Edgar Filing: SELECT MEDICAL HOLDINGS CORP

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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 June 30, 2015

¨ 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
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 July 31, 2015, Select Medical Holdings Corporation had outstanding 131,381,185 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, LLC (“Group Holdings”), and its subsidiaries. References to the “Company,” “we,” “us” and “our” refer collectively to Holdings, Select, and Group Holdings and its subsidiaries.

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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	6

	Condensed consolidated statements of cash flows	7

	Notes to condensed consolidated financial statements	8

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

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	62

ITEM 4.	CONTROLS AND PROCEDURES	63

PART II	OTHER INFORMATION	64

ITEM 1.	LEGAL PROCEEDINGS	64

ITEM 1A.	RISK FACTORS	65

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	74

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	74

ITEM 4.	MINE SAFETY DISCLOSURES	74

ITEM 5.	OTHER INFORMATION	74

ITEM 6.	EXHIBITS	74

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,		June 30,		December 31,			June 30,
	2014		2015		2014			2015

ASSETS
Current Assets:
Cash and cash equivalents	$	3,354	$	25,191	$	3,354		$	25,191
Accounts receivable, net of allowance for doubtful accounts of $46,425 and $50,675 at 2014 and 2015, respectively	444,269		633,621		444,269			633,621
Current deferred tax asset	15,991		17,355		15,991			17,355
Prepaid income taxes	17,888		—		17,888			—
Other current assets	46,142		78,153		46,142			78,153
Total Current Assets	527,644		754,320		527,644			754,320

Property and equipment, net	542,310		771,410		542,310			771,410
Goodwill	1,642,083		2,353,975		1,642,083			2,353,975
Other identifiable intangibles	72,519		261,642		72,519			261,642
Other assets	140,253		199,988		140,253			199,988

Total Assets	$	2,924,809	$	4,341,335	$	2,924,809		$	4,341,335

LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	21,746	$	27,337	$	21,746		$	27,337
Current portion of long-term debt and notes payable	10,874		17,448		10,874			17,448
Accounts payable	108,532		105,369		108,532			105,369
Accrued payroll	97,090		122,707		97,090			122,707
Accrued vacation	63,132		76,262		63,132			76,262
Accrued interest	10,674		14,152		10,674			14,152
Accrued other	82,376		122,801		82,376			122,801
Income taxes payable	—		2,303		—			2,303
Total Current Liabilities	394,424		488,379		394,424			488,379

Long-term debt, net of current portion	1,542,102		2,431,319		1,542,102			2,431,319
Non-current deferred tax liability	109,203		167,908		109,203			167,908
Other non-current liabilities	92,855		142,383		92,855			142,383

Total Liabilities	2,138,584		3,229,989		2,138,584			3,229,989

Commitments and contingencies (Note 10)

Redeemable non-controlling interests	10,985		257,187		10,985			257,187

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,233,308 shares and 131,373,985 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		422,524		885,407			894,225
Retained earnings (accumulated deficit)	325,678		383,278		(145,892		)	(88,292		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	739,515		805,933		739,515			805,933
Non-controlling interest	35,725		48,226		35,725			48,226
Total Equity	775,240		854,159		775,240			854,159

Total Liabilities and Equity	$	2,924,809	$	4,341,335	$	2,924,809		$	4,341,335

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 June 30,						For the Three Months Ended June 30,
	2014			2015			2014			2015

Net operating revenues	$	772,762		$	887,065		$	772,762		$	887,065

Costs and expenses:
Cost of services	642,881			743,879			642,881			743,879
General and administrative	19,377			24,041			19,377			24,041
Bad debt expense	11,115			12,286			11,115			12,286
Depreciation and amortization	17,196			21,848			17,196			21,848
Total costs and expenses	690,569			802,054			690,569			802,054

Income from operations	82,193			85,011			82,193			85,011

Other income and expense:
Equity in earnings of unconsolidated subsidiaries	1,239			3,848			1,239			3,848
Interest expense	(21,663		)	(25,288		)	(21,663		)	(25,288		)

Income before income taxes	61,769			63,571			61,769			63,571

Income tax expense	23,775			23,517			23,775			23,517

Net income	37,994			40,054			37,994			40,054

Less: Net income attributable to non-controlling interests	2,653			3,114			2,653			3,114

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	35,341		$	36,940		$	35,341		$	36,940

