10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2017

OR

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

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 Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of April 30, 2017, Select Medical Holdings Corporation had outstanding 132,759,535 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 (“Concentra Group Holdings”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings and its subsidiaries.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Condensed consolidated balance sheets	3
	Condensed consolidated statements of operations	4
	Condensed consolidated statements of changes in equity and income	5
	Condensed consolidated statements of cash flows	6
	Notes to condensed consolidated financial statements	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 4.	CONTROLS AND PROCEDURES	44
PART II	OTHER INFORMATION	45
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	46
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	47
SIGNATURES

2

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		March 31,		December 31,			March 31,
	2016		2017		2016			2017
ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	65,211	$	99,029		$	65,211
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively	573,752		691,520		573,752			691,520
Prepaid income taxes	12,423		2,402		12,423			2,402
Other current assets	77,699		85,081		77,699			85,081
Total Current Assets	762,903		844,214		762,903			844,214
Property and equipment, net	892,217		897,146		892,217			897,146
Goodwill	2,751,000		2,759,764		2,751,000			2,759,764
Identifiable intangible assets, net	340,562		337,076		340,562			337,076
Other assets	173,944		164,737		173,944			164,737
Total Assets	$	4,920,626	$	5,002,937	$	4,920,626		$	5,002,937
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	39,362	$	22,299	$	39,362		$	22,299
Current portion of long-term debt and notes payable	13,656		22,013		13,656			22,013
Accounts payable	126,558		125,118		126,558			125,118
Accrued payroll	146,397		110,196		146,397			110,196
Accrued vacation	83,261		88,736		83,261			88,736
Accrued interest	22,325		21,558		22,325			21,558
Accrued other	140,076		143,180		140,076			143,180
Income taxes payable	—		5,399		—			5,399
Total Current Liabilities	571,635		538,499		571,635			538,499
Long-term debt, net of current portion	2,685,333		2,771,410		2,685,333			2,771,410
Non-current deferred tax liability	199,078		195,729		199,078			195,729
Other non-current liabilities	136,520		142,208		136,520			142,208
Total Liabilities	3,592,566		3,647,846		3,592,566			3,647,846
Commitments and contingencies (Note 9)
Redeemable non-controlling interests	422,159		462,680		422,159			462,680
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,753,444 shares issued and outstanding at 2016 and 2017, respectively	132		132		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	443,908		450,373		925,111			931,661
Retained earnings (accumulated deficit)	371,685		351,224		(109,386		)	(129,932		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		801,729		815,725			801,729
Non-controlling interest	90,176		90,682		90,176			90,682
Total Equity	905,901		892,411		905,901			892,411
Total Liabilities and Equity	$	4,920,626	$	5,002,937	$	4,920,626		$	5,002,937

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

3

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,
	2016			2017			2016			2017
Net operating revenues	$	1,088,330		$	1,111,361		$	1,088,330		$	1,111,361
Costs and expenses:
Cost of services	922,262			928,357			922,262			928,357
General and administrative	28,268			28,075			28,268			28,075
Bad debt expense	16,397			20,625			16,397			20,625
Depreciation and amortization	34,517			42,539			34,517			42,539
Total costs and expenses	1,001,444			1,019,596			1,001,444			1,019,596
Income from operations	86,886			91,765			86,886			91,765
Other income and expense:
Loss on early retirement of debt	(773		)	(19,719		)	(773		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	4,652			5,521			4,652			5,521
Non-operating gain (loss)	25,087			(49		)	25,087			(49		)
Interest expense	(38,848		)	(40,853		)	(38,848		)	(40,853		)
Income before income taxes	77,004			36,665			77,004			36,665
Income tax expense	17,060			13,202			17,060			13,202
Net income	59,944			23,463			59,944			23,463
Less: Net income attributable to non-controlling interests	5,111			7,593			5,111			7,593
Net income attributable to Select Medical Holdings
Corporation and Select Medical Corporation	$	54,833		$	15,870		$	54,833		$	15,870
Basic	$	0.42		$	0.12
Diluted	$	0.42		$	0.12
Weighted average shares outstanding:
Basic	127,500			128,464
Diluted	127,581			128,628

