Edgar Filing: SELECT MEDICAL HOLDINGS CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2018



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 numbers: 001-34465 and 001-31441

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its Charter)



Delaware Delaware		20-1764048 23-2872718
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA 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 ý 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 ý 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging Growth Company o

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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



Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging Growth 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 ý

As of July 31, 2018, Select Medical Holdings Corporation had outstanding 135,376,051 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 Parent, LLC (“Concentra Group Holdings Parent”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings Parent and its subsidiaries.

Table of Contents

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	3

	Condensed consolidated statements of changes in equity and income	5

	Condensed consolidated statements of cash flows	6

	Notes to condensed consolidated financial statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57

ITEM 4.	CONTROLS AND PROCEDURES	58

PART II	OTHER INFORMATION	59

ITEM 1.	LEGAL PROCEEDINGS	59

ITEM 1A.	RISK FACTORS	61

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	62

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	62

ITEM 4.	MINE SAFETY DISCLOSURES	62

ITEM 5.	OTHER INFORMATION	62

ITEM 6.	EXHIBITS	63

SIGNATURES

Table of Contents

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, 2017		June 30, 2018		December 31, 2017			June 30, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	122,549	$	141,029	$	122,549		$	141,029
Accounts receivable	691,732		775,610		691,732			775,610
Prepaid income taxes	31,387		14,488		31,387			14,488
Other current assets	75,158		88,215		75,158			88,215
Total Current Assets	920,826		1,019,342		920,826			1,019,342
Property and equipment, net	912,591		965,844		912,591			965,844
Goodwill	2,782,812		3,314,606		2,782,812			3,314,606
Identifiable intangible assets, net	326,519		451,932		326,519			451,932
Other assets	184,418		213,076		184,418			213,076
Total Assets	$	5,127,166	$	5,964,800	$	5,127,166		$	5,964,800
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	29,463	$	23,292	$	29,463		$	23,292
Current portion of long-term debt and notes payable	22,187		24,479		22,187			24,479
Accounts payable	128,194		131,830		128,194			131,830
Accrued payroll	160,562		149,967		160,562			149,967
Accrued vacation	92,875		109,958		92,875			109,958
Accrued interest	19,885		13,293		19,885			13,293
Accrued other	143,166		170,067		143,166			170,067
Income taxes payable	9,071		4,425		9,071			4,425
Total Current Liabilities	605,403		627,311		605,403			627,311
Long-term debt, net of current portion	2,677,715		3,386,209		2,677,715			3,386,209
Non-current deferred tax liability	124,917		150,694		124,917			150,694
Other non-current liabilities	145,709		172,427		145,709			172,427
Total Liabilities	3,553,744		4,336,641		3,553,744			4,336,641
Commitments and contingencies (Note 10)
Redeemable non-controlling interests	640,818		616,232		640,818			616,232
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 134,326,823 shares issued and outstanding at 2017 and 2018, respectively	134		134		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	463,499		474,812		947,370			959,173
Retained earnings (accumulated deficit)	359,735		420,525		(124,002		)	(63,702		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	823,368		895,471		823,368			895,471
Non-controlling interests	109,236		116,456		109,236			116,456
Total Equity	932,604		1,011,927		932,604			1,011,927
Total Liabilities and Equity	$	5,127,166	$	5,964,800	$	5,127,166		$	5,964,800

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

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,
	2017			2018			2017			2018
Net operating revenues	$	1,102,465		$	1,296,210		$	1,102,465		$	1,296,210
Costs and expenses:
Cost of services	920,194			1,094,731			920,194			1,094,731
General and administrative	28,275			29,194			28,275			29,194
Depreciation and amortization	38,333			51,724			38,333			51,724
Total costs and expenses	986,802			1,175,649			986,802			1,175,649
Income from operations	115,663			120,561			115,663			120,561
Other income and expense:
Equity in earnings of unconsolidated subsidiaries	5,666			4,785			5,666			4,785
Non-operating gain	—			6,478			—			6,478
Interest expense	(37,655		)	(50,159		)	(37,655		)	(50,159		)
Income before income taxes	83,674			81,665			83,674			81,665
Income tax expense	32,374			21,106			32,374			21,106
Net income	51,300			60,559			51,300			60,559
Less: Net income attributable to non-controlling interests	9,245			14,048			9,245			14,048
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	42,055		$	46,511		$	42,055		$	46,511
Income per common share:
Basic	$	0.32		$	0.35
Diluted	$	0.32		$	0.35
Weighted average shares outstanding:
Basic	128,624			129,830
Diluted	128,777			129,924

