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 September 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		20-1764048 23-2872718
(State or other jurisdiction of incorporation or organization)		(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 September 30, 2015, Select Medical Holdings Corporation had outstanding 131,190,842 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	61

ITEM 4.	CONTROLS AND PROCEDURES	61

PART II	OTHER INFORMATION	62

ITEM 1.	LEGAL PROCEEDINGS	62

ITEM 1A.	RISK FACTORS	64

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	64

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	64

ITEM 4.	MINE SAFETY DISCLOSURES	65

ITEM 5.	OTHER INFORMATION	65

ITEM 6.	EXHIBITS	65

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,		September 30,		December 31,			September 30,
	2014		2015		2014			2015

ASSETS
Current Assets:
Cash and cash equivalents	$	3,354	$	22,635	$	3,354		$	22,635
Accounts receivable, net of allowance for doubtful accounts of $46,425 and $82,278 at 2014 and 2015, respectively	444,269		574,845		444,269			574,845
Current deferred tax asset	15,991		23,346		15,991			23,346
Prepaid income taxes	17,888		2,303		17,888			2,303
Other current assets	46,142		78,402		46,142			78,402
Total Current Assets	527,644		701,531		527,644			701,531

Property and equipment, net	542,310		800,430		542,310			800,430
Goodwill	1,642,083		2,367,228		1,642,083			2,367,228
Other identifiable intangibles	72,519		258,640		72,519			258,640
Other assets	140,253		186,576		140,253			186,576

Total Assets	$	2,924,809	$	4,314,405	$	2,924,809		$	4,314,405

Current Liabilities:
Bank overdrafts	$	21,746	$	24,099	$	21,746		$	24,099
Current portion of long-term debt and notes payable	10,874		17,666		10,874			17,666
Accounts payable	108,532		118,617		108,532			118,617
Accrued payroll	97,090		132,872		97,090			132,872
Accrued vacation	63,132		72,475		63,132			72,475
Accrued interest	10,674		25,300		10,674			25,300
Accrued other	82,376		131,460		82,376			131,460
Total Current Liabilities	394,424		522,489		394,424			522,489

Long-term debt, net of current portion	1,542,102		2,333,078		1,542,102			2,333,078
Non-current deferred tax liability	109,203		182,963		109,203			182,963
Other non-current liabilities	92,855		145,277		92,855			145,277

Total Liabilities	2,138,584		3,183,807		2,138,584			3,183,807

Commitments and contingencies (Note 11)

Redeemable non-controlling interests	10,985		257,122		10,985			257,122

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,233,308 shares and 131,190,842 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		419,477		885,407			898,968
Retained earnings (accumulated deficit)	325,678		405,689		(145,892		)	(73,671		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	739,515		825,297		739,515			825,297
Non-controlling interest	35,725		48,179		35,725			48,179
Total Equity	775,240		873,476		775,240			873,476

Total Liabilities and Equity	$	2,924,809	$	4,314,405	$	2,924,809		$	4,314,405

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

Net operating revenues	$	758,069		$	1,021,123		$	758,069		$	1,021,123

Costs and expenses:
Cost of services	644,392			900,949			644,392			900,949
General and administrative	19,719			22,201			19,719			22,201
Bad debt expense	10,357			18,287			10,357			18,287
Depreciation and amortization	17,584			31,472			17,584			31,472
Total costs and expenses	692,052			972,909			692,052			972,909

Income from operations	66,017			48,214			66,017			48,214

Other income and expense:
Equity in earnings of unconsolidated subsidiaries	1,988			6,348			1,988			6,348
Gain on sale of equity investment	—			29,647			—			29,647
Interest expense	(21,753		)	(33,052		)	(21,753		)	(33,052		)

Income before income taxes	46,252			51,157			46,252			51,157

Income tax expense	17,956			18,347			17,956			18,347
Net income	28,296			32,810			28,296			32,810

Less: Net income attributable to non-controlling interests	1,766			3,404			1,766			3,404

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	26,530		$	29,406		$	26,530		$	29,406

Basic	$	0.20		$	0.22
Diluted	$	0.20		$	0.22

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	126,639			127,386
Diluted	127,029			127,649

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 Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2015			2014			2015

Net operating revenues	$	2,293,409		$	2,703,531		$	2,293,409		$	2,703,531

Costs and expenses:
Cost of services	1,926,037			2,309,213			1,926,037			2,309,213
General and administrative	57,219			67,917			57,219			67,917
Bad debt expense	32,490			43,243			32,490			43,243
Depreciation and amortization	51,009			70,668			51,009			70,668
Total costs and expenses	2,066,755			2,491,041			2,066,755			2,491,041