Income per common share:
Basic	$	0.27		$	0.28
Diluted	$	0.27		$	0.28

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	127,038			127,674
Diluted	127,541			128,009

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 Six Months Ended June 30,						For the Six Months Ended June 30,
	2014			2015			2014			2015

Net operating revenues	$	1,535,340		$	1,682,408		$	1,535,340		$	1,682,408

Costs and expenses:
Cost of services	1,281,645			1,408,264			1,281,645			1,408,264
General and administrative	37,500			45,716			37,500			45,716
Bad debt expense	22,133			24,956			22,133			24,956
Depreciation and amortization	33,425			39,196			33,425			39,196
Total costs and expenses	1,374,703			1,518,132			1,374,703			1,518,132

Income from operations	160,637			164,276			160,637			164,276

Other income and expense:
Loss on early retirement of debt	(2,277		)	—			(2,277		)	—
Equity in earnings of unconsolidated subsidiaries	2,147			6,440			2,147			6,440
Interest expense	(42,279		)	(46,676		)	(42,279		)	(46,676		)

Income before income taxes	118,228			124,040			118,228			124,040

Income tax expense	45,867			46,701			45,867			46,701

Net income	72,361			77,339			72,361			77,339

Less: Net income attributable to non-controlling interests	3,976			5,336			3,976			5,336

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	68,385		$	72,003		$	68,385		$	72,003

Income per common share:
Basic	$	0.51		$	0.55
Diluted	$	0.51		$	0.55

Dividends paid per share	$	0.20		$	0.10

Weighted average shares outstanding:
Basic	131,266			127,620
Diluted	131,766			127,944

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	$	77,771		77,771										72,003			5,768
Net loss - attributable to redeemable non-controlling interests	(432		)
Total comprehensive income	$	77,339
Dividends paid to common stockholders				(13,129		)								(13,129		)
Issuance and vesting of restricted stock				5,765			202		0			5,765
Tax benefit from stock based awards				11								11
Stock option expense				29								29
Exercise of stock options				1,324			148		0			1,324
Acquisition of non-controlling interests				3,470													3,470
Distributions to non-controlling interests				(3,712		)											(3,712		)
Exchange of ownership interests with non-controlling interests				8,664								1,689					6,975
Other				(1,274		)	(209	)	(0		)			(1,274		)
Balance at June 30, 2015				$	854,159		131,374		$	131		$	422,524	$	383,278		$	48,226

							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	$	77,771		77,771								72,003			5,768
Net loss - attributable to redeemable non-controlling interests	(432		)
Total comprehensive income	$	77,339
Additional investment by Holdings				1,324						1,324
Dividends declared and paid to Holdings				(13,129		)						(13,129		)
Contribution related to restricted stock awards and stock option issuances by Holdings				5,794						5,794
Tax benefit from stock based awards				11						11
Acquisition of non-controlling interests				3,470											3,470
Distributions to non-controlling interests				(3,712		)									(3,712		)
Exchange of ownership interests with non-controlling interests				8,664						1,689					6,975
Other				(1,274		)						(1,274		)
Balance at June 30, 2015				$	854,159		0	$	0	$	894,225	$	(88,292	)	$	48,226

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 Six Months Ended June 30,						For the Six Months Ended June 30,
	2014			2015			2014			2015

Operating activities
Net income	$	72,361		$	77,339		$	72,361		$	77,339
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	—			52			—			52
Depreciation and amortization	33,425			39,196			33,425			39,196
Provision for bad debts	22,133			24,956			22,133			24,956
Equity in earnings of unconsolidated subsidiaries	(2,147		)	(6,440		)	(2,147		)	(6,440		)
Loss on early retirement of debt	2,277			—			2,277			—
Loss from disposal of assets	143			251			143			251
Non-cash stock compensation expense	4,120			5,794			4,120			5,794
Amortization of debt discount, premium and issuance costs	3,849			4,027			3,849			4,027
Deferred income taxes	1,275			(4,428		)	1,275			(4,428		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(84,249		)	(89,265		)	(84,249		)	(89,265		)
Other current assets	(2,935		)	(8,038		)	(2,935		)	(8,038		)
Other assets	(3,462		)	3,568			(3,462		)	3,568
Accounts payable	10,343			8,925			10,343			8,925
Accrued expenses	(14,086		)	707			(14,086		)	707
Income taxes	(878		)	18,416			(878		)	18,416
Net cash provided by operating activities	42,169			75,060			42,169			75,060