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

4

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, 2016	$	422,159		132,597		$	132	$	443,908		$	371,685		$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Holdings Corporation											15,870			15,870						15,870
Net income attributable to non-controlling interests	6,090													—			1,503			1,503
Issuance and vesting of restricted stock				101		0		4,280						4,280						4,280
Repurchase of common shares				(12	)	0		(85		)	(71		)	(156		)				(156		)
Exercise of stock options				67		0		617						617						617
Issuance of non-controlling interests								1,653						1,653			441			2,094
Purchase of non-controlling interests	(57		)								7			7						7
Distributions to non-controlling interests	(2,075		)											—			(1,532		)	(1,532		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	271										25			25			94			119
Balance at March 31, 2017	$	462,680		132,753		$	132	$	450,373		$	351,224		$	801,729		$	90,682		$	892,411

				Select Medical 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, 2016	$	422,159		0	$	0	$	925,111	$	(109,386	)	$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Corporation									15,870			15,870						15,870
Net income attributable to non-controlling interests	6,090											—			1,503			1,503
Additional investment by Holdings							617					617						617
Dividends declared and paid to Holdings									(156		)	(156		)				(156		)
Contribution related to restricted stock awards and stock option issuances by Holdings							4,280					4,280						4,280
Issuance of non-controlling interests							1,653					1,653			441			2,094
Purchase of non-controlling interests	(57		)						7			7						7
Distributions to non-controlling interests	(2,075		)									—			(1,532		)	(1,532		)
Redemption adjustment on non-controlling interests	36,292								(36,292		)	(36,292		)				(36,292		)
Other	271								25			25			94			119
Balance at March 31, 2017	$	462,680		0	$	0	$	931,661	$	(129,932	)	$	801,729		$	90,682		$	892,411

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

5

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,
	2016			2017			2016			2017
Operating activities
Net income	$	59,944		$	23,463		$	59,944		$	23,463
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	8,305			4,911			8,305			4,911
Depreciation and amortization	34,517			42,539			34,517			42,539
Provision for bad debts	16,397			20,625			16,397			20,625
Equity in earnings of unconsolidated subsidiaries	(4,652		)	(5,521		)	(4,652		)	(5,521		)
Loss on early retirement of debt	773			6,527			773			6,527
Gain on sale of assets and businesses	(30,393		)	(4,609		)	(30,393		)	(4,609		)
Impairment of equity investment	5,339			—			5,339			—
Stock compensation expense	3,976			4,586			3,976			4,586
Amortization of debt discount, premium and issuance costs	3,691			3,422			3,691			3,422
Deferred income taxes	(3,475		)	(3,425		)	(3,475		)	(3,425		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(39,164		)	(138,113		)	(39,164		)	(138,113		)
Other current assets	7,560			(7,621		)	7,560			(7,621		)
Other assets	(891		)	(48		)	(891		)	(48		)
Accounts payable	(21,322		)	412			(21,322		)	412
Accrued expenses	51,193			(18,429		)	51,193			(18,429		)
Income taxes	19,370			15,420			19,370			15,420
Net cash provided by (used in) operating activities	111,168			(55,861		)	111,168			(55,861		)
Investing activities
Acquisition of businesses, net of cash acquired	(412,883		)	(9,566		)	(412,883		)	(9,566		)
Purchases of property and equipment	(46,768		)	(50,653		)	(46,768		)	(50,653		)
Investment in businesses	(623		)	(500		)	(623		)	(500		)
Proceeds from sale of assets and businesses	62,600			19,512			62,600			19,512
Net cash used in investing activities	(397,674		)	(41,207		)	(397,674		)	(41,207		)
Financing activities
Borrowings on revolving facilities	190,000			530,000			190,000			530,000
Payments on revolving facilities	(175,000		)	(415,000		)	(175,000		)	(415,000		)
Proceeds from term loans	600,127			1,139,822			600,127			1,139,822
Payments on term loans	(226,962		)	(1,170,817		)	(226,962		)	(1,170,817		)
Revolving facility debt issuance costs	—			(3,887		)	—			(3,887		)
Borrowings of other debt	6,727			6,571			6,727			6,571
Principal payments on other debt	(4,464		)	(5,275		)	(4,464		)	(5,275		)
Repayments of bank overdrafts	(28,615		)	(17,062		)	(28,615		)	(17,062		)
Repurchase of common stock	—			(156		)	—			—
Dividends paid to Holdings	—			—			—			(156		)
Proceeds from exercise of stock options	21			617			—			—
Equity investment by Holdings	—			—			21			617
Proceeds from issuance of non-controlling interests	—			2,094			—			2,094
Purchase of non-controlling interests	(1,294		)	(50		)	(1,294		)	(50		)
Distributions to non-controlling interests	(3,061		)	(3,607		)	(3,061		)	(3,607		)
Net cash provided by financing activities	357,479			63,250			357,479			63,250
Net increase (decrease) in cash and cash equivalents	70,973			(33,818		)	70,973			(33,818		)
Cash and cash equivalents at beginning of period	14,435			99,029			14,435			99,029
Cash and cash equivalents at end of period	$	85,408		$	65,211		$	85,408		$	65,211
Supplemental Information
Cash paid for interest	$	21,544		$	38,565		$	21,544		$	38,565
Cash paid for taxes	$	1,209		$	1,207		$	1,209		$	1,207