Income from operations	226,654			212,490			226,654			212,490

Other income and expense:
Loss on early retirement of debt	(2,277		)	—			(2,277		)	—
Equity in earnings of unconsolidated subsidiaries	4,135			12,788			4,135			12,788
Gain on sale of equity investment	—			29,647			—			29,647
Interest expense	(64,032		)	(79,728		)	(64,032		)	(79,728		)

Income before income taxes	164,480			175,197			164,480			175,197

Income tax expense	63,823			65,048			63,823			65,048
Net income	100,657			110,149			100,657			110,149

Less: Net income attributable to non-controlling interests	5,742			8,740			5,742			8,740

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	94,915		$	101,409		$	94,915		$	101,409

Basic	$	0.71		$	0.77
Diluted	$	0.71		$	0.77

Dividends paid per share	$	0.30		$	0.10

Weighted average shares outstanding:
Basic	129,706			127,541
Diluted	130,177			127,844

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	$	109,259	109,259											101,409			7,850
Net income - attributable to redeemable non-controlling interests	890
Total comprehensive income	$	110,149
Dividends paid to common stockholders			(13,129		)									(13,129		)
Issuance and vesting of restricted stock			9,849			1,158		0			9,849
Tax benefit from stock based awards			383								383
Repurchase of common shares			(15,076		)	(1,378	)	(0		)	(7,790		)	(7,286		)
Stock option expense			41								41
Exercise of stock options			1,604			178		0			1,604
Non-controlling interests acquired in business combination			3,470														3,470
Distributions to non-controlling interests			(5,881		)												(5,881		)
Purchase of non-controlling interests			(5		)						(5		)
Exchange of ownership interests with non-controlling interests			8,664								1,689						6,975
Other			(943		)			(0		)				(983		)	40
Balance at September 30, 2015			$	873,476		131,191		$	131		$	419,477		$	405,689		$	48,179

						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	$	109,259	109,259									101,409			7,850
Net income - attributable to redeemable non-controlling interests	890
Total comprehensive income	$	110,149
Additional investment by Holdings			1,604						1,604
Dividends declared and paid to Holdings			(28,205		)							(28,205		)
Contribution related to restricted stock awards and stock option issuances by Holdings			9,890						9,890
Tax benefit from stock based awards			383						383
Non-controlling interests acquired in business combination			3,470												3,470
Distributions to non-controlling interests			(5,881		)										(5,881		)
Purchase of non-controlling interests			(5		)				(5		)
Exchange of ownership interests with non-controlling interests			8,664						1,689						6,975
Other			(943		)							(983		)	40
Balance at September 30, 2015			$	873,476		0	$	0	$	898,968		$	(73,671	)	$	48,179

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 Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2015			2014			2015

Operating activities
Net income	$	100,657		$	110,149		$	100,657		$	110,149
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	11,939			11,814			11,939			11,814
Depreciation and amortization	51,009			70,668			51,009			70,668
Provision for bad debts	32,490			43,243			32,490			43,243
Equity in earnings of unconsolidated subsidiaries	(4,135		)	(12,788		)	(4,135		)	(12,788		)
Loss on early retirement of debt	2,277			—			2,277			—
Gain on sale of assets and businesses	(1,236		)	(1,264		)	(1,236		)	(1,264		)
Gain on sale of equity investment	—			(29,647		)	—			(29,647		)
Stock compensation expense	7,391			9,244			7,391			9,244
Amortization of debt discount, premium and issuance costs	5,651			6,746			5,651			6,746
Deferred income taxes	2,844			(6,925		)	2,844			(6,925		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(52,924		)	(48,778		)	(52,924		)	(48,778		)
Other current assets	491			(4,580		)	491			(4,580		)
Other assets	(2,267		)	4,540			(2,267		)	4,540
Accounts payable	2,276			3,047			2,276			3,047
Accrued expenses	(17		)	32,716			(17		)	32,716
Income taxes	(4,203		)	15,246			(4,203		)	15,246
Net cash provided by operating activities	152,243			203,431			152,243			203,431

