409
Current deferred tax asset	10,519			2,252			3,190		—			15,961
Intercompany receivables	—			1,586,102			133,170		(1,719,272		)(a)	—
Other current assets	14,060			32,902			5,131		—			52,093
Total Current Assets	27,650			2,039,924			219,749		(1,719,272		)	568,051

Property and equipment, net	30,151			467,027			56,692		—			553,870
Investment in affiliates	3,774,640			84,150			—		(3,858,790		)(b)(c)	—
Goodwill	—			1,652,005			—		—			1,652,005
Non-current deferred tax asset	13,555			—			—		(13,555		)(d)	—
Other identifiable intangibles	—			72,640			—		—			72,640
Other assets	30,864			108,864			757		—			140,485

Total Assets	$	3,876,860		$	4,424,610		$	277,198	$	(5,591,617	)	$	2,987,051

Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	18,925		$	—		$	—	$	—		$	18,925
Current portion of long-term debt and notes payable	8,957			1,758			345		—			11,060
Accounts payable	10,150			77,693			13,170		—			101,013
Intercompany payables	1,852,442			(133,170		)	—		(1,719,272		)(a)	—
Accrued payroll	6,940			73,120			322		—			80,382
Accrued vacation	5,363			51,016			9,550		—			65,929
Accrued interest	21,684			121			—		—			21,805
Accrued other	38,855			39,593			8,625		—			87,073
Income taxes payable	6,776			—			—		—			6,776
Total Current Liabilities	1,970,092			110,131			32,012		(1,719,272		)	392,963

Long-term debt, net of current portion	1,087,579			389,575			92,473		—			1,569,627
Non-current deferred tax liability	—			112,305			7,952		(13,555		)(d)	106,702
Other non-current liabilities	53,467			39,961			4,817		—			98,245

Total Liabilities	3,111,138			651,972			137,254		(1,732,827		)	2,167,537

Redeemable non-controlling interests	—			—			11,275		—			11,275

Stockholder’s Equity:
Common stock	0			—			—		—			0
Capital in excess of par	889,989			—			—		—			889,989
Retained earnings (accumulated deficit)	(124,267		)	1,080,777			3,586		(1,084,363		)(c)	(124,267		)
Subsidiary investment	—			2,691,861			82,566		(2,774,427		)(b)	—
Total Select Medical Corporation Stockholder’s Equity	765,722			3,772,638			86,152		(3,858,790		)	765,722

Non-controlling interests	—			—			42,517		—			42,517
Total Equity	765,722			3,772,638			128,669		(3,858,790		)	808,239

Total Liabilities and Equity	$	3,876,860		$	4,424,610		$	277,198	$	(5,591,617	)	$	2,987,051

(a) Elimination of intercompany.

(b) Elimination of investments in consolidated subsidiaries.

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

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	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Three Months Ended March 31, 2015
	(unaudited)
	Select Medical Corporation (Parent Company Only)			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)

Net operating revenues	$	119		$	673,749		$	121,475		$	—		$	795,343

Costs and expenses:
Cost of services	436			561,093			102,856			—			664,385
General and administrative	21,751			(76		)	—			—			21,675
Bad debt expense	—			9,473			3,197			—			12,670
Depreciation and amortization	985			13,772			2,591			—			17,348
Total costs and expenses	23,172			584,262			108,644			—			716,078

Income (loss) from operations	(23,053		)	89,487			12,831			—			79,265

Other income and expense:
Intercompany interest and royalty fees	(286		)	280			6			—			—
Intercompany management fees	41,454			(35,247		)	(6,207		)	—			—
Equity in earnings of unconsolidated subsidiaries	—			2,571			21			—			2,592
Interest expense	(13,901		)	(6,003		)	(1,484		)	—			(21,388		)

Income from operations before income taxes	4,214			51,088			5,167			—			60,469

Income tax expense (benefit)	1,402			22,046			(264		)	—			23,184
Equity in earnings of subsidiaries	32,251			3,280			—			(35,531		)(a)	—

Net income	35,063			32,322			5,431			(35,531		)	37,285

Less: Net income attributable to non-controlling interests	—			—			2,222			—			2,222

Net income attributable to Select Medical Corporation	$	35,063		$	32,322		$	3,209		$	(35,531	)	$	35,063

(a) Elimination of equity in earnings of subsidiaries.

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	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Three Months Ended March 31, 2015
	(unaudited)
	Select Medical Corporation (Parent Company Only)		Subsidiary Guarantors		Non- Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)

Operating activities
Net income	$	35,063	$	32,322	$	5,431	$	(35,531	)(a)	$	37,285
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—		—		28		—