Investing activities
Purchases of property and equipment	(50,493		)	(68,912		)	(50,493		)	(68,912		)
Investment in businesses	(175		)	(855		)	(175		)	(855		)
Acquisition of businesses, net of cash acquired	(454		)	(1,047,997		)	(454		)	(1,047,997		)
Net cash used in investing activities	(51,122		)	(1,117,764		)	(51,122		)	(1,117,764		)

Financing activities
Borrowings on revolving facilities	515,000			660,000			515,000			660,000
Payments on revolving facilities	(425,000		)	(400,000		)	(425,000		)	(400,000		)
Payments on Select term loans	(33,994		)	(26,884		)	(33,994		)	(26,884		)
Issuance of 6.375% senior notes, includes premium	111,650			—			111,650			—
Proceeds from Concentra term loans, net of discounts	—			646,875			—			646,875
Borrowings of other debt	6,111			9,590			6,111			9,590
Principal payments on other debt	(7,049		)	(8,320		)	(7,049		)	(8,320		)
Debt issuance costs	(4,434		)	(23,300		)	(4,434		)	(23,300		)
Dividends paid to common stockholders	(27,153		)	(13,129		)	—			—
Dividends paid to Holdings	—			—			(154,653		)	(13,129		)
Repurchase of common stock	(127,500		)	—			—			—
Proceeds from issuance of common stock	5,297			1,325			—			—
Proceeds from issuance of non-controlling interest	—			217,065			—			217,065
Equity investment by Holdings	—			—			5,297			1,325
Proceeds from (repayments of) bank overdrafts	(3,314		)	5,590			(3,314		)	5,590
Tax benefit from stock based awards	—			11			—			11
Distributions to non-controlling interests	(1,840		)	(4,282		)	(1,840		)	(4,282		)
Net cash provided by financing activities	7,774			1,064,541			7,774			1,064,541

Net increase (decrease) in cash and cash equivalents	(1,179		)	21,837			(1,179		)	21,837

Cash and cash equivalents at beginning of period	4,319			3,354			4,319			3,354
Cash and cash equivalents at end of period	$	3,140		$	25,191		$	3,140		$	25,191

Supplemental Cash Flow Information
Cash paid for interest	$	39,107		$	39,932		$	39,107		$	39,932
Cash paid for taxes	$	45,471		$	32,702		$	45,471		$	32,702

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 June 30, 2015, and for the three and six month periods ended June 30, 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 and six months ended June 30, 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.

Redeemable Non-Controlling Interests

The interests held by other parties in subsidiaries, limited liability companies, and limited partnerships owned and controlled by the Company are generally reported as a component of stockholders’ equity. Some of those non-controlling interests consist of outside owners that have certain “put rights,” that are currently exercisable, and that, if exercised, require the Company to purchase the member’s non-controlling interest. These redeemable non-controlling interests that are currently redeemable, or considered probable of becoming redeemable, have been adjusted to their approximate redemption values, and are reported outside of the stockholders’ equity section. As of June 30, 2015 and December 31, 2014, the Company believes the redemption values of the non-controlling ownership interests approximates the fair value of those interests classified as redeemable non-controlling interests. The changes in the redeemable non-controlling interests amounts for the six months ended June 30, 2015 are as follows (in thousands):

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Balance at December 31, 2014 — redeemable non-controlling interests	$	10,985
Issuance of non-controlling interests in Concentra Group Holdings	217,065
Acquisition of Concentra Inc. non-controlling interests	28,865
Changes in the redemption amounts of non-controlling interests	1,274
Net loss attributable to non-controlling interests	(432		)
Distributions to non-controlling interests	(570		)
Balance at June 30, 2015 — redeemable non-controlling interests	$	257,187

3. Concentra Acquisition

On June 1, 2015, MJ Acquisition Corporation, a joint venture that Select created with Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), consummated the acquisition of Concentra Inc. (“Concentra”), the indirect operating subsidiary of Concentra Group Holdings, LLC (“Group Holdings”), and its subsidiaries. Pursuant to the terms of the stock purchase agreement (the “Purchase Agreement”), dated as of March 22, 2015, by and among MJ Acquisition Corporation, Concentra and Humana Inc. (“Humana”), MJ Acquisition Corporation acquired 100% of the issued and outstanding equity securities of Concentra, from Humana for $1,045.3 million, net of $3.7 million of cash acquired.

