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 March 31, 2019



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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SEM	New York Stock Exchange (NYSE)

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 every Interactive Data File required to be submitted 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 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
		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
		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 April 30, 2019, Select Medical Holdings Corporation had outstanding 135,416,312 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	4

	Condensed consolidated statements of changes in equity and income	5

	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	29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4.	CONTROLS AND PROCEDURES	44

PART II	OTHER INFORMATION	45

ITEM 1.	LEGAL PROCEEDINGS	45

ITEM 1A.	RISK FACTORS	47

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	48

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, 2018		March 31, 2019		December 31, 2018			March 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	175,178	$	147,815	$	175,178		$	147,815
Accounts receivable	706,676		779,861		706,676			779,861
Prepaid income taxes	20,539		7,709		20,539			7,709
Other current assets	90,131		117,500		90,131			117,500
Total Current Assets	992,524		1,052,885		992,524			1,052,885
Operating lease right-of-use assets	—		982,616		—			982,616
Property and equipment, net	979,810		972,807		979,810			972,807
Goodwill	3,320,726		3,323,749		3,320,726			3,323,749
Identifiable intangible assets, net	437,693		426,428		437,693			426,428
Other assets	233,512		263,007		233,512			263,007
Total Assets	$	5,964,265	$	7,021,492	$	5,964,265		$	7,021,492
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	25,083	$	31,133	$	25,083		$	31,133
Current operating lease liabilities	—		205,145		—			205,145
Current portion of long-term debt and notes payable	43,865		12,329		43,865			12,329
Accounts payable	146,693		140,581		146,693			140,581
Accrued payroll	172,386		142,289		172,386			142,289
Accrued vacation	110,660		116,675		110,660			116,675
Accrued interest	12,137		22,593		12,137			22,593
Accrued other	190,691		205,535		190,691			205,535
Income taxes payable	3,671		8,657		3,671			8,657
Total Current Liabilities	705,186		884,937		705,186			884,937
Non-current operating lease liabilities	—		820,007		—			820,007
Long-term debt, net of current portion	3,249,516		3,299,103		3,249,516			3,299,103
Non-current deferred tax liability	153,895		153,863		153,895			153,863
Other non-current liabilities	158,940		105,791		158,940			105,791
Total Liabilities	4,267,537		5,263,701		4,267,537			5,263,701
Commitments and contingencies (Note 12)
Redeemable non-controlling interests	780,488		833,241		780,488			833,241
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 135,262,866 shares issued and outstanding at 2018 and 2019, respectively	135		135		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	482,556		488,303		970,156			975,903
Retained earnings (accumulated deficit)	320,351		313,593		(167,114		)	(173,872		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	803,042		802,031		803,042			802,031
Non-controlling interests	113,198		122,519		113,198			122,519
Total Equity	916,240		924,550		916,240			924,550
Total Liabilities and Equity	$	5,964,265	$	7,021,492	$	5,964,265		$	7,021,492

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 March 31,						For the Three Months Ended March 31,
	2018			2019			2018			2019
Net operating revenues	$	1,252,964		$	1,324,631		$	1,252,964		$	1,324,631
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,065,813			1,132,092			1,065,813			1,132,092
General and administrative	31,782			28,677			31,782			28,677
Depreciation and amortization	46,771			52,138			46,771			52,138
Total costs and expenses	1,144,366			1,212,907			1,144,366			1,212,907
Income from operations	108,598			111,724			108,598			111,724
Other income and expense:
Loss on early retirement of debt	(10,255		)	—			(10,255		)	—
Equity in earnings of unconsolidated subsidiaries	4,697			4,366			4,697			4,366
Non-operating gain	399			6,532			399			6,532
Interest expense	(47,163		)	(50,811		)	(47,163		)	(50,811		)
Income before income taxes	56,276			71,811			56,276			71,811
Income tax expense	12,294			18,467			12,294			18,467
Net income	43,982			53,344			43,982			53,344
Less: Net income attributable to non-controlling interests	10,243			12,510			10,243			12,510
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	33,739		$	40,834		$	33,739		$	40,834
Earnings per common share (Note 11):
Basic	$	0.25		$	0.30
Diluted	$	0.25		$	0.30

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)



	For the Three Months Ended March 31, 2019

	Select Medical Holdings Corporation Stockholders
	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, 2018	135,266		$	135	$	482,556	$	320,351		$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Holdings Corporation							40,834			40,834						40,834
Net income attributable to non-controlling interests										—			4,810			4,810
Issuance of restricted stock	21		0		0					—						—
Forfeitures of unvested restricted stock	(24	)	0		0					—						—
Vesting of restricted stock					5,488					5,488						5,488
Issuance of non-controlling interests										—			6,837			6,837
Distributions to and purchases of non-controlling interests					259					259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests							(47,470		)	(47,470		)				(47,470		)
Other							(122		)	(122		)	413			291
Balance at March 31, 2019	135,263		$	135	$	488,303	$	313,593		$	802,031		$	122,519		$	924,550



