Edgar Filing: SELECT MEDICAL HOLDINGS CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 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 June 30, 2016, Select Medical Holdings Corporation had outstanding 131,472,188 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	56

ITEM 4.	CONTROLS AND PROCEDURES	57

PART II	OTHER INFORMATION	59

ITEM 1.	LEGAL PROCEEDINGS	59

ITEM 1A.	RISK FACTORS	60

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	60

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	61

ITEM 4.	MINE SAFETY DISCLOSURES	61

ITEM 5.	OTHER INFORMATION	61

ITEM 6.	EXHIBITS	61

SIGNATURES

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PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		June 30,		December 31,			June 30,
	2015		2016		2015			2016

ASSETS
Current Assets:
Cash and cash equivalents	$	14,435	$	78,420	$	14,435		$	78,420
Accounts receivable, net of allowance for doubtful accounts
of $61,133 and $56,664 at 2015 and 2016, respectively	603,558		613,790		603,558			613,790
Current deferred tax asset	28,688		43,955		28,688			43,955
Prepaid income taxes	16,694		—		16,694			—
Other current assets	85,779		88,862		85,779			88,862
Total Current Assets	749,154		825,027		749,154			825,027

Property and equipment, net	864,124		889,171		864,124			889,171
Goodwill	2,314,624		2,638,286		2,314,624			2,638,286
Other identifiable intangibles, net	318,675		343,928		318,675			343,928
Other assets	142,101		141,937		142,101			141,937

Total Assets	$	4,388,678	$	4,838,349	$	4,388,678		$	4,838,349

Current Liabilities:
Bank overdrafts	$	28,615	$	26,477	$	28,615		$	26,477
Current portion of long-term debt and notes payable	225,166		10,511		225,166			10,511
Accounts payable	137,409		118,420		137,409			118,420
Accrued payroll	120,989		135,552		120,989			135,552
Accrued vacation	73,977		81,074		73,977			81,074
Accrued interest	9,401		16,927		9,401			16,927
Accrued other	133,728		134,085		133,728			134,085
Income taxes payable	—		12,314		—			12,314
Total Current Liabilities	729,285		535,360		729,285			535,360

Long-term debt, net of current portion	2,160,730		2,707,311		2,160,730			2,707,311
Non-current deferred tax liability	218,705		201,538		218,705			201,538
Other non-current liabilities	133,220		131,699		133,220			131,699

Total Liabilities	3,241,940		3,575,908		3,241,940			3,575,908

Commitments and contingencies (Note 11)

Redeemable non-controlling interests	238,221		245,784		238,221			245,784

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,282,798 and 131,472,188 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		432,951		904,375			913,058
Retained earnings (accumulated deficit)	434,616		522,995		(45,122		)	43,019
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	859,253		956,077		859,253			956,077
Non-controlling interest	49,264		60,580		49,264			60,580
Total Equity	908,517		1,016,657		908,517			1,016,657

Total Liabilities and Equity	$	4,388,678	$	4,838,349	$	4,388,678		$	4,838,349

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

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Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended June 30,						For the Three Months Ended June 30,
	2015			2016			2015			2016

Net operating revenues	$	887,065		$	1,097,631		$	887,065		$	1,097,631

Costs and expenses:
Cost of services	743,879			916,985			743,879			916,985
General and administrative	24,041			25,870			24,041			25,870
Bad debt expense	12,286			17,517			12,286			17,517
Depreciation and amortization	21,848			36,205			21,848			36,205
Total costs and expenses	802,054			996,577			802,054			996,577

Income from operations	85,011			101,054			85,011			101,054

Other income and expense:
Equity in earnings of unconsolidated subsidiaries	3,848			4,546			3,848			4,546
Non-operating gain	—			13,035			—			13,035
Interest expense	(25,288		)	(44,332		)	(25,288		)	(44,332		)

Income before income taxes	63,571			74,303			63,571			74,303

Income tax expense	23,517			33,450			23,517			33,450
Net income	40,054			40,853			40,054			40,853

Less: Net income attributable to non-controlling interests	3,114			6,918			3,114			6,918

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	36,940		$	33,935		$	36,940		$	33,935

Basic	$	0.28		$	0.26
Diluted	$	0.28		$	0.26

Weighted average shares outstanding:
Basic	127,674			127,626
Diluted	128,009			127,820

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

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Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2015			2016			2015			2016