Select entered into a Subscription Agreement (the “Subscription Agreement”), by and among Select, WCAS, Group Holdings and the other members of Group Holdings. Pursuant to the Subscription Agreement, Select purchased Class A equity interests of Group Holdings for an aggregate purchase price of $217.9 million, representing a majority (50.1%) of the voting equity interests in Group Holdings. WCAS and the other members purchased Class A interests of Group Holdings for an aggregate purchase price of $217.1 million, representing a 49.9% share of the voting equity interests of Group Holdings.

MJ Acquisition Corporation entered into the Concentra credit facilities (See Footnote 6) to fund a portion of the purchase price for all of the issued and outstanding stock of Concentra. Concentra, as the surviving entity of the merger between MJ Acquisition Corporation and Concentra, became the borrower under the Concentra credit facilities.

Group Holdings contributed cash of $435.0 million, to MJ Acquisition Corporation. MJ Acquisition Corporation used the cash, together with $650.0 million in borrowings under the Concentra credit facilities, to pay the purchase price. Select owns 50.1% of the voting interests of Group Holdings, the indirect parent of Concentra. Concentra’s financial results are consolidated with Select’s as of June 1, 2015. Group Holdings issued a non-controlling interest valued at $217.1 million.

Concentra, formed in 1979, is one of the largest providers of occupational health, consumer health, physical therapy and veteran’s healthcare services in the United States based on the number of facilities. As of June 30, 2015, Concentra operated 300 freestanding medical centers in 38 states, 150 medical facilities located at the workplaces of Concentra’s employer customers and 30 Department of Veterans Affairs community-based outpatient clinics.

The Concentra acquisition is being accounted for under the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. The Company will allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The Company is in the process of completing its assessment of fair values for identifiable tangible and intangible assets, and liabilities assumed; therefore, the values set forth below are subject to adjustment during the measurement period for such activities as estimating useful lives of long-lived assets and finite lived intangibles and completing assessment of fair values by obtaining appraisals. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities by December 31, 2015.

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The following table summarizes the preliminary allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed, in accordance with the acquisition method of accounting (in thousands):

Cash and cash equivalents	$	3,772
Identifiable tangible assets, excluding cash and cash equivalents	389,782
Identifiable intangible assets	190,000
Goodwill	702,023
Total assets	1,285,577

Total current liabilities	91,557
Total non-current liabilities	112,601
Non-controlling interests	32,336
Total liabilities	236,494

Net assets acquired	1,049,083
Cash and cash equivalents acquired	(3,772		)
Net cash paid	$	1,045,311

Goodwill of $702.0 million has been preliminarily recognized in the transaction, representing the excess of the purchase price over the value of the tangible and intangible assets acquired and liabilities assumed. The goodwill has been pushed down to Concentra and is not deductible for tax purposes. However, prior to its acquisition by MJ Acquisition Corporation, Concentra completed certain acquisitions that resulted in goodwill with an estimated value of $21.1 million that is deductible for tax purposes, which the Company will deduct through 2025.

For the period of June 1, 2015 through June 30, 2015, Concentra contributed net revenue of $86.8 million and a net loss of approximately $0.4 million reflected in the Company’s Consolidated Statement of Operations. We incurred $4.7 million of acquisition costs for the period ended June 30, 2015. Acquisition costs consist of legal, advisory, and due diligence fees and expenses.

The following pro forma unaudited results of operations have been prepared assuming the acquisition of Concentra occurred January 1, 2014. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisition been consummated January 1, 2014.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2015		2014		2015
	(in thousands, except per share amounts)

Net revenue	$	1,026,748	$	1,087,953	$	2,033,445	$	2,094,650
Net income	35,421		40,532		63,832		68,943
Income per common share:
Basic	$	0.27	$	0.31	$	0.47	$	0.53
Diluted	$	0.27	$	0.31	$	0.47	$	0.52

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The pro forma financial information is based on the preliminary allocation of the purchase price and therefore subject to adjustment upon finalizing the purchase price allocation during the measurement period. The net income tax impact was calculated at a statutory rate, as if Concentra had been a subsidiary of the company as of January 1, 2014.