	For the Three Months Ended March 31, 2018

	Select Medical Holdings Corporation Stockholders
	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	134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Holdings Corporation								33,739			33,739						33,739
Net income attributable to non-controlling interests											—			4,500			4,500
Issuance of restricted stock	4		0		0						—						—
Forfeitures of unvested restricted stock	(88	)	0		0						—						—
Vesting of restricted stock					4,717						4,717						4,717
Repurchase of common shares	(7	)	0		(69		)	(53		)	(122		)				(122		)
Exercise of stock options	80		0		738						738						738
Issuance and exchange of non-controlling interests								74,341			74,341						74,341
Distributions to non-controlling interests								(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests								(1,051		)	(1,051		)				(1,051		)
Other								103			103			35			138
Balance at March 31, 2018	134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277

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 (Continued)

(unaudited)

(in thousands)



	For the Three Months Ended March 31, 2019

	Select Medical Corporation Stockholders
	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, 2018	0	$	0	$	970,156	$	(167,114	)	$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Corporation						40,834			40,834						40,834
Net income attributable to non-controlling interests									—			4,810			4,810
Contribution related to restricted stock award issuances by Holdings				5,488					5,488						5,488
Issuance of non-controlling interests									—			6,837			6,837
Distributions to and purchases of non-controlling interests				259					259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests						(47,470		)	(47,470		)				(47,470		)
Other						(122		)	(122		)	413			291
Balance at March 31, 2019	0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550



	For the Three Months Ended March 31, 2018

	Select Medical Corporation Stockholders
	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	0	$	0	$	947,370	$	(124,002	)	$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Corporation						33,739			33,739						33,739
Net income attributable to non-controlling interests									—			4,500			4,500
Additional investment by Holdings				738					738						738
Dividends declared and paid to Holdings						(122		)	(122		)				(122		)
Contribution related to restricted stock award issuances by Holdings				4,717					4,717						4,717
Issuance and exchange of non-controlling interests						74,341			74,341						74,341
Distributions to non-controlling interests						(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests						(1,051		)	(1,051		)				(1,051		)
Other						103			103			35			138
Balance at March 31, 2018	0	$	0	$	952,825	$	(100,225	)	$	852,600		$	112,677		$	965,277

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 Three Months Ended March 31,						For the Three Months Ended March 31,
	2018			2019			2018			2019
Operating activities
Net income	$	43,982		$	53,344		$	43,982		$	53,344
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	1,364			7,872			1,364			7,872
Depreciation and amortization	46,771			52,138			46,771			52,138
Provision for bad debts	85			1,567			85			1,567
Equity in earnings of unconsolidated subsidiaries	(4,697		)	(4,366		)	(4,697		)	(4,366		)
Loss on extinguishment of debt	412			—			412			—
Gain on sale of assets and businesses	(513		)	(6,233		)	(513		)	(6,233		)
Stock compensation expense	4,927			6,255			4,927			6,255
Amortization of debt discount, premium and issuance costs	3,136			3,231			3,136			3,231
Deferred income taxes	78			(81		)	78			(81		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(45,811		)	(74,752		)	(45,811		)	(74,752		)
Other current assets	(8,945		)	(7,523		)	(8,945		)	(7,523		)
Other assets	16,633			57,319			16,633			57,319
Accounts payable	(6,552		)	4,324			(6,552		)	4,324
Accrued expenses	(11,981		)	(69,163		)	(11,981		)	(69,163		)
Income taxes	11,838			17,830			11,838			17,830
Net cash provided by operating activities	50,727			41,762			50,727			41,762
Investing activities
Business combinations, net of cash acquired	(515,359		)	(6,120		)	(515,359		)	(6,120		)
Purchases of property and equipment	(39,617		)	(49,073		)	(39,617		)	(49,073		)
Investment in businesses	(1,754		)	(27,608		)	(1,754		)	(27,608		)
Proceeds from sale of assets and businesses	691			2			691			2
Net cash used in investing activities	(556,039		)	(82,799		)	(556,039		)	(82,799		)
Financing activities
Borrowings on revolving facilities	165,000			360,000			165,000			360,000
Payments on revolving facilities	(150,000		)	(220,000		)	(150,000		)	(220,000		)
Proceeds from term loans	779,904			—			779,904			—
Payments on term loans	(2,875		)	(132,685		)	(2,875		)	(132,685		)
Revolving facility debt issuance costs	(1,333		)	—			(1,333		)	—
Borrowings of other debt	11,600			8,290			11,600			8,290
Principal payments on other debt	(5,909		)	(6,155		)	(5,909		)	(6,155		)
Repurchase of common stock	(122		)	—			—			—
Dividends paid to Holdings	—			—			(122		)	—
Proceeds from exercise of stock options	738			—			—			—
Equity investment by Holdings	—			—			738			—
Increase (decrease) in overdrafts	(7,916		)	6,050			(7,916		)	6,050
Proceeds from issuance of non-controlling interests	—			3,425			—			3,425
Distributions to and purchases of non-controlling interests	(286,641		)	(5,251		)	(286,641		)	(5,251		)
Net cash provided by financing activities	502,446			13,674			502,446			13,674
Net decrease in cash and cash equivalents	(2,866		)	(27,363		)	(2,866		)	(27,363		)
Cash and cash equivalents at beginning of period	122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	119,683		$	147,815		$	119,683		$	147,815
Supplemental Information
Cash paid for interest	$	35,233		$	37,199		$	35,233		$	37,199
Cash paid for taxes	376			718			376			718
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 March 31, 2019, and for the three month periods ended March 31, 2018 and 2019, 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 months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019. 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, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019.


