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 March 31, 2016

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to .

Commission File Number: 001 – 34465 and 001 – 31441

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware
Delaware
(State or other jurisdiction of
incorporation or organization)

20-1764048
23-2872718
(I.R.S. employer identification
number)

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

(Address of principal executive offices and zip code)

(717) 972-1100

(Registrants’ telephone number, including area code)

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

YES x NO o

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

YES x NO o

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

Large accelerated
filer x

Accelerated
filer o

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

Smaller reporting
company o

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

Large accelerated
filer o

Accelerated
filer o

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

Smaller reporting company o

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

YES o NO x

As of March 31, 2016, Select Medical Holdings Corporation had outstanding 131,250,374 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	5

	Condensed consolidated statements of cash flows	6

	Notes to condensed consolidated financial statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45

ITEM 4.	CONTROLS AND PROCEDURES	46

PART II	OTHER INFORMATION	48

ITEM 1.	LEGAL PROCEEDINGS	48

ITEM 1A.	RISK FACTORS	49

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	49

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	49

ITEM 4.	MINE SAFETY DISCLOSURES	49

ITEM 5.	OTHER INFORMATION	49

ITEM 6.	EXHIBITS	49

SIGNATURES

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PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		March 31,		December 31,			March 31,
	2015		2016		2015			2016

ASSETS
Current Assets:
Cash and cash equivalents	$	14,435	$	85,408	$	14,435		$	85,408
Accounts receivable, net of allowance for doubtful accounts of $61,133 and $55,709 at 2015 and 2016, respectively	603,558		626,375		603,558			626,375
Current deferred tax asset	28,688		45,817		28,688			45,817
Prepaid income taxes	16,694		—		16,694			—
Other current assets	85,779		86,423		85,779			86,423
Total Current Assets	749,154		844,023		749,154			844,023

Property and equipment, net	864,124		872,543		864,124			872,543
Goodwill	2,314,624		2,675,522		2,314,624			2,675,522
Other identifiable intangibles, net	318,675		318,174		318,675			318,174
Other assets	142,101		137,707		142,101			137,707

Total Assets	$	4,388,678	$	4,847,969	$	4,388,678		$	4,847,969

Current Liabilities:
Bank overdrafts	$	28,615	$	—	$	28,615		$	—
Current portion of long-term debt and notes payable	225,166		8,296		225,166			8,296
Accounts payable	137,409		122,279		137,409			122,279
Accrued payroll	120,989		128,553		120,989			128,553
Accrued vacation	73,977		79,783		73,977			79,783
Accrued interest	9,401		23,453		9,401			23,453
Accrued other	133,728		149,993		133,728			149,993
Income taxes payable	—		2,848		—			2,848
Total Current Liabilities	729,285		515,205		729,285			515,205

Long-term debt, net of current portion	2,160,730		2,773,450		2,160,730			2,773,450
Non-current deferred tax liability	218,705		213,923		218,705			213,923
Other non-current liabilities	133,220		136,046		133,220			136,046

Total Liabilities	3,241,940		3,638,624		3,241,940			3,638,624

Commitments and contingencies (Note 11)

Redeemable non-controlling interests	238,221		239,627		238,221			239,627

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,282,798 and 131,250,374 shares issued and outstanding at 2015 and 2016, respectively	131		131		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	424,506		428,294		904,375			908,163
Retained earnings (accumulated deficit)	434,616		489,518		(45,122		)	9,780
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	859,253		917,943		859,253			917,943
Non-controlling interest	49,264		51,775		49,264			51,775
Total Equity	908,517		969,718		908,517			969,718

Total Liabilities and Equity	$	4,388,678	$	4,847,969	$	4,388,678		$	4,847,969

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

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Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2015			2016			2015			2016

Net operating revenues	$	795,343		$	1,088,330		$	795,343		$	1,088,330

Costs and expenses:
Cost of services	664,385			922,262			664,385			922,262
General and administrative	21,675			28,268			21,675			28,268
Bad debt expense	12,670			16,397			12,670			16,397
Depreciation and amortization	17,348			34,517			17,348			34,517
Total costs and expenses	716,078			1,001,444			716,078			1,001,444