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

6

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of March 31, 2017, and for the three month periods ended March 31, 2016 and 2017, have been prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. 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, 2016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2017.

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 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 from those estimates.

Recent Accounting Pronouncements

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.  The standard  provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

7

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits 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 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 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 a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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.

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.

In May 2014, March 2016, April 2016, and December 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, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), 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 retrospective or cumulative effect transition method.

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

The Company’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.

8

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626
Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the prior year balance sheet presentation has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes.

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.

For the Physiotherapy acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. During the three months ended March 31, 2017, the Company finalized the purchase price allocation.

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

Cash and cash equivalents	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	87,832
Identifiable intangible assets	32,484
Goodwill	343,187
Total assets	475,843
Total liabilities	54,685
Acquired non-controlling interests	2,514
Net assets acquired	418,644
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	406,304

Goodwill of $343.2 million has been recognized in 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 Physiotherapy’s future earnings potential and its assembled workforce. Goodwill has been assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8 million, which the Company will deduct through 2030.

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

The following pro forma unaudited results of operations have been prepared assuming the acquisition of Physiotherapy occurred on January 1, 2015. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisition been consummated on the aforementioned date. The Company’s results of operations for the three months ended March 31, 2017 include 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 March 31, 2016
	(in thousands, except per share amounts)
Net revenue	$	1,141,860
Net income	53,014
Income per common share:
Basic	$	0.40
Diluted	$	0.40

The net income tax impact was calculated at a statutory rate, as if Physiotherapy had been a subsidiary of the Company as of January 1, 2015. Pro forma results for the three months ended March 31, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

The Company completed acquisitions within our Concentra and outpatient rehabilitation segments during the three months ended March 31, 2017. Consideration given for these acquisitions consisted of $9.6 million of cash, net of cash received. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $8.6 million and $0.3 million of goodwill was recognized in our Concentra and outpatient rehabilitation reporting units, respectively.

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4.Intangible Assets and Liabilities

The Company’s goodwill and identifiable intangible assets and liabilities consist of the following:

	December 31,							March 31,
	2016							2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Goodwill	$	2,751,000	$	—		$	2,751,000	$	2,759,764	$	—		$	2,759,764
Identifiable intangibles—Indefinite lived assets:
Trademarks	166,698		—			166,698		166,698		—			166,698
Certificates of need	17,026		—			17,026		17,152		—			17,152
Accreditations	2,235		—			2,235		2,143		—			2,143
Identifiable intangibles—Finite lived assets:
Customer relationships	142,198		(23,185		)	119,013		142,890		(26,908		)	115,982
Favorable leasehold interests	13,089		(2,317		)	10,772		13,177		(2,796		)	10,381
Non-compete agreements	26,655		(1,837		)	24,818		27,057		(2,337		)	24,720
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	369,117	$	(32,041	)	$	337,076
Identifiable intangibles—Finite lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(1,690	)	$	3,653

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $3.8 million and $4.4 million for the three months ended March 31, 2016 and 2017, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million annually.