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,
	2017			2018			2017			2018

Net operating revenues	$	2,193,982		$	2,549,174		$	2,193,982		$	2,549,174
Costs and expenses:
Cost of services	1,849,332			2,160,544			1,849,332			2,160,544
General and administrative	56,350			60,976			56,350			60,976
Depreciation and amortization	80,872			98,495			80,872			98,495
Total costs and expenses	1,986,554			2,320,015			1,986,554			2,320,015
Income from operations	207,428			229,159			207,428			229,159
Other income and expense:
Loss on early retirement of debt	(19,719		)	(10,255		)	(19,719		)	(10,255		)
Equity in earnings of unconsolidated subsidiaries	11,187			9,482			11,187			9,482
Non-operating gain (loss)	(49		)	6,877			(49		)	6,877
Interest expense	(78,508		)	(97,322		)	(78,508		)	(97,322		)
Income before income taxes	120,339			137,941			120,339			137,941
Income tax expense	45,576			33,400			45,576			33,400
Net income	74,763			104,541			74,763			104,541
Less: Net income attributable to non-controlling interests	16,838			24,291			16,838			24,291
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	57,925		$	80,250		$	57,925		$	80,250
Income per common share:
Basic	$	0.44		$	0.60
Diluted	$	0.44		$	0.60
Weighted average shares outstanding:
Basic	128,544			129,761
Diluted	128,703			129,871

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

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Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)



				Select Medical Holdings Corporation Stockholders
	Redeemable Non-controlling Interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	$	640,818		134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Holdings Corporation											80,250			80,250						80,250
Net income attributable to non-controlling interests	16,652													—			7,639			7,639
Issuance of restricted stock				174		0		0						—						—
Forfeitures of unvested restricted stock				(88	)	0		0						—						—
Vesting of restricted stock								9,562						9,562						9,562
Repurchase of common shares				(49	)	0		(490		)	(399		)	(889		)				(889		)
Exercise of stock options				175		0		1,620						1,620						1,620
Issuance and exchange of non-controlling interests	163,659							1,553			74,341			75,894			1,921			77,815
Distributions to and purchases of non-controlling interests	(215,084		)					(932		)	(83,617		)	(84,549		)	(3,052		)	(87,601		)
Redemption adjustment on non-controlling interests	9,551										(9,551		)	(9,551		)				(9,551		)
Other	636										(234		)	(234		)	712			478
Balance at June 30, 2018	$	616,232		134,327		$	134	$	474,812		$	420,525		$	895,471		$	116,456		$	1,011,927



				Select Medical Corporation Stockholders
	Redeemable Non-controlling Interests			Common Stock Issued	Common Stock Par Value		Capital in Excess of Par			Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	$	640,818		0	$	0	$	947,370		$	(124,002	)	$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Corporation										80,250			80,250						80,250
Net income attributable to non-controlling interests	16,652												—			7,639			7,639
Additional investment by Holdings							1,620						1,620						1,620
Dividends declared and paid to Holdings										(889		)	(889		)				(889		)
Contribution related to restricted stock award issuances by Holdings							9,562						9,562						9,562
Issuance and exchange of non-controlling interests	163,659						1,553			74,341			75,894			1,921			77,815
Distributions to and purchases of non-controlling interests	(215,084		)				(932		)	(83,617		)	(84,549		)	(3,052		)	(87,601		)
Redemption adjustment on non-controlling interests	9,551									(9,551		)	(9,551		)				(9,551		)
Other	636									(234		)	(234		)	712			478
Balance at June 30, 2018	$	616,232		0	$	0	$	959,173		$	(63,702	)	$	895,471		$	116,456		$	1,011,927

