Edgar Filing: SELECT MEDICAL HOLDINGS CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 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 October 31, 2016, Select Medical Holdings Corporation had outstanding 132,329,220 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	34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61

ITEM 4.	CONTROLS AND PROCEDURES	62

PART II	OTHER INFORMATION	63

ITEM 1.	LEGAL PROCEEDINGS	63

ITEM 1A.	RISK FACTORS	65

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	66

ITEM 4.	MINE SAFETY DISCLOSURES	66

ITEM 5.	OTHER INFORMATION	66

ITEM 6.	EXHIBITS	66

SIGNATURES

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PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

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

ASSETS
Current Assets:
Cash and cash equivalents	$	14,435	$	68,223	$	14,435		$	68,223
Accounts receivable, net of allowance for doubtful accounts of $61,133 and $61,084 at 2015 and 2016, respectively	603,558		592,711		603,558			592,711
Current deferred tax asset	28,688		50,647		28,688			50,647
Prepaid income taxes	16,694		11,474		16,694			11,474
Other current assets	85,779		82,680		85,779			82,680
Total Current Assets	749,154		805,735		749,154			805,735

Property and equipment, net	864,124		863,485		864,124			863,485
Goodwill	2,314,624		2,674,623		2,314,624			2,674,623
Other identifiable intangibles, net	318,675		338,220		318,675			338,220
Other assets	142,101		163,342		142,101			163,342

Total Assets	$	4,388,678	$	4,845,405	$	4,388,678		$	4,845,405

Current Liabilities:
Bank overdrafts	$	28,615	$	20,151	$	28,615		$	20,151
Current portion of long-term debt and notes payable	225,166		12,690		225,166			12,690
Accounts payable	137,409		114,181		137,409			114,181
Accrued payroll	120,989		138,090		120,989			138,090
Accrued vacation	73,977		78,776		73,977			78,776
Accrued interest	9,401		32,964		9,401			32,964
Accrued other	133,728		142,431		133,728			142,431
Due to third party payors	—		11,065		—			11,065
Total Current Liabilities	729,285		550,348		729,285			550,348

Long-term debt, net of current portion	2,160,730		2,642,115		2,160,730			2,642,115
Non-current deferred tax liability	218,705		210,000		218,705			210,000
Other non-current liabilities	133,220		136,527		133,220			136,527

Total Liabilities	3,241,940		3,538,990		3,241,940			3,538,990

Commitments and contingencies (Note 11)

Redeemable non-controlling interests	238,221		246,429		238,221			246,429

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,282,798 and 132,395,317 shares issued and outstanding at 2015 and 2016, respectively	131		132		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	424,506		440,316		904,375			921,069
Retained earnings (accumulated deficit)	434,616		528,593		(45,122		)	47,972
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	859,253		969,041		859,253			969,041
Non-controlling interest	49,264		90,945		49,264			90,945
Total Equity	908,517		1,059,986		908,517			1,059,986

Total Liabilities and Equity	$	4,388,678	$	4,845,405	$	4,388,678		$	4,845,405

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 September 30,						For the Three Months Ended September 30,
	2015			2016			2015			2016

Net operating revenues	$	1,021,123		$	1,053,795		$	1,021,123		$	1,053,795

Costs and expenses:
Cost of services	900,949			915,703			900,949			915,703
General and administrative	22,201			27,088			22,201			27,088
Bad debt expense	18,287			17,677			18,287			17,677
Depreciation and amortization	31,472			37,165			31,472			37,165
Total costs and expenses	972,909			997,633			972,909			997,633

Income from operations	48,214			56,162			48,214			56,162

Other income and expense:
Loss on early retirement of debt	—			(10,853		)	—			(10,853		)
Equity in earnings of unconsolidated subsidiaries	6,348			5,268			6,348			5,268
Non-operating gain (loss)	29,647			(1,028		)	29,647			(1,028		)
Interest expense	(33,052		)	(44,482		)	(33,052		)	(44,482		)

Income before income taxes	51,157			5,067			51,157			5,067

Income tax expense	18,347			1,075			18,347			1,075
Net income	32,810			3,992			32,810			3,992

Less: Net income (loss) attributable to non-controlling interests	3,404			(2,479		)	3,404			(2,479		)

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	29,406		$	6,471		$	29,406		$	6,471

Basic	$	0.22		$	0.05
Diluted	$	0.22		$	0.05

Weighted average shares outstanding:
Basic	127,386			127,848
Diluted	127,649			127,989

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 Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2016			2015			2016