Income from operations	79,265			86,886			79,265			86,886

Other income and expense:
Loss on early retirement of debt	—			(773		)	—			(773		)
Equity in earnings of unconsolidated subsidiaries	2,592			4,652			2,592			4,652
Non-operating gain, net	—			25,087			—			25,087
Interest expense	(21,388		)	(38,848		)	(21,388		)	(38,848		)

Income before income taxes	60,469			77,004			60,469			77,004

Income tax expense	23,184			17,060			23,184			17,060
Net income	37,285			59,944			37,285			59,944

Less: Net income attributable to non-controlling interests	2,222			5,111			2,222			5,111

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	35,063		$	54,833		$	35,063		$	54,833

Basic	$	0.27		$	0.42
Diluted	$	0.27		$	0.42

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	127,565			127,500
Diluted	127,872			127,581

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, 2015			$	908,517		131,283		131		424,506			434,616			49,264
Net income	$	56,195	56,195										54,833			1,362
Net income - attributable to redeemable non-controlling interests	3,749
Total comprehensive income	$	59,944
Issuance and vesting of restricted stock			3,773			(36	)	0		3,773
Tax benefit from stock based awards			16							16
Stock option expense			11							11
Exercise of stock options			21			3		0		21
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(2,323		)											(2,323		)
Issuance of non-controlling interests			523													523
Purchase of redeemable non-controlling interests			320										320
Other			151							(33		)	(251		)	435
Balance at March 31, 2016			$	969,718		131,250		$	131	$	428,294		$	489,518		$	51,775

						Select Medical Corporation Stockholders
	Comprehensive Income		Total			Common Stock Issued	Common Stock Par Value		Capital in Excess of Par			Retained Earnings (Accumulated Deficit)			Non-controlling Interests
Balance at December 31, 2015			$	908,517		0	$	0	$	904,375		$	(45,122	)	$	49,264
Net income	$	56,195	56,195									54,833			1,362
Net income - attributable to redeemable non-controlling interests	3,749
Total comprehensive income	$	59,944
Additional investment by Holdings			21						21
Contribution related to restricted stock awards and stock option issuances by Holdings			3,784						3,784
Tax benefit from stock based awards			16						16
Non-controlling interests acquired in business combination			2,514												2,514
Distributions to non-controlling interests			(2,323		)										(2,323		)
Issuance of non-controlling interests			523												523
Purchase of redeemable non-controlling interests			320									320
Other			151						(33		)	(251		)	435
Balance at March 31, 2016			$	969,718		0	$	0	$	908,163		$	9,780		$	51,775

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

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Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2015			2016			2015			2016

Operating activities
Net income	$	37,285		$	59,944		$	37,285		$	59,944
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	28			8,305			28			8,305
Depreciation and amortization	17,348			34,517			17,348			34,517
Amortization of leasehold interests	—			123			—			123
Provision for bad debts	12,670			16,397			12,670			16,397
Equity in earnings of unconsolidated subsidiaries	(2,592		)	(4,652		)	(2,592		)	(4,652		)
Loss on early retirement of debt	—			773			—			773
Loss (gain) on sale of assets and business	5			(30,393		)	5			(30,393		)
Impairment of equity investment	—			5,339			—			5,339
Stock compensation expense	2,399			3,976			2,399			3,976
Amortization of debt discount, premium and issuance costs	1,929			3,691			1,929			3,691
Deferred income taxes	(2,471		)	(3,475		)	(2,471		)	(3,475		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(61,810		)	(39,164		)	(61,810		)	(39,164		)
Other current assets	(5,924		)	7,560			(5,924		)	7,560
Other assets	1,663			(1,014		)	1,663			(1,014		)
Accounts payable	5,332			(21,322		)	5,332			(21,322		)
Accrued expenses	6,757			51,193			6,757			51,193
Income taxes	24,916			19,354			24,916			19,354
Net cash provided by operating activities	37,535			111,152			37,535			111,152

Investing activities
Purchases of property and equipment	(27,848		)	(46,768		)	(27,848		)	(46,768		)
Proceeds from sale of assets and business	—			62,600			—			62,600
Investment in businesses	(1,000		)	(623		)	(1,000		)	(623		)
Acquisition of businesses, net of cash acquired	(2,686		)	(412,883		)	(2,686		)	(412,883		)
Net cash used in investing activities	(31,534		)	(397,674		)	(31,534		)	(397,674		)