Pro forma results for the three months ended June 30, 2015 were adjusted to include approximately $8.6 million of interest expense, an income tax benefit of approximately $1.8 million, approximately $0.3 million of rent expense, and approximately $0.1 million in net loss attributable to non-controlling interest. Results for the same period were also adjusted to exclude Concentra acquisition costs of $4.7 million and amortization expense of approximately $0.7 million.

Pro forma results for the three months ended June 30, 2014 were adjusted to include approximately $12.0 million of interest expense, approximately $1.4 million in net income attributable to non-controlling interest, an income tax benefit of approximately $1.3 million, and approximately $0.5 million of rent expense. Results for the same period were also adjusted to exclude amortization expense of approximately $1.0 million.

Pro forma results for the six months ended June 30, 2015 were adjusted to include approximately $20.5 million of interest expense, an income tax benefit of approximately $6.5 million, approximately $0.9 million of rent expense, and $0.8 million in net loss attributable to non-controlling interest. Results for the same period were also adjusted to exclude Concentra acquisition costs of $4.7 million and amortization expense of approximately $1.8 million.

Pro forma results for the six months ended June 30, 2014 were adjusted to include approximately $24.0 million of interest expense, $4.7 million of Concentra acquisition costs, an income tax benefit of approximately $5.0 million, approximately $2.0 million of net loss attributable to non-controlling interest, and approximately $0.9 million of rent expense. Results for the same period were also adjusted to exclude amortization expense of approximately $2.1 million.

4. Property and Equipment

Property and equipment consists of the following:

	December 31, 2014			June 30, 2015
	(in thousands)
Land	$	71,635		$	74,510
Leasehold improvements	155,648			274,606
Buildings and improvements	396,228			404,936
Furniture and equipment	272,919			360,632
Construction-in-progress	41,230			72,915
	937,660			1,187,599
Accumulated depreciation and amortization	(395,350		)	(416,189		)
Total property and equipment	$	542,310		$	771,410

Depreciation expense was $20.7 million and $17.1 million for the three months ended June 30, 2015 and 2014, respectively. Depreciation expense was $37.8 million and $33.2 million for the six months ended June 30, 2015 and 2014, respectively.

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5. Intangible Assets

The net carrying value of the Company’s goodwill and identifiable intangible assets consist of the following:

	December 31, 2014		June 30, 2015
	(in thousands)
Goodwill	$	1,642,083	$	2,353,975

Identifiable intangibles:
Trademarks	$	57,709	$	140,709
Certificates of need	12,727		12,884
Accreditations	2,083		2,083
Customer relationships	—		105,966
Total identifiable intangibles	$	72,519	$	261,642

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At June 30, 2015, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 4.5 years, respectively.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 2015 are as follows:

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2014	$	1,335,460		$	306,623	$	—	$	1,642,083
Goodwill acquired	9,922			—		702,023		711,945
Measurement period adjustment	(53		)			—		(53		)
Balance as of June 30, 2015	$	1,345,329		$	306,623	$	702,023	$	2,353,975

Refer to Footnote 3 — Concentra Acquisition for details of the goodwill acquired during the period.

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6. Indebtedness

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

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

	December 31, 2014		June 30, 2015
	(in thousands)
Select 6.375% senior notes(1)	$	711,465	$	711,350
Select credit facilities:
Select revolving facility	60,000		320,000
Select term loans(2)	775,996		749,823
Other - Select	5,515		15,554
Total Select debt	1,552,976		1,796,727
Less: Select current maturities	10,874		10,311
Select long-term debt maturities	$	1,542,102	$	1,786,416

Concentra credit facilities:
Concentra revolving facility			$	—
Concentra term loans(3)			646,908
Other - Concentra			5,132
Total Concentra debt			652,040
Less: Concentra current maturities			7,137
Concentra long-term debt maturities			$	644,903

Total current maturities	$	10,874	$	17,448
Total long-term debt maturities	1,542,102		2,431,319
Total debt	$	1,552,976	$	2,448,767

(1) Includes unamortized premium of $1.5 million and $1.4 million at December 31, 2014 and June 30, 2015, respectively.

(2) Includes unamortized discounts of $4.2 million and $3.5 million at December 31, 2014 and June 30, 2015, respectively.

(3) Includes unamortized discounts of $3.1 million at June 30, 2015.