The Company’s favorable leasehold interest assets and unfavorable leasehold interest 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 Company’s unfavorable leasehold interests are presented as part of accrued other and other non-current liabilities on the condensed consolidated balance sheets.

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.6 years, respectively.

The changes in goodwill for the three months ended March 31, 2017 are as follows:

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	—			311		8,627		8,938
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of March 31, 2017	$	1,447,064		$	644,036	$	668,664	$	2,759,764

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

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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.

The Company’s long-term debt and notes payable consist of the following:

	December 31, 2016		March 31, 2017
	(in thousands)
Select 6.375% senior notes(1)	$	702,545	$	702,966
Select credit facilities:
Select revolving facility	220,000		335,000
Select term loan(2)	1,122,203		1,122,052
Other—Select	22,688		24,842
Total Select debt	2,067,436		2,184,860
Less: Select current maturities	8,996		21,641
Select long-term debt maturities	$	2,058,440	$	2,163,219
Concentra credit facilities:
Concentra term loans(3)	$	626,375	$	604,068
Other—Concentra	5,178		4,495
Total Concentra debt	631,553		608,563
Less: Concentra current maturities	4,660		372
Concentra long-term debt maturities	$	626,893	$	608,191
Total current maturities	$	13,656	$	22,013
Total long-term debt maturities	2,685,333		2,771,410
Total debt	$	2,698,989	$	2,793,423

(1)Includes unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2)Includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3)Includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt and notes payable for the period April 1, 2017 through December 31, 2017 and for the years after 2017 are approximately as follows:

	Select			Concentra			Total
	(in thousands)
April 1, 2017 — December 31, 2017	$	18,072		$	343		$	18,415
2018	14,976			128			15,104
2019	23,327			144			23,471
2020	11,568			3,177			14,745
2021	721,514			6,680			728,194
2022 and beyond	1,430,385			613,198			2,043,583
Total principal	2,219,842			623,670			2,843,512
Unamortized discounts and premiums	(13,051		)	(2,641		)	(15,692		)
Unamortized debt issuance costs	(21,931		)	(12,466		)	(34,397		)
Total	$	2,184,860		$	608,563		$	2,793,423

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Select Credit Facilities

On March 6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Select used borrowings under the Select credit facilities to: (i) refinance in full the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017.  The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

Select will be required to prepay borrowings under the Select credit facilities 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, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year.  Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00.  Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

The Select credit facilities also contain a number of other 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 Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

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Loss on Early Retirement of Debt

During the three months ended March 31, 2017, the Company refinanced its senior secured credit facilities, which consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018, which resulted in losses on early retirement of debt of $19.7 million.

Excess Cash Flow Payment

On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with the Concentra first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow.

6.  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.

The face values, carrying values, and fair values of the Company’s 6.375% senior notes and credit facilities are as follows:

	December 31, 2016						March 31, 2017
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	702,545	$	710,000	$	710,000	$	702,966	$	715,325
Select credit facilities(2)	1,367,751		1,342,203		1,370,460		1,485,000		1,457,052		1,474,013
Concentra credit facilities(3)	642,239		626,375		644,648		619,175		604,068		622,271

(1)The carrying value includes an unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2)The carrying value includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3)The carrying value includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

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 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.

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7.Segment Information

The Company’s reportable segments consist of: 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 accounting policies of the segments are the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2016. 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, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

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

	Three Months Ended March 31, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,954	$	238,082	$	250,877	$	417		$	1,088,330
Adjusted EBITDA	86,756		28,879		34,153		(21,173		)	128,615
Total assets(2)	2,434,405		974,264		1,310,317		103,878			4,822,864
Capital expenditures	33,675		4,974		3,210		4,909			46,768

	Three Months Ended March 31, 2017
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,787	$	255,817	$	256,149	$	608		$	1,111,361
Adjusted EBITDA	88,665		31,351		42,592		(23,718		)	138,890
Total assets	2,622,220		980,261		1,297,672		102,784			5,002,937
Capital expenditures	32,357		6,673		8,686		2,937			50,653