Financing activities
Borrowings on revolving facilities	215,000			190,000			215,000			190,000
Payments on revolving facilities	(175,000		)	(175,000		)	(175,000		)	(175,000		)
Payments on term loans	(26,884		)	(226,962		)	(26,884		)	(226,962		)
Borrowings on Select term loans, net of discount and debt issuance costs	—			600,127			—			600,127
Borrowings of other debt	6,582			6,727			6,582			6,727
Principal payments on other debt	(4,584		)	(4,464		)	(4,584		)	(4,464		)
Dividends paid to common stockholders	(13,129		)	—			—			—
Dividends paid to Holdings	—			—			(13,129		)	—
Proceeds from issuance of common stock	489			21			—			—
Equity investment by Holdings	—			—			489			21
Repayments of bank overdrafts	(2,821		)	(28,615		)	(2,821		)	(28,615		)
Tax benefit from stock based awards	5			16			5			16
Purchase of non-controlling interests	—			(1,294		)	—			(1,294		)
Distributions to non-controlling interests	(2,425		)	(3,061		)	(2,425		)	(3,061		)
Net cash provided by (used in) financing activities	(2,767		)	357,495			(2,767		)	357,495

Net increase in cash and cash equivalents	3,234			70,973			3,234			70,973

Cash and cash equivalents at beginning of period	3,354			14,435			3,354			14,435
Cash and cash equivalents at end of period	$	6,588		$	85,408		$	6,588		$	85,408

Supplemental Cash Flow Information
Cash paid for interest	$	8,735		$	21,544		$	8,735		$	21,544
Cash paid for taxes	$	733		$	1,209		$	733		$	1,209

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

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SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of March 31, 2016 and for the three month periods ended March 31, 2015 and 2016 have been prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2016. 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, 2015 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.

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.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (the “ASU”) 2016-02, Leases. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the adoption methodology and the impact of this update on its consolidated financial position, results of operations, and cash flows.

In May 2014, the FASB issued ASU 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. In March of 2016, the FASB issued ASU 2016-08 to further clarify the implementation guidance on principal versus agent considerations. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation, which simplifies various aspects of accounting for share-based payments to employees. The areas for simplification involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard will be effective 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.

Recently Adopted Accounting Pronouncements

In April and August 2015, the FASB issued ASU 2015-03 and ASU 2015-15, each titled Interest- Imputation of Interest, 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 Company adopted the standard at the beginning of the first quarter of 2016. The balance sheet as of December 31, 2015 was retrospectively conformed to reflect the adoption of the standard and approximately $38.0 million of unamortized debt issuance costs are now classified as a direct reduction of debt, rather than a component of other assets.

Reclassifications

Certain reclassifications have been made to prior-year amounts in order to conform to the current-year presentation.

3. Acquisitions

Physiotherapy Acquisition

On January 22, 2016 Select entered into an Agreement and Plan of Merger with Grip Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Select, Physiotherapy Associates Holdings, Inc., a Delaware corporation (“Physiotherapy”), and KHR Physio, LLC, a Delaware limited liability company, solely in its capacity as the Holder Representative. On March 4, 2016, Select consummated the merger of Physiotherapy and acquired 100% of the issued and outstanding equity securities of Physiotherapy for $408.7 million, net of $12.3 million of cash acquired. Select financed the acquisition using a combination of cash on

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hand and proceeds from an incremental term loan facility under the Select credit facilities, as defined below (see note 7 for more details). During the three months ended March 31, 2016, $3.2 million of Physiotherapy acquisition costs were recognized in general and administrative expense.

Physiotherapy is a national provider of outpatient physical rehabilitation care offering a wide range of services, including general orthopedics, spinal care and neurological rehabilitation, as well as orthotics and prosthetics services. As of March 4, 2016, Physiotherapy operated 574 clinics.

The Physiotherapy acquisition is being accounted for under the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. The Company has prepared a preliminary allocation of 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, 2016.