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,
	2017			2018			2017			2018
Operating activities
Net income	$	74,763		$	104,541		$	74,763		$	104,541
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	10,933			7,830			10,933			7,830
Depreciation and amortization	80,872			98,495			80,872			98,495
Provision for bad debts	745			102			745			102
Equity in earnings of unconsolidated subsidiaries	(11,187		)	(9,482		)	(11,187		)	(9,482		)
Loss on extinguishment of debt	6,527			484			6,527			484
Gain on sale of assets and businesses	(9,523		)	(6,980		)	(9,523		)	(6,980		)
Stock compensation expense	9,270			10,911			9,270			10,911
Amortization of debt discount, premium and issuance costs	5,974			6,486			5,974			6,486
Deferred income taxes	(1,474		)	(1,691		)	(1,474		)	(1,691		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(140,949		)	(5,774		)	(140,949		)	(5,774		)
Other current assets	(5,557		)	(3,011		)	(5,557		)	(3,011		)
Other assets	4,621			6,684			4,621			6,684
Accounts payable	759			(5,462		)	759			(5,462		)
Accrued expenses	(4,833		)	1,207			(4,833		)	1,207
Income taxes	19,399			12,610			19,399			12,610
Net cash provided by operating activities	40,340			216,950			40,340			216,950
Investing activities
Business combinations, net of cash acquired	(18,508		)	(517,704		)	(18,508		)	(517,704		)
Purchases of property and equipment	(105,302		)	(81,648		)	(105,302		)	(81,648		)
Investment in businesses	(9,874		)	(3,291		)	(9,874		)	(3,291		)
Proceeds from sale of assets and businesses	34,552			6,672			34,552			6,672
Net cash used in investing activities	(99,132		)	(595,971		)	(99,132		)	(595,971		)
Financing activities
Borrowings on revolving facilities	630,000			265,000			630,000			265,000
Payments on revolving facilities	(550,000		)	(345,000		)	(550,000		)	(345,000		)
Proceeds from term loans	1,139,487			779,904			1,139,487			779,904
Payments on term loans	(1,173,692		)	(5,750		)	(1,173,692		)	(5,750		)
Revolving facility debt issuance costs	(4,392		)	(1,333		)	(4,392		)	(1,333		)
Borrowings of other debt	9,444			19,928			9,444			19,928
Principal payments on other debt	(10,437		)	(11,521		)	(10,437		)	(11,521		)
Repurchase of common stock	(600		)	(889		)	—			—
Dividends paid to Holdings	—			—			(600		)	(889		)
Proceeds from exercise of stock options	963			1,620			—			—
Equity investment by Holdings	—			—			963			1,620
Decrease in overdrafts	(5,228		)	(6,171		)	(5,228		)	(6,171		)
Proceeds from issuance of non-controlling interests	3,553			2,926			3,553			2,926
Distributions to non-controlling interests	(5,536		)	(301,213		)	(5,536		)	(301,213		)
Net cash provided by financing activities	33,562			397,501			33,562			397,501
Net increase (decrease) in cash and cash equivalents	(25,230		)	18,480			(25,230		)	18,480
Cash and cash equivalents at beginning of period	99,029			122,549			99,029			122,549
Cash and cash equivalents at end of period	$	73,799		$	141,029		$	73,799		$	141,029
Supplemental Information
Cash paid for interest	$	76,650		$	97,338		$	76,650		$	97,338
Cash paid for taxes	$	27,626		$	22,480		$	27,626		$	22,480
Non-cash equity exchange for acquisition of U.S. HealthWorks	$	—		$	238,000		$	—		$	238,000

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”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of June 30, 2018, and for the three and six month periods ended June 30, 2017 and 2018, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. 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, 2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2018. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2018.

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, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Lease Accounting

Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”) which established Topic 842, Leases (the “standard”). This standard includes a lessee accounting model that recognizes two types of leases: finance and operating. This standard 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 the standard 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.

Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of operations.

The Company will implement the new standard beginning January 1, 2019. The Company has completed its inventory of leases and has begun to implement a new IT platform to account for leases under the new standard. The Company is currently validating the data in the IT platform to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

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Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

Beginning in May 2014, the FASB issued several Accounting Standards Updates which established Topic 606, Revenue from Contracts with Customers (the “standard”). This standard supersedes existing revenue recognition requirements and seeks to eliminate most industry-specific guidance under current GAAP. 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.