Excess Cash Flow Payment

On March 4, 2015, Select made a principal prepayment of $26.9 million associated with the Select series D term loan and Select series E term loan (collectively, the “Select term loans”) in accordance with the provision in the Select credit facilities (as defined below) that requires mandatory prepayments of term loans as a result of annual excess cash flow as defined in the Select credit facilities.

Select revolving facility

On May 20, 2015 Select entered into an additional credit extension amendment of its revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”) to obtain $100.0 million of incremental revolving commitments. The revolving commitments mature on March 1, 2018.

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Concentra credit facilities

Concentra first lien credit agreement

On June 1, 2015, MJ Acquisition Corporation, as the initial borrower, entered into a first lien credit agreement (the “Concentra first lien credit agreement”). Concentra, as the surviving entity of the merger between MJ Acquisition Corporation and Concentra, became the borrower. The Concentra first lien credit agreement provides for $500.0 million in first lien loans comprised of a $450.0 million, seven-year term loan (“Concentra first lien term loan”) and a $50.0 million, five-year revolving credit facility (“Concentra revolving facility”). The borrowings under the Concentra first lien credit agreement are guaranteed, on a first lien basis, by Concentra Holdings, Inc., the direct parent of Concentra. Select and Holdings are not parties to the Concentra first lien credit agreement and are not obligors with respect to Concentra’s debt under such agreement.

Borrowings under the Concentra first lien credit agreement will bear interest at a rate equal to:

· in the case of the Concentra first lien term loan, Adjusted LIBO (as defined in the Concentra first lien credit agreement) plus 3.00% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 2.00% (subject to an Alternate Base Rate floor of 2.00%); and

· in the case of the Concentra revolving facility, Adjusted LIBO plus a percentage ranging from 2.75% to 3.00%, or Alternate Base Rate plus a percentage ranging from 1.75% to 2.00%, in each case based on Concentra’s leverage ratio.

The Concentra first lien term loan will amortize in equal quarterly installments, in aggregate annual amounts equal to 0.25% of the original principal amount of the first lien term loan commencing on September 30, 2015. The balance of the Concentra first lien term loan will be payable on June 1, 2022. The Concentra revolving facility matures on June 1, 2020.

Concentra second lien credit agreement

On June 1, 2015, MJ Acquisition Corporation, as the initial borrower, entered into a second lien credit agreement (the “Concentra second lien credit agreement” and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”). Concentra, as the surviving entity of the merger between MJ Acquisition Corporation and Concentra, became the borrower. The Concentra second lien credit agreement provides for a $200.0 million eight-year second lien term loan (“Concentra second lien term loan” and, together with the Concentra first lien term loans, the “Concentra term loans”). The borrowings under the Concentra second lien credit agreement are guaranteed, on a second lien basis, by Concentra Holdings, Inc., the direct parent of Concentra. Select and Holdings are not parties to the Concentra second lien credit agreement and are not obligors with respect to Concentra’s debt under such agreement.

Borrowings under the Concentra second lien term loan will bear interest at a rate equal to Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 8.00% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 7.00% (subject to an Alternate Base Rate floor of 2.00%).

In the event that, on or prior to June 1, 2016, Concentra prepays any of the Concentra second lien term loan to refinance such term loan, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid and if Concentra prepays any of the Concentra second lien term loan to refinance such term loan on or prior to June 1, 2017, Concentra shall pay a premium of 1.00% of the

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aggregate principal amount of the Concentra second lien term loan prepaid. The Concentra second lien term loan will be payable on June 1, 2023.

Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt for the period from July 1, 2015 through December 31, 2015 and the years after 2015 are approximately as follows and are presented including the discounts on Select term loans and premium on Select’s senior notes, and including the discounts on Concentra credit facilities:

	Select		Concentra		Total
	(in thousands)
July 1, 2015 — December 31, 2015	$	4,757	$	3,698	$	8,455
2016	282,135		5,504		287,639
2017	6,402		4,139		10,541
2018	790,645		4,151		794,796
2019	2,465		4,165		6,630
2020 and beyond	710,323		630,383		1,340,706
Total	$	1,796,727	$	652,040	$	2,448,767

Loss on Early Retirement of Debt

On March 4, 2014, Select amended the Select term loans under the Select credit facilities. During the six months ended June 30, 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 the Select term loans modifications.