Net operating revenues	$	2,703,531		$	3,239,756		$	2,703,531		$	3,239,756

Costs and expenses:
Cost of services	2,309,213			2,754,950			2,309,213			2,754,950
General and administrative	67,917			81,226			67,917			81,226
Bad debt expense	43,243			51,591			43,243			51,591
Depreciation and amortization	70,668			107,887			70,668			107,887
Total costs and expenses	2,491,041			2,995,654			2,491,041			2,995,654

Income from operations	212,490			244,102			212,490			244,102

Other income and expense:
Loss on early retirement of debt	—			(11,626		)	—			(11,626		)
Equity in earnings of unconsolidated subsidiaries	12,788			14,466			12,788			14,466
Non-operating gain	29,647			37,094			29,647			37,094
Interest expense	(79,728		)	(127,662		)	(79,728		)	(127,662		)

Income before income taxes	175,197			156,374			175,197			156,374

Income tax expense	65,048			51,585			65,048			51,585
Net income	110,149			104,789			110,149			104,789

Less: Net income attributable to non-controlling interests	8,740			9,550			8,740			9,550

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	101,409		$	95,239		$	101,409		$	95,239

Basic	$	0.77		$	0.72
Diluted	$	0.77		$	0.72

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	127,541			127,659
Diluted	127,844			127,804

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	$	93,037	93,037										95,239			(2,202		)
Net income - attributable to redeemable non-controlling interests	11,752
Total comprehensive income	$	104,789
Issuance and vesting of restricted stock			12,344			1,089		1		12,343
Tax benefit from stock based awards			514							514
Repurchase of common shares			(1,939		)	(155	)	0		(883		)	(1,056		)
Stock option expense			4							4
Exercise of stock options			1,488			178		0		1,488
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(6,939		)											(6,939		)
Issuance of non-controlling interests			50,178							2,377						47,801
Purchase of redeemable non-controlling interests			466										466
Other			(198		)					(33		)	(672		)	507
Balance at September 30, 2016			$	1,059,986		132,395		$	132	$	440,316		$	528,593		$	90,945

						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	$	93,037	93,037									95,239			(2,202		)
Net income - attributable to redeemable non-controlling interests	11,752
Total comprehensive income	$	104,789
Additional investment by Holdings			1,488						1,488
Dividends declared and paid to Holdings			(1,939		)							(1,939		)
Contribution related to restricted stock awards and stock option issuances by Holdings			12,348						12,348
Tax benefit from stock based awards			514						514
Non-controlling interests acquired in business combination			2,514												2,514
Distributions to non-controlling interests			(6,939		)										(6,939		)
Issuance of non-controlling interests			50,178						2,377						47,801
Purchase of redeemable non-controlling interests			466									466
Other			(198		)				(33		)	(672		)	507
Balance at September 30, 2016			$	1,059,986		0	$	0	$	921,069		$	47,972		$	90,945

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 Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2016			2015			2016

Operating activities
Net income	$	110,149		$	104,789		$	110,149		$	104,789
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	11,814			16,145			11,814			16,145
Depreciation and amortization	70,668			107,887			70,668			107,887
Amortization of leasehold interests	—			457			—			457
Provision for bad debts	43,243			51,591			43,243			51,591
Equity in earnings of unconsolidated subsidiaries	(12,788		)	(14,466		)	(12,788		)	(14,466		)
Loss on early retirement of debt	—			11,626			—			11,626
Loss on disposal of assets	—			282			—			282
Gain on sale of assets and businesses	(1,264		)	(42,192		)	(1,264		)	(42,192		)
Gain on sale of equity investment	(29,647		)	(241		)	(29,647		)	(241		)
Impairment of equity investment	—			5,339			—			5,339
Stock compensation expense	9,244			12,924			9,244			12,924
Amortization of debt discount, premium and issuance costs	6,746			11,845			6,746			11,845
Deferred income taxes	(6,925		)	(13,088		)	(6,925		)	(13,088		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(48,778		)	(40,776		)	(48,778		)	(40,776		)
Other current assets	(4,580		)	12,094			(4,580		)	12,094
Other assets	4,540			4,689			4,540			4,689
Accounts payable	3,047			(17,752		)	3,047			(17,752		)
Accrued expenses	32,716			52,996			32,716			52,996
Due to third party payors	—			11,065			—			11,065
Income taxes	15,246			5,033			15,246			5,033
Net cash provided by operating activities	203,431			280,247			203,431			280,247