Investing activities
Purchases of property and equipment	(73,350		)	(113,992		)	(73,350		)	(113,992		)
Proceeds from sale of assets	—			1,542			—			1,542
Investment in businesses	(3,135		)	(1,703		)	(3,135		)	(1,703		)
Proceeds from sale of equity investment	—			33,096			—			33,096
Acquisition of businesses, net of cash acquired	(1,211		)	(1,049,872		)	(1,211		)	(1,049,872		)
Net cash used in investing activities	(77,696		)	(1,130,929		)	(77,696		)	(1,130,929		)

Financing activities
Borrowings on revolving facilities	675,000			840,000			675,000			840,000
Payments on revolving facilities	(655,000		)	(675,000		)	(655,000		)	(675,000		)
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	7,036			11,041			7,036			11,041
Principal payments on other debt	(11,696		)	(13,167		)	(11,696		)	(13,167		)
Debt issuance costs	(4,434		)	(23,300		)	(4,434		)	(23,300		)
Dividends paid to common stockholders	(40,257		)	(13,129		)	—			—
Dividends paid to Holdings	—			—			(169,314		)	(26,751		)
Repurchase of common stock	(129,057		)	(13,622		)	—			—
Proceeds from issuance of common stock	5,545			1,604			—			—
Equity investment by Holdings	—			—			5,545			1,604
Proceeds from issuance of non-controlling interest	185			217,065			185			217,065
Proceeds from bank overdrafts	10,304			2,353			10,304			2,353
Tax benefit from stock based awards	—			383			—			383
Distributions to non-controlling interests	(3,119		)	(7,440		)	(3,119		)	(7,440		)
Net cash provided by (used in) financing activities	(67,837		)	946,779			(67,837		)	946,779

Net increase in cash and cash equivalents	6,710			19,281			6,710			19,281

Cash and cash equivalents at beginning of period	4,319			3,354			4,319			3,354
Cash and cash equivalents at end of period	$	11,029		$	22,635		$	11,029		$	22,635

Supplemental Cash Flow Information
Cash paid for interest	$	47,782		$	59,937		$	47,782		$	59,937
Cash paid for taxes	$	65,184		$	55,905		$	65,184		$	55,905

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 September 30, 2015, and for the three and nine month periods ended September 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 nine months ended September 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.

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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 September 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 nine months ended September 30, 2015 are as follows (in thousands):

Balance at December 31, 2014 — redeemable non-controlling interests	$	10,985
Issuance of redeemable non-controlling interests	217,836
Redeemable non-controlling interests acquired in business combination	28,865
Changes in the redemption amounts of redeemable non-controlling interests	981
Net income attributable to redeemable non-controlling interests	890
Distributions to redeemable non-controlling interests	(1,559		)
Repurchase of redeemable non-controlling interests	(876		)
Balance at September 30, 2015 — redeemable non-controlling interests	$	257,122

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standard was effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In April and August 2015, the FASB issued ASU No. 2015-03 and ASU No. 2015-15, Interest- Imputation of Interest, respectively, to simplify the presentation of debt issuance costs. The standard requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement. The guidance is effective for annual fiscal periods beginning after December 15, 2015. Early adoption is permitted, however the Company will defer. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which changes the reporting requirement for retrospective adjustments to provisional amounts in the measurement period. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The revised guidance is effective for annual fiscal periods beginning after December 15, 2015. Early adoption is permitted and the Company intends to prospectively adopt ASU No. 2015-16, as applicable.

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 $1,047.2 million, net of $3.8 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,

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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 (Refer to Footnote 7 - Indebtedness) 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 September 30, 2015, Concentra operated 300 freestanding medical centers in 38 states, 141 medical facilities located at the workplaces of Concentra’s employer customers and 34 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.

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	390,751
Identifiable intangible assets	190,000
Goodwill	715,304
Total assets	1,299,827

Total current liabilities	91,598
Total non-current liabilities	124,934
Non-controlling interests	32,336
Total liabilities	248,868

Net assets acquired	1,050,959
Less: Cash and cash equivalents acquired	3,772
Net cash paid	$	1,047,187

Goodwill of $715.3 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

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factors considered in determining the goodwill that resulted from the Concentra purchase price included Concentra’s future earnings potential and the value of Concentra’s assembled workforce. The goodwill has been allocated to the Concentra segment 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 three months ended September 30, 2015, Concentra contributed net revenue of $259.0 million and net income of approximately $0.3 million which is reflected in the Company’s consolidated statement of operations.