Net operating revenues	$	1,682,408		$	2,185,961		$	1,682,408		$	2,185,961

Costs and expenses:
Cost of services	1,408,264			1,839,247			1,408,264			1,839,247
General and administrative	45,716			54,138			45,716			54,138
Bad debt expense	24,956			33,914			24,956			33,914
Depreciation and amortization	39,196			70,722			39,196			70,722
Total costs and expenses	1,518,132			1,998,021			1,518,132			1,998,021

Income from operations	164,276			187,940			164,276			187,940

Other income and expense:
Loss on early retirement of debt	—			(773		)	—			(773		)
Equity in earnings of unconsolidated subsidiaries	6,440			9,198			6,440			9,198
Non-operating gain	—			38,122			—			38,122
Interest expense	(46,676		)	(83,180		)	(46,676		)	(83,180		)

Income before income taxes	124,040			151,307			124,040			151,307

Income tax expense	46,701			50,510			46,701			50,510
Net income	77,339			100,797			77,339			100,797

Less: Net income attributable to non-controlling interests	5,336			12,029			5,336			12,029

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	72,003		$	88,768		$	72,003		$	88,768

Basic	$	0.55		$	0.68
Diluted	$	0.55		$	0.68

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	127,620			127,563
Diluted	127,944			127,709

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

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Condensed Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

						Select Medical Holdings Corporation Stockholders										Non-
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			controlling Interests
Balance at December 31, 2015			$	908,517		131,283		$	131	$	424,506		$	434,616		$	49,264
Net income	$	90,774	90,774										88,768			2,006
Net income - attributable to redeemable non-controlling interests	10,023
Total comprehensive income	$	100,797
Issuance and vesting of restricted stock			7,786			149		0		7,786
Tax benefit from stock based awards			269							269
Repurchase of common shares			(506		)	(38	)	0		(238		)	(268		)
Stock option expense			4							4
Exercise of stock options			657			78		0		657
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(3,505		)											(3,505		)
Issuance of non-controlling interests			9,831													9,831
Purchase of redeemable non-controlling interests			320										320
Other			(4		)					(33		)	(441		)	470
Balance at June 30, 2016			$	1,016,657		131,472		$	131	$	432,951		$	522,995		$	60,580

						Select Medical Corporation Stockholders										Non-
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings (Accumulated Deficit)			controlling Interests
Balance at December 31, 2015			$	908,517		0		$	0	$	904,375		$	(45,122	)	$	49,264
Net income	$	90,774	90,774										88,768			2,006
Net income - attributable to redeemable non-controlling interests	10,023
Total comprehensive income	$	100,797
Additional investment by Holdings			657							657
Dividends declared and paid to Holdings			(506		)								(506		)
Contribution related to restricted stock awards and stock option issuances by Holdings			7,790							7,790
Tax benefit from stock based awards			269							269
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(3,505		)											(3,505		)
Issuance of non-controlling interests			9,831													9,831
Purchase of redeemable non-controlling interests			320										320
Other			(4		)					(33		)	(441		)	470
Balance at June 30, 2016			$	1,016,657		0		$	0	$	913,058		$	43,019		$	60,580

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

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Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2015			2016			2015			2016

Operating activities
Net income	$	77,339		$	100,797		$	77,339		$	100,797
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	52			12,039			52			12,039
Depreciation and amortization	39,196			70,722			39,196			70,722
Amortization of leasehold interests	—			295			—			295
Provision for bad debts	24,956			33,914			24,956			33,914
Equity in earnings of unconsolidated subsidiaries	(6,440		)	(9,198		)	(6,440		)	(9,198		)
Loss on early retirement of debt	—			773			—			773
Loss on disposal of assets	251			55			251			55
Gain on sale of assets and business	—			(43,461		)	—			(43,461		)
Impairment of equity investment	—			5,339			—			5,339
Stock compensation expense	5,794			8,174			5,794			8,174
Amortization of debt discount, premium and issuance costs	4,027			7,077			4,027			7,077
Deferred income taxes	(4,428		)	(13,286		)	(4,428		)	(13,286		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(89,265		)	(44,096		)	(89,265		)	(44,096		)
Other current assets	(8,038		)	11,011			(8,038		)	11,011
Other assets	3,568			4,213			3,568			4,213
Accounts payable	8,925			(15,852		)	8,925			(15,852		)
Accrued expenses	707			20,632			707			20,632
Income taxes	18,416			28,821			18,416			28,821
Net cash provided by operating activities	75,060			177,969			75,060			177,969