Investing activities
Purchases of property and equipment	(113,992		)	(118,260		)	(113,992		)	(118,260		)
Proceeds from sale of assets and businesses	1,542			71,388			1,542			71,388
Investment in businesses	(1,703		)	(3,140		)	(1,703		)	(3,140		)
Proceeds from sale of equity investment	33,096			1,241			33,096			1,241
Acquisition of businesses, net of cash acquired	(1,049,872		)	(414,231		)	(1,049,872		)	(414,231		)
Net cash used in investing activities	(1,130,929		)	(463,002		)	(1,130,929		)	(463,002		)

Financing activities
Borrowings on revolving facilities	840,000			420,000			840,000			420,000
Payments on revolving facilities	(675,000		)	(545,000		)	(675,000		)	(545,000		)
Net proceeds from term loans	623,575			795,344			623,575			795,344
Payments on term loans	(26,884		)	(434,842		)	(26,884		)	(434,842		)
Borrowings of other debt	11,041			23,801			11,041			23,801
Principal payments on other debt	(13,167		)	(15,477		)	(13,167		)	(15,477		)
Dividends paid to common stockholders	(13,129		)	—			—			—
Dividends paid to Holdings	—			—			(26,751		)	(1,939		)
Repurchase of common stock	(13,622		)	(1,939		)	—			—
Proceeds from issuance of common stock	1,604			1,488			—			—
Equity investment by Holdings	—			—			1,604			1,488
Proceeds from issuance of non-controlling interest	217,065			11,846			217,065			11,846
Proceeds from (repayments of) bank overdrafts	2,353			(8,464		)	2,353			(8,464		)
Tax benefit from stock based awards	383			514			383			514
Purchase of non-controlling interests	—			(1,530		)	—			(1,530		)
Distributions to non-controlling interests	(7,440		)	(9,198		)	(7,440		)	(9,198		)
Net cash provided by financing activities	946,779			236,543			946,779			236,543

Net increase in cash and cash equivalents	19,281			53,788			19,281			53,788

Cash and cash equivalents at beginning of period	3,354			14,435			3,354			14,435
Cash and cash equivalents at end of period	$	22,635		$	68,223		$	22,635		$	68,223

Supplemental Cash Flow Information
Cash paid for interest	$	59,937		$	92,928		$	59,937		$	92,928
Cash paid for taxes	$	55,905		$	59,937		$	55,905		$	59,937

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 September 30, 2016, and for the three and nine month periods ended September 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 nine months ended September 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 August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in 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.

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, 2016. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

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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 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 currently evaluating the standard to determine the impact it will have 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 to determine the impact it will have on its consolidated financial statements.

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

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adoption of the standard and approximately $38.0 million of unamortized debt issuance costs were reclassified to be a direct reduction of debt, rather than a component of other assets.

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 $406.3 million, 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 nine months ended September 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	92,981
Identifiable intangible assets	32,484
Goodwill	319,145
Total assets	456,950
Total liabilities	35,792
Acquired non-controlling interests	2,514
Net assets acquired	418,644
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	406,304

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Goodwill of $319.1 million has been 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.

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.

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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 September 30, 2016, Concentra contributed net revenue of $258.5 million and net income of approximately $0.9 million, which are reflected in the Company’s consolidated statements of operations. For the nine months ended September 30, 2016, Concentra contributed net revenue of $764.3 million and net income of approximately $7.9 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. The Company’s results of operations for the three months ended September 30, 2016 include 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 September 30,		For the Nine Months Ended September 30,
	2015		2015		2016
	(in thousands, except per share amounts)
Net revenue	$	1,099,857	$	3,350,131	$	3,293,286
Net income attributable to Holdings	26,277		88,502		93,407
Income per common share:
Basic	$	0.20	$	0.67	$	0.71
Diluted	$	0.20	$	0.67	$	0.71

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The pro forma financial information is based on the preliminary allocation of the purchase price of the Physiotherapy acquisition, and is 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 nine months ended September 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 nine months ended September 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

In addition to the acquisition of Physiotherapy, the Company completed other acquisitions consisting of hospital, clinic, and center businesses during the nine months ended September 30, 2016. The specialty hospital transactions were conducted principally through either the exchange of nonmonetary assets or issuance of equity interests. Assets transferred and equity interests issued for these acquisitions consisted of $7.6 million in cash payments, net of cash received, $17.7 million for specialty hospitals exchanged, and issuance of $38.3 million of equity interests. The specialty hospital exchange transaction resulted in a non-operating gain totaling $6.5 million due, in part, to a bargain purchase because the fair values of the identifiable assets received in the exchange transaction exceeded the fair values of the transferred hospitals. The assets received in these acquisitions consisted principally of cash, real property, and goodwill, of which $46.2 million, $0.9 million, and $4.1 million of goodwill was recognized in our specialty hospital, outpatient rehabilitation, and Concentra reporting units, respectively.