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.

Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and trade receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage or receives authorization from the patient’s employer prior to the patient’s visit.

Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% and 18% of the Company’s accounts receivable are from Medicare at December 31, 2018, and March 31, 2019, respectively.

Leases

The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.

Balance Sheet

For both operating and finance leases, the Company recognizes a right-of-use asset and lease liability at lease commencement. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents an obligation to make lease payments arising from a lease which are measured on a discounted basis. The Company elected the short-term lease exemption for its equipment leases; accordingly, equipment leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

Table of Contents

Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.

The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.

Statement of Operations

For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset.

For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.

The Company elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.

The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.

Redeemable Non-Controlling Interests

The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values after the attribution of net income or loss.

The changes in redeemable non-controlling interests, which are the same for Holdings and Select, are as follows (in thousands):



Balance as of December 31, 2017	$	640,818
Net income attributable to redeemable non-controlling interests	5,743
Issuance and exchange of redeemable non-controlling interests	163,659
Distributions to redeemable non-controlling interests	(203,972		)
Redemption adjustment on redeemable non-controlling interests	1,051
Other	175
Balance as of March 31, 2018	$	607,474



Balance as of December 31, 2018	$	780,488
Net income attributable to redeemable non-controlling interests	7,700
Distributions to and purchases of redeemable non-controlling interests	(2,771		)
Redemption adjustment on redeemable non-controlling interests	47,470
Other	354
Balance as of March 31, 2019	$	833,241

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Recent Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The Company’s accounts receivable derived from contracts with customers will be subject to ASU 2016-13.

The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s accounts receivable derived from contracts with customers, the Company believes that the impact of ASU 2016-13 is unlikely to be material.

Recently Adopted Accounting Pronouncements

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and continue to be reported in accordance with ASC Topic 840, Leases.

The Company elected the package of practical expedients, which permitted the Company not to reassess under ASC Topic 842 the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

The adoption of the standard resulted in the recognition of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption.

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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, from Dignity Health Holding Corporation (“DHHC”).

Concentra acquired U.S. HealthWorks for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“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 estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.

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



Accounts receivable	$	68,934
Other current assets	10,810
Property and equipment	69,712
Identifiable intangible assets	140,406
Other assets	25,435
Goodwill	540,067
Total assets	855,364
Accounts payable and other current liabilities	49,925
Deferred income taxes and other long-term liabilities	51,851
Total liabilities	101,776
Consideration given	$	753,588

For the period February 1, 2018 through March 31, 2018, U.S. HealthWorks contributed net operating revenues of $89.9 million which is reflected in the Company’s consolidated statement of operations for the three months ended March 31, 2018. Due to the integrated nature of the Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.

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 the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date. For the three months ended March 31, 2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.



	Three Months Ended March 31, 2018
	(in thousands)
Net operating revenues	$	1,300,544
Net income attributable to the Company	34,538

The Company’s pro forma results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, 2017. Accordingly, for the three months ended March 31, 2018, pro forma results were adjusted to exclude $2.9 million of U.S. HealthWorks acquisition costs.


4.	Sale of Businesses

The Company recognized a non-operating gain of $6.5 million during the three months ended March 31, 2019, which resulted from the sale of 22 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary.

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5.	Variable Interest Entities

Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In states which prohibit the corporate practice of medicine, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.

The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.

Based on the provisions of these agreements, Concentra has the ability to direct the activities which most significantly impact the performance of these professional corporations and associations and has an obligation to absorb losses or receive benefits which could potentially be significant to the professional corporations and associations. Accordingly, the professional corporations and associations are variable interest entities for which Concentra is the primary beneficiary.

The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2 million and $177.6 million at December 31, 2018, and March 31, 2019, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $164.4 million and $175.8 million at December 31, 2018, and March 31, 2019, respectively.


6.	Leases

The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.

The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with two, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with two, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with two, five year renewal options.

For the three months ended March 31, 2019, the Company’s total lease cost was as follows (in thousands):



	Unrelated Parties		Related Parties		Total
Operating lease cost	$	66,836	$	1,342	$	68,178
Finance lease cost:
Amortization of right-of-use assets	36		—		36
Interest on lease liabilities	97		—		97
Short-term lease cost	592		—		592
Variable lease cost	11,836		156