For the period of June 1, 2015 through September 30, 2015, Concentra contributed net revenue of $345.8 million and a net loss of approximately $0.1 million which is reflected in the Company’s consolidated statement of operations. We incurred $4.7 million of acquisition costs in the nine months ended September 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.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
	(in thousands, except per share amounts)

Net revenue	$	1,017,953	$	1,021,123	$	3,051,398	$	3,115,773
Net income	25,011		29,406		88,843		100,628
Income per common share:
Basic	$	0.19	$	0.22	$	0.67	$	0.77
Diluted	$	0.19	$	0.22	$	0.66	$	0.76

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 September 30, 2014 were adjusted to include approximately $12.1 million of interest expense, an income tax benefit of approximately $2.5 million, approximately $0.5 million of rent expense, and approximately $0.2 million in net loss attributable to non-controlling interests. Results for the same period were also adjusted to exclude amortization expense of approximately $1.0 million.

Pro forma results for the nine months ended September 30, 2015 were adjusted to include approximately $19.8 million of interest expense, an income tax benefit of approximately $3.5 million, approximately $1.3 million in net income attributable to non-controlling interests, and approximately $0.9 million of rent expense. Results for the same period were also adjusted to exclude seller costs of $6.0 million, Concentra acquisition costs of $4.7 million, and amortization expense of approximately $1.8 million.

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Pro forma results for the nine months ended September 30, 2014 were adjusted to include approximately $36.1 million of interest expense, an income tax benefit of approximately $7.5 million, $4.7 million of Concentra acquisition costs, approximately $2.2 million of net loss attributable to non-controlling interests, and approximately $1.4 million of rent expense. Results for the same period were also adjusted to exclude amortization expense of approximately $3.1 million.

4. Property and Equipment

Property and equipment consists of the following:

	December 31, 2014			September 30, 2015
	(in thousands)
Land	$	71,635		$	74,661
Leasehold improvements	155,648			287,788
Buildings and improvements	396,228			407,726
Furniture and equipment	272,919			355,548
Construction-in-progress	41,230			106,802
Total property and equipment	937,660			1,232,525
Accumulated depreciation and amortization	(395,350		)	(432,095		)
Property and equipment, net	$	542,310		$	800,430

Depreciation expense was $28.5 million and $17.4 million for the three months ended September 30, 2015 and 2014, respectively. Depreciation expense was $66.3 million and $50.6 million for the nine months ended September 30, 2015 and 2014, respectively.

5. Intangible Assets

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

	December 31, 2014		September 30, 2015
	(in thousands)

Goodwill	$	1,642,083	$	2,367,228

Identifiable intangibles:
Trademarks	$	57,709	$	140,709
Certificates of need	12,727		12,983
Accreditations	2,083		2,083
Customer relationships	—		102,865
Total identifiable intangibles	$	72,519	$	258,640

Amortization expense was $3.0 million and $0.2 for the three months ended September 30, 2015 and 2014, respectively. Amortization expense was $4.4 million and $0.4 million for the nine months ended September 30, 2015 and 2014, respectively.

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The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At September 30, 2015, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 4.1 years, respectively.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 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		)	—			13,281		13,228
Disposal of business	—			(28		)	—		(28		)
Balance as of September 30, 2015	$	1,345,329		$	306,595		$	715,304	$	2,367,228

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

6. Investments in Unconsolidated Subsidiaries

During the three months ended September 30, 2015, the Company sold an equity investment in an unconsolidated subsidiary of a start-up healthcare company for $33.1 million, which resulted in a gain on the sale of an equity investment of $29.6 million. The gain on sale of the equity investment was classified as non-operating income in the condensed consolidated statements of operations for the three months and nine months ended September 30, 2015. The proceeds of $33.1 million were classified as cash provided from an investing activity in the condensed consolidated statements of cash flows for the nine months ended September 30, 2015.

For the nine months ended September 30, 2015 and 2014, the Company received cash distributions of $11.8 million and $11.9 million, respectively. The cash distributions were determined to be a return on capital from certain of its unconsolidated equity investments and were classified as cash provided by operating activities in its condensed consolidated statements of cash flows. The prior-year amount was reclassified in order to conform to the current year presentation.

7. 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		September 30, 2015
	(in thousands)
Select 6.375% senior notes(1)	$	711,465	$	711,293
Select credit facilities:
Select revolving facility	60,000		225,000
Select term loans(2)	775,996		750,156
Other - Select	5,515		14,375
Total Select debt	1,552,976		1,700,824
Less: Select current maturities	10,874		11,617
Select long-term debt maturities	$	1,542,102	$	1,689,207

Concentra credit facilities:
Concentra revolving facility			$	—
Concentra term loans(3)			645,886
Other - Concentra			4,034
Total Concentra debt			649,920
Less: Concentra current maturities			6,049
Concentra long-term debt maturities			$	643,871

Total current maturities	$	10,874	$	17,666
Total long-term debt maturities	1,542,102		2,333,078
Total debt	$	1,552,976	$	2,350,744

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(1) Includes unamortized premium of $1.5 million and $1.3 million at December 31, 2014 and September 30, 2015, respectively.