Investing activities
Purchases of property and equipment	(68,912		)	(80,258		)	(68,912		)	(80,258		)
Proceeds from sale of assets and business	—			71,366			—			71,366
Investment in businesses	(855		)	(1,590		)	(855		)	(1,590		)
Acquisition of businesses, net of cash acquired	(1,047,997		)	(421,519		)	(1,047,997		)	(421,519		)
Net cash used in investing activities	(1,117,764		)	(432,001		)	(1,117,764		)	(432,001		)

Financing activities
Borrowings on revolving facilities	660,000			320,000			660,000			320,000
Payments on revolving facilities	(400,000		)	(380,000		)	(400,000		)	(380,000		)
Net proceeds from Select term loans	—			600,127			—			600,127
Net proceeds from Concentra term loans	623,575			—			623,575			—
Payments on term loans	(26,884		)	(229,649		)	(26,884		)	(229,649		)
Borrowings of other debt	9,590			22,082			9,590			22,082
Principal payments on other debt	(8,320		)	(9,926		)	(8,320		)	(9,926		)
Dividends paid to common stockholders	(13,129		)	—			—			—
Dividends paid to Holdings	—			—			(13,129		)	(506		)
Repurchase of common stock	—			(506		)	—			—
Proceeds from issuance of common stock	1,325			657			—			—
Equity investment by Holdings	—			—			1,325			657
Proceeds from issuance of non-controlling interest	217,065			3,103			217,065			3,103
Proceeds from (repayments of) bank overdrafts	5,590			(2,138		)	5,590			(2,138		)
Tax benefit from stock based awards	11			269			11			269
Purchase of non-controlling interests	—			(1,294		)	—			(1,294		)
Distributions to non-controlling interests	(4,282		)	(4,708		)	(4,282		)	(4,708		)
Net cash provided by financing activities	1,064,541			318,017			1,064,541			318,017

Net increase in cash and cash equivalents	21,837			63,985			21,837			63,985

Cash and cash equivalents at beginning of period	3,354			14,435			3,354			14,435
Cash and cash equivalents at end of period	$	25,191		$	78,420		$	25,191		$	78,420

Supplemental Cash Flow Information
Cash paid for interest	$	39,932		$	69,315		$	39,932		$	69,315
Cash paid for taxes	$	32,702		$	35,518		$	32,702		$	35,518

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

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SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of June 30, 2016, and for the three and six month periods ended June 30, 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 and six months ended June 30, 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 March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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, 2016. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In February 2016, the FASB issued 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

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lessee will depend on its classification as 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.

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. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is evaluating the adoption methodology and the impact of this update on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changes the presentation of deferred income taxes. The intent is to simplify the presentation of deferred income taxes through the requirement that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the standard.

In May 2014, March 2016, and April 2016 the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, respectively, which supersede 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 standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a modified retrospective or cumulative effect transition method for retrospective application. The Company is currently evaluating the standards to determine the impact they 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.

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3. Acquisitions

Physiotherapy Acquisition

On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for $408.7 million, which is subject to a post closing purchase price adjustment, net of $12.3 million of cash acquired. Select financed the acquisition using a combination of cash on 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 six months ended June 30, 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.

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	93,426
Identifiable intangible assets	33,495
Goodwill	319,203
Total assets	458,464
Total liabilities	34,956
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 $319.2 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.

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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.

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 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. During the quarter ended June 30, 2016, the Company completed the accounting for certain deferred tax matters.

The following table summarizes the 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	406,926
Identifiable intangible assets	254,990
Goodwill	651,152
Total assets	1,316,840
Total liabilities	248,797
Acquired non-controlling interests	17,084
Net assets acquired	1,050,959
Less: Cash and cash equivalents acquired	(3,772		)
Net cash paid	$	1,047,187

Goodwill of $651.2 million was 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 Concentra purchase price included Concentra’s future earnings potential and the value of Concentra’s assembled workforce. The goodwill is 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 $23.9 million that is deductible for tax purposes, which the Company will deduct through 2025.

For the three months ended June 30, 2016, Concentra contributed net revenue of $254.9 million and net income of approximately $4.7 million, which are reflected in the Company’s consolidated statements of operations. For the six months ended June 30, 2016, Concentra contributed net revenue of $505.7 million and net income of approximately $7.0 million, which are reflected in the Company’s consolidated statements of operations.