The Company adopted the new standard on January 1, 2018, using the full retrospective transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:



	Three Months Ended June 30, 2017
	As Reported		As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	1,120,675	$	1,102,465		$	(18,210	)
Bad debt expense	18,174		(36		)	(18,210		)



	Six Months Ended June 30, 2017
	As Reported			As Adjusted⁽¹⁾			Adoption Impact
	(in thousands)
Condensed Consolidated Statements of Operations
Net operating revenues	$	2,232,036		$	2,193,982		$	(38,054	)
Bad debt expense	38,799			745			(38,054		)

Condensed Consolidated Statements of Cash Flows
Provision for bad debts	38,799			745			$	(38,054	)
Changes in accounts receivable	(179,003		)	(140,949		)	38,054

_____________________________________________________________

(1) Bad debt expense is now included in cost of services on the condensed consolidated statements of operations.



	December 31, 2017
	As Reported		As Adjusted		Adoption Impact
	(in thousands)
Condensed Consolidated Balance Sheets
Accounts receivable	$	767,276	$	691,732	$	(75,544	)
Allowance for doubtful accounts	75,544		—		(75,544		)
Accounts receivable	$	691,732	$	691,732	$	—

The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the guidance effective January 1, 2018. Adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

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3. Acquisitions

U.S. HealthWorks Acquisition

On February 1, 2018, Concentra Inc. (“Concentra”) acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) dated as of October 22, 2017, by and among Concentra, U.S. HealthWorks, Concentra Group Holdings, LLC (“Concentra Group Holdings”), Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and Dignity Health Holding Corporation (“DHHC”). For the six months ended June 30, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.

In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.

Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.

For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values in accordance with the provisions of Accounting Standards Codification Topic 805, Business Combinations. The Company is in the process of completing its assessment of the acquisition-date fair values of the assets acquired and the liabilities assumed and determining the estimated useful lives of long-lived assets and finite-lived intangible assets; therefore, the values set forth below are subject to adjustment during the measurement period. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities by December 31, 2018.

The following table reconciles the preliminary allocation of estimated fair value to identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):



Identifiable tangible assets	$	181,189
Identifiable intangible assets	140,406
Goodwill	534,347
Total assets	855,942
Total liabilities	102,942
Consideration given	$	753,000

A preliminary estimate for goodwill of $534.3 million has been recognized for the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.

For the three months ended June 30, 2018, U.S. HealthWorks had net operating revenues of $139.4 million which is reflected in the Company’s consolidated statements of operations. For the period February 1, 2018 through June 30, 2018, U.S. HealthWorks had net operating revenues of $229.4 million which is reflected in the Company’s consolidated statements of operations for the six months ended June 30, 2018. Due to the integrated nature of our operations, it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.

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Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date.



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2018		2017		2018
	(in thousands, except per share amounts)
Net revenue	$	1,243,221	$	1,296,210	$	2,471,705	$	2,596,755
Net income	51,080		62,612		66,668		107,524
Net income attributable to the Company	38,954		48,563		46,070		82,365
Income per common share:
Basic	$	0.29	$	0.36	$	0.35	$	0.61
Diluted	$	0.29	$	0.36	$	0.35	$	0.61

The pro forma financial information is based on the preliminary allocation of the purchase price of the U.S. HealthWorks 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 U.S. HealthWorks had been a subsidiary of the Company as of January 1, 2017.

For the six months ended June 30, 2017, pro forma results were adjusted to include the U.S. HealthWorks acquisition costs recognized by the Company during 2017 and 2018, which were approximately $5.7 million. For the six months ended June 30, 2018, pro forma results were adjusted to exclude approximately $2.9 million of U.S. HealthWorks acquisition costs which were recognized by the Company during the period.