4. Sale of Businesses

The Company recognized non-operating gains totaling $42.1 million for the nine months ended September 30, 2016, principally as the result of the sale of its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. Additionally, the Company sold nine outpatient rehabilitation clinics to an entity in which the Company holds a non-controlling interest, resulting in a non-operating gain of $1.7 million.

5. Equity Investment Events

During the nine months ended September 30, 2016, an entity in which the Company owned a non-controlling interest was sold, which resulted in a non-operating loss of $5.1 million.

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6. Intangible Assets

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

	December 31, 2015		September 30, 2016
	(in thousands)
Goodwill	$	2,314,624	$	2,674,623
Identifiable intangibles—Indefinite lived assets:
Trademarks	162,609		166,698
Certificates of need	13,022		13,070
Accreditations	2,045		2,045
Identifiable intangibles—Finite lived assets:
Customer relationships	132,751		122,095
Favorable leasehold interests	8,248		11,227
Non-compete agreements	—		23,085
Total identifiable intangibles	$	2,633,299	$	3,012,843

The Company’s customer relationships and non-compete agreement assets amortize over their estimated useful lives. Amortization expense was $4.1 million and $3.0 million for the three months ended September 30, 2016 and 2015, respectively. Amortization expense was $12.2 million and $4.4 million for the nine months ended September 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 $16.3 million.

In addition, the Company has recognized unfavorable leasehold interests which are recorded as liabilities. The net carrying value of unfavorable leasehold interests was $4.0 million and $3.0 million as of September 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 September 30, 2016 and $0.5 million for the nine months ended September 30, 2016.

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At September 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 nine months ended September 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	46,205			358,153			4,115		408,473
Measurement period adjustment	—			(38,148		)	4,825		(33,323		)
Disposed	(6,758		)	(8,393		)	—		(15,151		)
Balance as of September 30, 2016	$	1,396,826		$	618,207		$	659,590	$	2,674,623

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		September 30, 2016
	(in thousands)
Select 6.375% senior notes(1)	$	700,867	$	702,124
Select credit facilities:
Select revolving facility	295,000		175,000
Select term loans(2)	743,071		1,121,655
Other—Select	11,987		22,802
Total Select debt	1,750,925		2,021,581
Less: Select current maturities	222,905		7,268
Select long-term debt maturities	$	1,528,020	$	2,014,313

Concentra credit facilities:
Concentra revolving facility	$	5,000	$	—
Concentra term loans(3)	624,659		627,262
Other—Concentra	5,312		5,962
Total Concentra debt	634,971		633,224
Less: Concentra current maturities	2,261		5,422
Concentra long-term debt maturities	$	632,710	$	627,802

Total current maturities	$	225,166	$	12,690
Total long-term debt maturities	2,160,730		2,642,115
Total debt	$	2,385,896	$	2,654,805

(1) Includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and September 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $8.9 million at December 31, 2015 and September 30, 2016, respectively.

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(2) Includes unamortized discounts of $2.8 million and $12.9 million at December 31, 2015 and September 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $14.8 million at December 31, 2015 and September 30, 2016, respectively.

(3) Includes unamortized discounts of $2.9 million at both December 31, 2015 and September 30, 2016. Includes unamortized debt issuance costs of $20.2 million and $13.7 million at December 31, 2015 and September 30, 2016, respectively.

Maturities of Long-Term Debt and Notes Payable

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

	Select			Concentra			Total
	(in thousands)
October 1, 2016 — December 31, 2016	$	4,236		$	2,160		$	6,396
2017	16,731			7,890			24,621
2018	706,426			6,617			713,043
2019	18,084			6,636			24,720
2020	6,303			6,656			12,959
2021 and beyond	1,305,337			619,873			1,925,210
Total principal	2,057,117			649,832			2,706,949
Unamortized discounts and premiums	(11,811		)	(2,905		)	(14,716		)
Unamortized debt issuance costs	(23,725		)	(13,703		)	(37,428		)
Total	$	2,021,581		$	633,224		$	2,654,805

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) provided for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans, (ii) extended the financial covenants through March 3, 2021, (iii) added 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) made certain other technical amendments to the Select credit facilities. The Series F Tranche B Term Loans 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

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Series F Tranche B Term Loans is 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 nine months ended September 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.