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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. The three months ended June 30, 2016, includes both Concentra and Physiotherapy for the entire period and there are no pro forma adjustments; therefore, no pro forma information is presented for the period.

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2015		2015		2016
	(in thousands, except per share amounts)
Net revenue	$	1,135,268	$	2,250,274	$	2,239,491
Net income attributable to Holdings	38,671		64,069		85,820
Income per common share:
Basic	$	0.29	$	0.49	$	0.64
Diluted	$	0.29	$	0.49	$	0.64

The pro forma financial information is based on the preliminary allocation of the purchase price of the Physiotherapy acquisition, and therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period. 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 six months ended June 30, 2015 were adjusted to include $3.2 million of Physiotherapy acquisition costs and exclude $4.7 million of Concentra acquisition costs. Pro forma results for the six months ended June 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

In addition to the acquisition of Physiotherapy, during the six months ended June 30, 2016, the Company acquired interests in several businesses. The Company provided total consideration of $49.7 million, consisting of cash amounting to $12.5 million (net of cash acquired), minority interest issued of $9.8 million, and liabilities assumed of $1.3 million, for identifiable tangible net assets consisting principally of accounts receivable and property and equipment with an aggregate fair value of $11.0 million. Based on the preliminary purchase price allocations, these acquisitions resulted in recognition of goodwill of $14.6 million in the specialty hospital segment, $0.5 million in the outpatient rehabilitation segment and $3.5 million in the Concentra segment.

4. Sale of Businesses

The Company recognized a non-operating gain of $43.4 million for the six months ended June 30, 2016. The Company sold its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. The Company also transferred five specialty hospitals in an exchange transaction and sold nine outpatient rehabilitation clinics, which resulted in non-operating gains of $7.8 million and $1.7 million, respectively.

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5. Impairment of Equity Investment

During the six months ended June 30, 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 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		June 30, 2016
	(in thousands)
Goodwill	$	2,314,624	$	2,638,286
Identifiable intangibles—Indefinite lived assets:
Trademarks	162,609		166,419
Certificates of need	13,022		13,156
Accreditations	2,045		2,135
Identifiable intangibles—Finite lived assets:
Customer relationships	132,751		125,765
Favorable leasehold interests	8,248		11,699
Non-compete agreements	—		24,754
Total identifiable intangibles	$	2,633,299	$	2,982,214

The Company’s customer relationships and non-compete agreement assets amortize over their estimated useful lives. Amortization expense for the Company’s customer relationships and non-compete agreements was $4.3 million and $1.1 million for the three months ended June 30, 2016 and 2015, respectively. Amortization expense was $8.1 million and $1.2 million for the six months ended June 30, 2016 and 2015, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million.

In addition, the Company has recognized unfavorable leasehold interests which are recorded as liabilities. The net carrying value of unfavorable leasehold interests was $4.3 million and $3.0 million as of June 30, 2016 and December 31, 2015, respectively.

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 net effect of this amortization increased rent expense by $0.2 million for the three months ended June 30, 2016 and $0.3 million for the six months ended June 30, 2016.

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At June 30, 2016, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 3.1 years, respectively.

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The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 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
Acquired	14,600			357,808			3,545		375,953
Measurement period adjustment	—			(38,090		)	4,825		(33,265		)
Disposed	(10,633		)	(8,393		)	—		(19,026		)
Balance as of June 30, 2016	$	1,361,346		$	617,920		$	659,020	$	2,638,286

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

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		June 30, 2016
	(in thousands)
Select 6.375% senior notes(1)	$	700,867	$	701,703
Select credit facilities:
Select revolving facility	295,000		240,000
Select term loans(2)	743,071		1,121,105
Other—Select	11,987		24,158
Total Select debt	1,750,925		2,086,966
Less: Select current maturities	222,905		6,778
Select long-term debt maturities	$	1,528,020	$	2,080,188

Concentra credit facilities:
Concentra revolving facility	$	5,000	$	—
Concentra term loans(3)	624,659		624,113
Other—Concentra	5,312		6,743
Total Concentra debt	634,971		630,856
Less: Concentra current maturities	2,261		3,733
Concentra long-term debt maturities	$	632,710	$	627,123

Total current maturities	$	225,166	$	10,511
Total long-term debt maturities	2,160,730		2,707,311
Total debt	$	2,385,896	$	2,717,822

(1) Includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $9.4 million at December 31, 2015 and June 30, 2016, respectively.

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(2) Includes unamortized discounts of $2.8 million and $13.8 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $16.0 million at December 31, 2015 and June 30, 2016, respectively.