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4. Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the six months ended June 30, 2018:



	Critical Illness Recovery Hospital⁽¹⁾		Rehabilitation Hospital⁽¹⁾		Outpatient Rehabilitation			Concentra			Total
	(in thousands)
Balance as of December 31, 2017	$	1,045,220	$	415,528	$	647,522		$	674,542		$	2,782,812
Acquired	—		1,118		2,465			535,595			539,178
Measurement period adjustment	—		—		—			(1,248		)	(1,248		)
Sold	—		—		(6,136		)	—			(6,136		)
Balance as of June 30, 2018	$	1,045,220	$	416,646	$	643,851		$	1,208,889		$	3,314,606

_______________________________________________________________________________


(1)	The critical illness recovery hospital reporting unit was previously referred to as the long term acute care reporting unit. The rehabilitation hospital reporting unit was previously referred to as the inpatient rehabilitation reporting unit.

Identifiable Intangible Assets

The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:



	December 31, 2017							June 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,155		—			19,155		19,173		—			19,173
Accreditations	1,895		—			1,895		1,895		—			1,895
Finite-lived intangible assets:
Trademarks	—		—			—		5,000		(2,083		)	2,917
Customer relationships	143,953		(38,281		)	105,672		278,969		(49,617		)	229,352
Favorable leasehold interests	13,295		(4,319		)	8,976		13,553		(5,148		)	8,405
Non-compete agreements	28,023		(3,900		)	24,123		28,472		(4,980		)	23,492
Total identifiable intangible assets	$	373,019	$	(46,500	)	$	326,519	$	513,760	$	(61,828	)	$	451,932

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At June 30, 2018, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 8.7 years, respectively.

The Company’s finite-lived customer relationships, non-compete agreements, and trademarks amortize over their estimated useful lives. Amortization expense was $4.3 million and $7.8 million for the three months ended June 30, 2017 and 2018, respectively. Amortization expense was $8.7 million and $14.2 million for the six months ended June 30, 2017 and 2018, respectively. The Company’s leasehold interests have finite lives and 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.

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5.	Long-Term Debt and Notes Payable

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

As of June 30, 2018, the Company’s long-term debt and notes payable are as follows (in thousands):



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	664		$	(5,601	)	$	705,063	$	718,094
Credit facilities:
Revolving facility	150,000		—			—			150,000		138,000
Term loans	1,135,625		(11,444		)	(11,504		)	1,112,677		1,148,401
Other	43,680		—			(500		)	43,180		43,180
Total Select debt	2,039,305		(10,780		)	(17,605		)	2,010,920		2,047,675
Concentra:
Credit facilities:
Term loans	1,414,175		(3,288		)	(21,720		)	1,389,167		1,414,840
Other	10,601		—			—			10,601		10,601
Total Concentra debt	1,424,776		(3,288		)	(21,720		)	1,399,768		1,425,441
Total debt	$	3,464,081	$	(14,068	)	$	(39,325	)	$	3,410,688	$	3,473,116

Principal maturities of the Company’s long-term debt and notes payable are approximately as follows (in thousands):



	2018		2019		2020		2021		2022		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	710,000	$	—	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		150,000		—		150,000
Term loans	5,750		11,500		11,500		11,500		11,500		1,083,875		1,135,625
Other	6,119		3,321		25,285		221		—		8,734		43,680
Total Select debt	11,869		14,821		36,785		721,721		161,500		1,092,609		2,039,305
Concentra:
Credit facilities:
Term loans	—		—		5,719		12,365		1,156,091		240,000		1,414,175
Other	2,860		3,418		322		320		308		3,373		10,601
Total Concentra debt	2,860		3,418		6,041		12,685		1,156,399		243,373		1,424,776
Total debt	$	14,729	$	18,239	$	42,826	$	734,406	$	1,317,899	$	1,335,982	$	3,464,081

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As of December 31, 2017, the Company’s long-term debt and notes payable are as follows (in thousands):



	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	778		$	(6,553	)	$	704,225	$	727,750
Credit facilities:
Revolving facility	230,000		—			—			230,000		211,600
Term loans	1,141,375		(12,445		)	(12,500		)	1,116,430		1,154,215
Other	36,877		—			(533		)	36,344		36,344
Total Select debt	2,118,252		(11,667		)	(19,586		)	2,086,999		2,129,909
Concentra:
Credit facilities:
Term loans	619,175		(2,257		)	(10,668		)	606,250		625,173
Other	6,653		—			—			6,653		6,653
Total Concentra debt	625,828		(2,257		)	(10,668		)	612,903		631,826
Total debt	$	2,744,080	$	(13,924	)	$	(30,254	)	$	2,699,902	$	2,761,735

Select Credit Facilities

On March 22, 2018, Select entered into Amendment No. 1 to the senior secured credit agreement (the “Select credit agreement”) dated March 6, 2017. The Select credit agreement originally provided for $1.6 billion in senior secured credit facilities comprised of $1.15 billion in term loans (the “Select term loans”) and a $450.0 million revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.