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	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	80,887
Identifiable intangible assets	2,800
Goodwill	357,292
Total assets	453,319
Total liabilities	29,811
Acquired non-controlling interests	2,514
Net assets acquired	420,994
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	408,654

Goodwill of $357.3 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 factors considered in determining the goodwill that resulted from the Physiotherapy purchase price included Physiotherapy’s future earnings potential and the value of the assembled workforce. The goodwill has been allocated to the Outpatient Rehabilitation segment and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in goodwill with an estimated value of $8.8 million that is deductible for tax purposes, which the Company will deduct through 2030.

Due to the integrated nature of our operations, it is not practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.

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Concentra Acquisition

On June 1, 2015, MJ Acquisition Corporation, a joint venture that Select created with Welsh, Carson, Anderson & Stowe XII, L.P., consummated the acquisition of Concentra, Inc. (“Concentra”), the indirect operating subsidiary of Concentra Group Holdings, LLC, and its subsidiaries. Pursuant to the terms of the stock purchase agreement, dated as of March 22, 2015, by and among MJ Acquisition Corporation, Concentra and Humana Inc., MJ Acquisition Corporation acquired 100% of the issued and outstanding equity securities of Concentra from Humana, Inc. for $1,047.2 million, net of $3.8 million of cash acquired.

During the fourth quarter of the year ended December 31, 2015, the Company finalized the purchase price allocation to identifiable intangible assets, fixed assets, non-controlling interests, and certain pre-acquisition contingencies. The Company is in the process of completing the accounting for certain deferred tax matters. The Company expects to complete the purchase price allocation during the second quarter of 2016. There were no purchase accounting adjustments during the three months ended March 31, 2016.

For the three months ended March 31, 2016, Concentra contributed net revenue of $250.9 million and net income of approximately $2.2 million which are reflected in the Company’s consolidated statements of operations.

Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisitions of Concentra and Physiotherapy occurred January 1, 2014 and 2015, respectively. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisitions been consummated on the aforementioned dates.

	March 31,
	2015		2016
	(in thousands, except per share amounts)
Net revenue	$	1,115,006	$	1,141,860
Net income	27,159		54,763
Income per common share:
Basic	$	0.21	$	0.42
Diluted	$	0.20	$	0.42

The pro forma financial information is based on the preliminary allocation of the purchase price of the Concentra and Physiotherapy acquisitions, and therefore subject to adjustment upon finalizing the purchase price allocations, as described above, during the measurement periods. The net income tax impact was calculated at a statutory rate, as if Concentra and Physiotherapy had been subsidiaries of the Company as of January 1, 2014 and 2015, respectively.

Pro forma results for the three months ended March 31, 2015 were adjusted to include $3.2 million of Physiotherapy acquisition costs. Pro forma results for the three months ended March 31, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

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Other Acquisitions

In addition to the acquisition of Physiotherapy, during the three months ended March 31, 2016, the Company acquired interests in several businesses, consisting principally of outpatient rehabilitation businesses and occupational medicine centers. The Company provided total consideration of $4.3 million, consisting of cash amounting to $3.9 million (net of cash acquired) and liabilities assumed of $0.4 million, for identifiable tangible net assets consisting principally of accounts receivable, and property and equipment with an aggregate fair value of $0.2 million. These acquisitions resulted in recognition of goodwill of $0.5 million in the outpatient rehabilitation segment and $3.5 million in the Concentra segment.

4. Sale of the Contract Therapy Business

On March 31, 2016, the Company sold its contract therapy business for a purchase price at closing of $65.0 million, excluding transaction expenses and subject to certain post-closing adjustments, which resulted in a non-operating gain of $30.4 million for the three months ended March 31, 2016. The Company may also receive an earn-out of up to an aggregate of $7.5 million contingent on the contract therapy business meeting certain revenue thresholds from 2016 through 2018. The net proceeds of $62.6 million were classified as an investing activity in the statements of cash flows for the three months ended March 31, 2016. The contract therapy business had a tax basis which exceeded the sales price and was treated as a discrete tax event particular to the quarter ended March 31, 2016.

5. Impairment of Equity Investment

During the three months ended March 31, 2016, the Company recognized an impairment loss of $5.3 million on one of its equity investments. The loss, which was triggered by a planned sale of the investee by the controlling interest, is reflected as part of non-operating gain, net on the Company’s consolidated statements of operations.