(2) Includes unamortized discounts of $4.2 million and $3.1 million at December 31, 2014 and September 30, 2015, respectively.

(3) Includes unamortized discounts of $3.0 million at September 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.

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.

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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 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 October 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)
October 1 – December 31, 2015	$	2,577	$	1,578	$	4,155
2016	283,412		5,504		288,916
2017	6,402		4,139		10,541
2018	695,645		4,151		699,796
2019	2,465		4,165		6,630
2020 and beyond	710,323		630,383		1,340,706
Total	$	1,700,824	$	649,920	$	2,350,744

Loss on Early Retirement of Debt

On March 4, 2014, Select amended the Select term loans under the Select credit facilities. During the nine months ended September 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.

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8. 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 $975.2 million at December 31, 2014 and September 30, 2015, respectively. The fair value of the Select credit facilities was $816.6 million and $960.6 million at December 31, 2014 and September 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 $711.3 million at December 31, 2014 and September 30, 2015, respectively. The fair value of Select’s 6.375% senior notes was $722.4 million and $695.8 million at December 31, 2014 and September 30, 2015, respectively. The fair value of this debt was based on quoted market prices.

The carrying value of the Concentra term loans was $645.9 million at September 30, 2015. The fair value of the Concentra term loans, was $649.3 million at September 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.

9. 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 gain on sale of equity investment.

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

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

Net operating revenues	$	556,335	$	201,720		$	14		$	758,069
Adjusted EBITDA	80,950		23,012			(17,162		)	86,800
Total assets	2,223,808		531,285			106,984			2,862,077
Capital expenditures	18,167		3,430			1,260			22,857

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

Net operating revenues	$	562,328	$	199,593	$	258,969	$	233		$	1,021,123
Adjusted EBITDA	53,656		23,807		25,584		(18,536		)	84,511
Total assets	2,333,049		541,435		1,332,975		106,946			4,314,405
Capital expenditures	27,494		4,023		9,640		3,923			45,080

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

Net operating revenues	$	1,678,793	$	614,368		$	248		$	2,293,409
Adjusted EBITDA	261,788		74,433			(51,239		)	284,982
Total assets	2,223,808		531,285			106,984			2,862,077
Capital expenditures	59,465		9,606			4,279			73,350

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

Net operating revenues	$	1,753,445	$	603,831	$	345,798	$	457		$	2,703,531
Adjusted EBITDA	241,575		74,662		36,783		(54,672		)	298,348
Total assets	2,333,049		541,435		1,332,975		106,946			4,314,405
Capital expenditures	81,329		11,048		13,494		8,121			113,992

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

	Three Months Ended September 30, 2014
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)	Other			Total
	(in thousands)
Adjusted EBITDA	$	80,950		$	23,012			$	(17,162	)
Depreciation and amortization	(13,445		)	(3,210		)		(929		)
Stock compensation expense	—			—				(3,199		)
Income (loss) from operations	$	67,505		$	19,802			$	(21,290	)	$	66,017
Equity in earnings of unconsolidated subsidiaries											1,988
Interest expense											(21,753		)
Income before income taxes											$	46,252

	Three Months Ended September 30, 2015
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	53,656		$	23,807		$	25,584		$	(18,536	)
Depreciation and amortization	(13,782		)	(3,247		)	(13,316		)	(1,127		)
Stock compensation expense	—			—			(811		)	(4,014		)
Income (loss) from operations	$	39,874		$	20,560		$	11,457		$	(23,677	)	$	48,214
Gain on sale of equity investment													29,647
Equity in earnings of unconsolidated subsidiaries													6,348
Interest expense													(33,052		)
Income before income taxes													$	51,157

	Nine Months Ended September 30, 2014
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)	Other			Total
	(in thousands)
Adjusted EBITDA	$	261,788		$	74,433			$	(51,239	)
Depreciation and amortization	(38,607		)	(9,647		)		(2,755		)
Stock compensation expense	—			—				(7,319		)
Income (loss) from operations	$	223,181		$	64,786			$	(61,313	)	$	226,654
Loss on early retirement of debt