Concentra Credit Facilities

Concentra First Lien Credit Agreement

On February 1, 2018, Concentra entered into an amendment to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015, by and among Concentra, as the borrower, Concentra Holdings, Inc., a subsidiary of Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other lenders party thereto. Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement (as described in Note 3), as well as to pay fees and expenses associated with the financing.

Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.

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Concentra Second Lien Credit Agreement

On February 1, 2018, Concentra entered into a second lien credit agreement (the “Concentra second lien credit agreement” and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”) with Concentra Holdings, Inc., Wells Fargo Bank, National Association, as the administrative agent and the collateral agent, and the other lenders party thereto.

The Concentra second lien credit agreement provided for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).

In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.

Concentra will be required to prepay borrowings under the Concentra second lien term loan with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.

The Concentra second lien credit agreement also contains a number of affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.

Loss on Early Retirement of Debt

The amendments to the Select credit facilities and Concentra credit facilities resulted in losses on early retirement of debt totaling $10.3 million for the six months ended June 30, 2018. The losses on early retirement of debt consisted of $0.5 million of debt extinguishment losses and $9.8 million of debt modification losses during the six months ended June 30, 2018.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s 6.375% senior notes and for its credit facilities. 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.

The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.

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6. Segment Information

The Company identifies its operating segments according to how the chief operating decision maker evaluates financial performance and allocates resources. During the year ended December 31, 2017, the Company changed its internal segment reporting structure which is reflective of how the Company now manages its business operations, reviews operating performance, and allocates resources. The Company’s reportable segments include the critical illness recovery hospital segment (previously referred to as the long term acute care segment), rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment), outpatient rehabilitation segment, and Concentra segment. Prior year results for the three and six months ended June 30, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and 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 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, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

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,						Six Months Ended June 30,
	2017			2018			2017			2018
	(in thousands)
Net operating revenues:⁽¹⁾
Critical illness recovery hospital⁽²⁾	$	439,194		$	442,452		$	884,317		$	907,128
Rehabilitation hospital⁽²⁾	151,378			173,769			296,203			348,543
Outpatient rehabilitation	254,984			267,183			505,355			524,564
Concentra	256,887			412,823			507,476			768,939
Other	22			(17		)	631			—
Total Company	$	1,102,465		$	1,296,210		$	2,193,982		$	2,549,174
Adjusted EBITDA:
Critical illness recovery hospital⁽²⁾	$	75,043		$	60,725		$	147,380		$	133,697
Rehabilitation hospital⁽²⁾	23,129			28,195			39,457			54,971
Outpatient rehabilitation	41,926			41,947			73,277			72,472
Concentra	43,061			72,568			85,653			130,365
Other	(24,479		)	(25,207		)	(48,197		)	(50,045		)
Total Company	$	158,680		$	178,228		$	297,570		$	341,460
Total assets:
Critical illness recovery hospital⁽²⁾	$	1,989,618		$	1,828,038		$	1,989,618		$	1,828,038
Rehabilitation hospital⁽²⁾	665,999			867,175			665,999			867,175
Outpatient rehabilitation	982,811			979,678			982,811			979,678
Concentra	1,310,483			2,174,931			1,310,483			2,174,931
Other	105,300			114,978			105,300			114,978
Total Company	$	5,054,211		$	5,964,800		$	5,054,211		$	5,964,800
Purchases of property and equipment, net:
Critical illness recovery hospital⁽²⁾	$	9,771		$	12,849		$	20,714		$	23,321
Rehabilitation hospital⁽²⁾	26,920			8,080			48,334			20,997
Outpatient rehabilitation	6,201			8,018			12,874			15,356
Concentra	7,601			10,121			16,287			16,742