6. Intangible Assets

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

	December 31, 2015		March 31, 2016
	(in thousands)
Goodwill	$	2,314,624	$	2,675,522
Identifiable intangibles—Indefinite lived assets:
Trademarks	162,609		165,409
Certificates of need	13,022		13,032
Accreditations	2,045		2,045
Identifiable intangibles—Finite lived assets:
Customer relationships	132,751		129,436
Favorable leasehold interests	8,248		8,134
Non-compete agreements	—		118
Total identifiable intangibles	$	2,633,299	$	2,993,696

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The Company’s customer relationship and non-compete agreement assets amortize over their estimated useful lives. Amortization expense for the Company’s customer relationships and non-compete agreements was $3.8 million for the three months ended March 31, 2016. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $14.6 million.

In addition, the Company has recognized unfavorable leasehold interests which are recorded as liabilities. The net carrying value of unfavorable leasehold interests was $2.8 million as of March 31, 2016.

The Company’s favorable leasehold assets and unfavorable leasehold liabilities are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. The effect of this amortization increased rent expense by $0.1 million for the three months ended March 31, 2016.

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At March 31, 2016, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 3.6 years, respectively.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the three months ended March 31, 2016 are as follows:

	Specialty Hospitals		Outpatient Rehabilitation			Concentra		Total
	(in thousands)
Balance as of December 31, 2015	$	1,357,379	$	306,595		$	650,650	$	2,314,624
Goodwill acquired during year	—		357,808			3,545		361,353
Measurement period adjustment	—		—			138		138
Sale of business	—		(593		)	—		(593		)
Balance as of March 31, 2016	$	1,357,379	$	663,810		$	654,333	$	2,675,522

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

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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 shown in the following tables:

	December 31, 2015		March 31, 2016
	(in thousands)
Select 6.375% senior notes(1)	$	700,867	$	701,289
Select credit facilities:
Select revolving facility	295,000		315,000
Select term loans(2)	743,071		1,120,554
Other—Select	11,987		16,045
Total Select debt	1,750,925		2,152,888
Less: Select current maturities	222,905		6,855
Select long-term debt maturities	$	1,528,020	$	2,146,033
Concentra credit facilities:
Concentra revolving facility	$	5,000	$	—
Concentra term loans(3)	624,659		624,386
Other—Concentra	5,312		4,472
Total Concentra debt	634,971		628,858
Less: Concentra current maturities	2,261		1,441
Concentra long-term debt maturities	$	632,710	$	627,417
Total current maturities	$	225,166	$	8,296
Total long-term debt maturities	2,160,730		2,773,450
Total debt	$	2,385,896	$	2,781,746

(1) Includes unamortized premium of $1.2 million at both December 31, 2015 and March 31, 2016. Includes unamortized debt issuance costs of $10.4 million and $9.9 million at December 31, 2015 and March 31, 2016, respectively.

(2) Includes unamortized discounts of $2.8 million and $14.7 million at December 31, 2015 and March 31, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $17.2 million at December 31, 2015 and March 31, 2016, respectively.

(3) Includes unamortized discounts of $2.9 million and $2.8 million at December 31, 2015 and March 31, 2016, respectively. Includes unamortized debt issuance costs of $20.2 million and $19.5 million at December 31, 2015 and March 31, 2016, respectively.

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Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt for the period from April 1, 2016 through December 31, 2016 and the years after 2016 are approximately as follows:

	Select			Concentra			Total
	(in thousands)
April 1, 2016 — December 31, 2016	$	13,414		$	3,702		$	17,116
2017	14,280			4,581			18,861
2018	845,740			4,597			850,337
2019	8,488			4,615			13,103
2020	6,250			4,636			10,886
2021 and beyond	1,305,313			628,965			1,934,278
Total principal	2,193,485			651,096			2,844,581
Unamortized discounts and premiums	(13,513		)	(2,781		)	(16,294		)
Unamortized debt issuance costs	(27,084		)	(19,457		)	(46,541		)
Total	$	2,152,888		$	628,858		$	2,781,746

Excess Cash Flow Payment

On March 2, 2016, Select made a principal prepayment of $10.2 million associated with its term loans (the “Select term loans”) in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow as defined in the Select credit facilities.