7. 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 the Select credit facilities was $836.0 million and $1,069.8 million at December 31, 2014 and June 30, 2015, respectively. The fair value of the Select credit facilities was $816.6 million and $1,049.7 million at December 31, 2014 and June 30, 2015, respectively. The fair value of the Select 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 June 30, 2015, respectively. The fair value of Select’s 6.375% senior notes was $722.4 million and $711.8 million at December 31, 2014 and June 30, 2015, respectively. The fair value of this debt was based on quoted market prices.

The carrying value of the Concentra term loans, was $646.9 million at June 30, 2015. The fair value of the Concentra term loans, was $645.7 million at June 30, 2015. The fair value of Concentra term loans was based on quoted market prices for this debt in the syndicated loan market.

The Company considers the inputs in the valuation process 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.

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8. Segment Information

The Company’s reportable segments consist of: (i) specialty hospitals, (ii) outpatient rehabilitation, and (iii) Concentra. 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 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, Concentra acquisition costs, 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 June 30, 2014
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)	Other			Total
	(in thousands)

Net operating revenues	$	557,833	$	214,798		$	131		$	772,762
Adjusted EBITDA	88,688		30,432			(17,766		)	101,354
Total assets	2,271,256		532,529			99,986			2,903,771
Capital expenditures	19,800		2,546			848			23,194

	Three Months Ended June 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)		Other			Total
	(in thousands)

Net operating revenues	$	592,336	$	207,795	$	86,829	$	105		$	887,065
Adjusted EBITDA	91,447		28,722		11,199		(16,471		)	114,897
Total assets	2,372,723		538,586		1,320,941		109,085			4,341,335
Capital expenditures	31,042		3,103		3,854		3,065			41,064

	Six Months Ended June 30, 2014
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)	Other			Total
	(in thousands)

Net operating revenues	$	1,122,458	$	412,648		$	234		$	1,535,340
Adjusted EBITDA	180,838		51,421			(34,077		)	198,182
Total assets	2,271,256		532,529			99,986			2,903,771
Capital expenditures	41,298		6,176			3,019			50,493

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	Six Months Ended June 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)		Other			Total
	(in thousands)

Net operating revenues	$	1,191,117	$	404,238	$	86,829	$	224		$	1,682,408
Adjusted EBITDA	187,919		50,855		11,199		(36,136		)	213,837
Total assets	2,372,723		538,586		1,320,941		109,085			4,341,335
Capital expenditures	53,835		7,025		3,854		4,198			68,912

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

	Three Months Ended June 30, 2014
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)	Other			Total
	(in thousands)
Adjusted EBITDA	$	88,688		$	30,432			$	(17,766	)
Depreciation and amortization	(13,067		)	(3,225		)		(904		)
Stock compensation expense	—			—				(1,965		)
Income (loss) from operations	$	75,621		$	27,207			$	(20,635	)	$	82,193
Equity in earnings of unconsolidated subsidiaries											1,239
Interest expense											(21,663		)
Income before income taxes											$	61,769

	Three Months Ended June 30, 2015
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)			Other			Total
	(in thousands)
Adjusted EBITDA	$	91,447		$	28,722		$	11,199		$	(16,471	)
Depreciation and amortization	(13,404		)	(3,177		)	(4,194		)	(1,073		)
Stock compensation expense	—			—			—			(3,323		)
Concentra acquisition costs	—			—			(4,715		)	—
Income (loss) from operations	$	78,043		$	25,545		$	2,290		$	(20,867	)	$	85,011
Equity in earnings of unconsolidated subsidiaries													3,848
Interest expense													(25,288		)
Income before income taxes													$	63,571

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	Six Months Ended June 30, 2014
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)	Other			Total
	(in thousands)
Adjusted EBITDA	$	180,838		$	51,421			$	(34,077	)
Depreciation and amortization	(25,162		)	(6,437		)		(1,826		)
Stock compensation expense	—			—				(4,120		)
Income (loss) from operations	$	155,676		$	44,984			$	(40,023	)	$	160,637
Loss on early retirement of debt											(2,277		)
Equity in earnings of unconsolidated subsidiaries											2,147
Interest expense											(42,279		)
Income before income taxes											$	118,228

	Six Months Ended June 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)		Other			Total
	(in thousands)
Adjusted EBITDA	$	187,919	$	50,855	$	11,199	$	(36,136	)
Depreciation and amortization	(26,627