Concentra Credit Facilities

On September 26, 2016, Concentra entered into Amendment No. 1 (the “Concentra Credit Agreement Amendment”) to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015. The Concentra first lien credit agreement initially provided for $500.0 million in first lien credit facilities composed of $450.0 million, seven-year term loans (“Concentra first lien term loan”) and a $50.0 million, five-year revolving credit facility (“Concentra revolving facility”).

The Concentra Credit Agreement Amendment provided an additional $200.0 million of first lien term loans due June 1, 2022, the proceeds of which were used to prepay in full Concentra’s second lien term loan due June 1, 2023; and also amended certain restrictive covenants to give Concentra greater operational flexibility.

The Concentra first lien term loan continues to bear interest at a rate equal to Adjusted LIBO (as defined in the Concentra first lien credit agreement) plus 3.00% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 2.00% (subject to an Alternate Base Rate floor of 2.00%). The Concentra first lien term loan amortizes in equal quarterly installments of $1.6 million through March 31, 2022, with the remaining unamortized aggregate principal due on the maturity date.

The reacquisition price of the second lien term loans was $202.0 million. The premium plus the expensing of unamortized deferred financing costs and original issuance discount resulted in a loss on early retirement of debt of $10.9 million during the three months ended September 30, 2016.

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8. Fair Value

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

	December 31, 2015						September 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	$	702,124	$	698,853
Select credit facilities(2)	1,048,277		1,038,071		1,023,616		1,324,315		1,296,655		1,318,943
Concentra credit facilities(3)	652,750		629,659		645,392		643,870		627,262		642,260

(1) The carrying value includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and September 30, 2016, respectively, and unamortized debt issuance costs of $10.4 million and $8.9 million at December 31, 2015 and September 30, 2016, respectively.

(2) The carrying value includes unamortized discounts of $2.8 million and $12.9 million at December 31, 2015 and September 30, 2016, respectively, and unamortized debt issuance costs of $7.4 million and $14.8 million at December 31, 2015 and September 30, 2016, respectively.

(3) The carrying value includes unamortized discounts of $2.9 million at both December 31, 2015 and September 30, 2016 and unamortized debt issuance costs of $20.2 million and $13.7 million at December 31, 2015 and September 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.

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 shared 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.

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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 September 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	562,328	$	199,593	$	258,969	$	233		$	1,021,123
Adjusted EBITDA	53,656		23,807		25,584		(18,536		)	84,511
Total assets	2,333,049		541,435		1,332,975		106,946			4,314,405
Capital expenditures	27,494		4,023		9,640		3,923			45,080

	Three Months Ended September 30, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	544,491	$	250,710	$	258,507	$	87		$	1,053,795
Adjusted EBITDA	48,264		31,995		40,888		(23,070		)	98,077
Total assets	2,461,751		977,431		1,327,438		78,785			4,845,405
Capital expenditures	24,378		6,234		2,720		4,670			38,002

	Nine Months Ended September 30, 2015
	Specialty Hospitals		Outpatient Rehabilitation		Concentra(2)		Other			Total
	(in thousands)
Net operating revenues	$	1,753,445	$	603,831	$	345,798	$	457		$	2,703,531
Adjusted EBITDA	241,575		74,662		36,783		(54,672		)	298,348
Total assets	2,333,049		541,435		1,332,975		106,946			4,314,405
Capital expenditures	81,329		11,048		13,494		8,121			113,992

	Nine Months Ended September 30, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net operating revenues	$	1,729,261	$	745,720	$	764,252	$	523		$	3,239,756
Adjusted EBITDA	217,759		99,006		118,080		(66,696		)	368,149
Total assets	2,461,751		977,431		1,327,438		78,785			4,845,405
Capital expenditures	79,366		15,032		10,647		13,215			118,260

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

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

	Three Months Ended September 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation (1)			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	48,264		$	31,995		$	40,888		$	(23,070	)
Depreciation and amortization	(14,317		)	(6,159		)	(15,278		)	(1,411		)
Stock compensation expense	—			—			(193		)	(4,557		)
Income (loss) from operations	$	33,947		$	25,836		$	25,417		$	(29,038	)	$	56,162
Non-operating loss													(1,028		)
Loss on early retirement of debt													(10,853		)
Equity in earnings of unconsolidated subsidiaries													5,268
Interest expense													(44,482		)
Income before income taxes													$	5,067