Select Credit Facilities

On March 4, 2016, Select entered into an Additional Credit Extension Amendment (the “Additional Credit Extension Amendment”) to Select’s senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and lender, and the additional lenders named therein (the “Select credit facilities”). The Additional Credit Extension Amendment (i) provides for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans, (ii) extends the financial covenants through March 3, 2021, (iii) adds a 1.00% prepayment premium for prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower yield than the Series F Tranche B Term Loans, and (iv) makes certain other technical amendments to the Select credit facilities. The Series F Tranche B Term Loans will bear interest at a rate per annum equal to the Adjusted LIBO Rate (as defined in the Select credit facilities, subject to an Adjusted LIBO Rate floor of 1.00%) plus 5.00% for Eurodollar Loans or the Alternate Base Rate (as defined in the Select credit facilities) plus 4.00% for Alternate Base Rate Loans (as defined in the Select credit facilities). Select is required to make principal payments on the Series F Tranche B Term Loans in quarterly installments on the last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to 0.25% of the aggregate principal amount of the Series F Tranche B Term Loans outstanding as of the date of the Additional Credit Extension Amendment. The balance of the Series F Tranche B Term Loans will be payable on March 3, 2021. Except as specifically set forth in the Additional Credit Extension Amendment, the terms and conditions of the Series F Tranche B Term Loans are identical to the terms of the outstanding Series E Term B Loans under the Select credit facilities and the other loan documents to which Select is party.

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Select used the proceeds of the Series F Tranche B Term Loans to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing, and the Additional Credit Extension Amendment.

As a result of the Additional Credit Extension Amendment relating to the Series F Tranche B Term Loans, the interest rate payable on the Series E Tranche B Term Loans was increased from Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 4.00%.

During the three months ended March 31, 2016, the Company recognized a loss on early retirement of debt of $0.8 million.

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.

	December 31, 2015						March 31, 2016
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select credit facilities	$	1,048,277	$	1,038,071	$	1,023,616	$	1,467,440	$	1,435,554	$	1,446,415
Select 6.375% senior notes	710,000		700,867		623,948		710,000		701,289		670,950
Concentra credit facilities	652,750		629,659		645,392		646,625		624,386		639,275

The fair value of the Select credit facilities and the Concentra credit facilities was based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes debt was based on quoted market prices.

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, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

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

	Three Months Ended March 31, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra	Other			Total
	(in thousands)
Net operating revenues	$	598,781	$	196,443		$	119		$	795,343
Adjusted EBITDA	96,472		22,133			(19,665		)	98,940
Total assets	2,332,591		540,473			113,987			2,987,051
Capital expenditures	22,793		3,922			1,133			27,848

	Three Months Ended March 31, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	598,954	$	238,082	$	250,877	$	417		$	1,088,330
Adjusted EBITDA	86,756		28,879		34,153		(21,173		)	128,615
Total assets	2,438,776		1,001,913		1,313,590		93,690			4,847,969
Capital expenditures	33,675		4,974		3,210		4,909			46,768

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

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

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	Three Months Ended March 31, 2016
	Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	86,756		$	28,879		$	34,153		$	(21,173	)
Depreciation and amortization	(13,893		)	(4,036		)	(15,376		)	(1,212		)
Stock compensation expense	—			—			(192		)	(3,784		)
Physiotherapy acquisition costs	—			—			—			(3,236		)
Income (loss) from operations	$	72,863		$	24,843		$	18,585		$	(29,405	)	$	86,886
Loss on early retirement of debt													(773		)
Equity in earnings of unconsolidated subsidiaries													4,652
Non-operating gain, net													25,087
Interest expense													(38,848		)
Income before income taxes													$	77,004

(1) The outpatient rehabilitation segment includes the operating results of the contract therapy business for the three months ended March 31, 2016. Total assets presented under outpatient rehabilitation reflect the disposition of the assets sold as a result of the sale of the contract therapy business.