(3) Includes unamortized discounts of $2.9 million and $2.7 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $20.2 million and $18.7 million at December 31, 2015 and June 30, 2016, respectively.

Maturities of Long-Term Debt and Notes Payable

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

	Select			Concentra			Total
	(in thousands)
July 1, 2016 — December 31, 2016	$	8,880		$	3,559		$	12,439
2017	15,257			5,871			21,128
2018	771,228			4,597			775,825
2019	18,070			4,615			22,685
2020	6,288			4,636			10,924
2021 and beyond	1,305,313			628,965			1,934,278
Total principal	2,125,036			652,243			2,777,279
Unamortized discounts and premiums	(12,663		)	(2,677		)	(15,340		)
Unamortized debt issuance costs	(25,407		)	(18,710		)	(44,117		)
Total	$	2,086,966		$	630,856		$	2,717,822

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

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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.

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 six months ended June 30, 2016, the Company recognized a loss on early retirement of debt of $0.8 million relating to the repayment of the Series D Tranche B Term Loans under the Select credit facilities.

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						June 30, 2016
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	700,867	$	623,948	$	710,000	$	701,703	$	674,926
Select credit facilities(2)	1,048,277		1,038,071		1,023,616		1,390,877		1,361,105		1,376,415
Concentra credit facilities(3)	652,750		629,659		645,392		645,500		624,113		638,159

(1) The carrying value includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $9.4 million at December 31, 2015 and June 30, 2016, respectively.

(2) The carrying value includes unamortized discounts of $2.8 million and $13.8 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $16.0 million at December 31, 2015 and June 30, 2016, respectively.

(3) The carrying value includes unamortized discounts of $2.9 million and $2.7 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $20.2 million and $18.7 million at December 31, 2015 and June 30, 2016, respectively.

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.

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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 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 earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, Concentra acquisition costs, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

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

	Three Months Ended June 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)		Other			Total
	(in thousands)
Net operating revenues	$	592,336	$	207,795	$	86,829	$	105		$	887,065
Adjusted EBITDA	91,447		28,722		11,199		(16,471		)	114,897
Total assets	2,372,723		538,586		1,320,941		109,085			4,341,335
Capital expenditures	31,042		3,103		3,854		3,065			41,064

	Three Months Ended June 30, 2016
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	585,816	$	256,928	$	254,868	$	19		$	1,097,631
Adjusted EBITDA	82,739		38,132		43,039		(22,453		)	141,457
Total assets	2,448,390		984,140		1,333,293		72,526			4,838,349
Capital expenditures	21,313		3,825		4,716		3,636			33,490

	Six Months Ended June 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(1)		Other			Total
	(in thousands)
Net operating revenues	$	1,191,117	$	404,238	$	86,829	$	224		$	1,682,408
Adjusted EBITDA	187,919		50,855		11,199		(36,136		)	213,837
Total assets	2,372,723		538,586		1,320,941		109,085			4,341,335
Capital expenditures	53,835		7,025		3,854		4,198			68,912

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	Six Months Ended June 30, 2016
	Specialty Hospitals		Outpatient Rehabilitation(2)		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	1,184,770	$	495,010	$	505,745	$	436		$	2,185,961
Adjusted EBITDA	169,495		67,011		77,192		(43,626		)	270,072
Total assets	2,448,390		984,140		1,333,293		72,526			4,838,349
Capital expenditures	54,988		8,798		7,927		8,545			80,258

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

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

	Three Months Ended June 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	82,739		$	38,132		$	43,039		$	(22,453	)
Depreciation and amortization	(13,812		)	(6,202		)	(14,916		)	(1,275		)
Stock compensation expense	—			—			(192		)	(4,006		)
Income (loss) from operations	$	68,927		$	31,930		$	27,931		$	(27,734	)	$	101,054
Equity in earnings of unconsolidated subsidiaries													4,546
Non-operating gain													13,035
Interest expense													(44,332		)
Income before income taxes													$	74,303

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	Six Months Ended June 30, 2015
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)			Other			Total
	(in thousands)
Adjusted EBITDA	$	187,919		$	50,855		$	11,199		$	(36,136	)
Depreciation and amortization	(26,627		)	(6,317		)	(4,194		)	(2,058		)
Stock compensation expense	—			—			—			(5,650		)
Concentra acquisition costs	—			—			(4,715		)	—
Income (loss) from operations