10. Income per Common Share

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

	Three Months Ended March 31,
	2015		2016
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	35,063	$	54,833
Less: Earnings allocated to unvested restricted stockholders	973		1,582
Net income available to common stockholders	$	34,090	$	53,251

Denominator:
Weighted average shares — basic	127,565		127,500
Effect of dilutive securities:
Stock options	307		81
Weighted average shares — diluted	127,872		127,581

Basic income per common share	$	0.27	$	0.42
Diluted income per common share	$	0.27	$	0.42

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11. Commitments and Contingencies

Litigation

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

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

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

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

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management plan imposing certain deadlines. The defendants filed a Motion to Dismiss the Second Amended Complaint in December 2015. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

On July 13, 2015, the federal District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (‘‘SSH-Knoxville’’), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the Court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015. The defendants filed a Motion to Dismiss such Complaint in November 2015. The Company intends to vigorously defend this action if the relators pursue it, but at this time the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At March 31, 2016, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at the Company’s long term acute care properties, inpatient rehabilitation facilities, and Concentra centers totaling approximately $10.6 million.

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

Select’s 6.375% senior notes are fully and unconditionally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the ‘‘Subsidiary Guarantors’’) which is defined as a subsidiary where Select or a subsidiary of Select holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the ‘‘Non-Guarantor Subsidiaries,’’ including Group Holdings and its subsidiaries, which were designated as Non-Guarantor subsidiaries by Select’s board of directors at the closing of the Concentra acquisition, the ‘‘Non-Guarantor Concentra’’).

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 2015 and March 31, 2016 and for the three months ended March 31, 2015 and 2016.

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

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

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	Select Medical Corporation Condensed Consolidating Balance Sheet March 31, 2016 (unaudited)



	Select (Parent		Subsidiary		Non-Guarantor		Non-Guarantor					Consolidated Select
	Company Only)		Guarantors		Subsidiaries		Concentra		Eliminations			Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	46,768	$	9,692	$	5,013	$	23,935	$	—		$	85,408
Accounts receivable, net	—		427,287		80,259		118,829		—			626,375
Current deferred tax asset	10,692		25,010		4,921		5,194		—			45,817
Intercompany receivables	—		1,992,778		106,964		—		(2,099,742		)(a)	—
Prepaid income taxes	—		—		—		5,827		(5,827		)(e)	—
Other current assets	15,993		38,183		6,676		25,571		—			86,423
Total Current Assets	73,453		2,492,950		203,833		179,356		(2,105,569		)	844,023

Property and equipment, net	40,925		561,766		62,733		207,119		—			872,543
Investment in affiliates	4,498,143		48,329		—		—		(4,546,472		)(b)(c)	—
Goodwill	—		2,021,189		—		654,333		—			2,675,522
Other identifiable intangibles, net	—		75,586		—		242,588		—			318,174
Non-current deferred tax asset	13,986		—		—		—		(13,986		)(d)	—
Other assets	3,687		103,103		723		30,194		—			137,707

Total Assets	4,630,194		5,302,923		267,289		1,313,590		(6,666,027		)	4,847,969

Liabilities and Equity
Current Liabilities:
Current portion of long-term debt and notes payable	5,843		543		469		1,441		—			8,296
Accounts payable	10,433		88,182		13,309		10,355		—			122,279
Intercompany payables	1,992,778		106,964		—		—		(2,099,742		)(a)	—
Accrued payroll	4,985		90,503		5,432		27,633		—			128,553
Accrued vacation	6,655		50,253		11,967		10,908		—			79,783
Accrued interest	20,353		1		11		3,088		—			23,453
Accrued other	41,721		55,325		12,177		40,770		—			149,993
Income taxes payable	8,675		—		—		—		(5,827		)(e)	2,848
Total Current Liabilities	2,091,443		391,771		43,365		94,195		(2,105,569		)	515,205

Long-term debt, net of current portion	1,574,907		468,966		102,160		627,417		—			2,773,450
Non-current deferred tax liability	—		112,154		9,010		106,745		(13,986		)(d)	213,923
Other non-current liabilities	45,901		46,415		4,921		38,809		—			136,046

Total Liabilities	3,712,251		1,019,306		159,456		867,166		(2,119,555		)	3,638,624

Redeemable non-controlling interests	—		—		10,695		228,932		—			239,627

Stockholder’s Equity:
Common stock	0		—		—		—		—			0
Capital in excess of par