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

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

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	Three Months Ended March 31, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	88,665		$	31,351		$	42,592		$	(23,718	)
Depreciation and amortization	(18,500		)	(6,340		)	(16,123		)	(1,576		)
Stock compensation expense	—			—			(306		)	(4,280		)
Income (loss) from operations	$	70,165		$	25,011		$	26,163		$	(29,574	)	$	91,765
Loss on early retirement of debt													(19,719		)
Equity in earnings of unconsolidated subsidiaries													5,521
Non-operating loss													(49		)
Interest expense													(40,853		)
Income before income taxes													$	36,665

(1)The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

(2)Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.

8.  Income per Common Share

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.

The following table sets forth the calculation of income per share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted earnings per share, respectively.

	Three Months Ended March 31,
	2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	54,833	$	15,870
Less: Earnings allocated to unvested restricted stockholders	1,582		507
Net income available to common stockholders	$	53,251	$	15,363
Denominator:
Weighted average shares—basic	127,500		128,464
Effect of dilutive securities:
Stock options	81		164
Weighted average shares—diluted	127,581		128,628
Basic income per common share:	$	0.42	$	0.12
Diluted income per common share:	$	0.42	$	0.12

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9.             Commitments and Contingencies

Litigation

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

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

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

Evansville Litigation

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

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However,

17

the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Knoxville Litigation

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

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Wilmington Litigation

On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. The Company intends to vigorously defend this action if the plaintiff-relator pursues it, but at this time the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At March 31, 2017, the Company had outstanding commitments under construction contracts related to new construction, improvements, and renovations totaling approximately $69.9 million.

18

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

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

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 2016 and March 31, 2017 and for the three months ended March 31, 2016 and March 31, 2017.

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

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

19

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	72		$	6,836	$	3,405		$	54,898	$	—		$	65,211
Accounts receivable, net	—			442,132		125,079			124,309		—			691,520
Intercompany receivables	—			2,183,527		169,816			—		(2,353,343		) (a)	—
Prepaid income taxes	2,402			—		—			—		—			2,402
Other current assets	17,714			34,693		11,878			20,796		—			85,081
Total Current Assets	20,188			2,667,188		310,178			200,003		(2,353,343		)	844,214
Property and equipment, net	49,309			609,822		54,118			183,897		—			897,146
Investment in affiliates	4,513,416			100,095		—			—		(4,613,511		) (b) (c)	—
Goodwill	—			2,091,100		—			668,664		—			2,759,764
Identifiable intangible assets, net	—			108,545		—			228,531		—			337,076
Other assets	50,355			86,384		38,882			16,577		(27,461		) (d)	164,737
Total Assets	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	22,299		$	—	$	—		$	—	$	—		$	22,299
Current portion of long-term debt and notes payable	20,506			502		633			372					22,013
Accounts payable	13,349			78,195		17,429			16,145		—			125,118
Intercompany payables	2,183,527			169,816		—			—		(2,353,343		) (a)	—
Accrued payroll	4,268			76,290		2,488			27,150		—			110,196
Accrued vacation	3,740			57,763		11,968			15,265		—			88,736
Accrued interest	19,390			—		4			2,164		—			21,558
Accrued other	38,937			62,607		9,780			31,856		—			143,180
Income taxes payable	—			—		—			5,399		—			5,399
Total Current Liabilities	2,306,016			445,173		42,302			98,351		(2,353,343		)	538,499
Long-term debt, net of current portion	1,482,768			525,263		155,188			608,191		—			2,771,410
Non-current deferred tax liability	—			135,640		667			86,883		(27,461		) (d)	195,729
Other non-current liabilities	42,755			56,617		6,849			35,987		—			142,208
Total Liabilities	3,831,539			1,162,693		205,006			829,412		(2,380,804		)	3,647,846
Redeemable non-controlling interests	—			—		9,899			452,781		—			462,680
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	931,661			—		—			—		—			931,661
Retained earnings (accumulated deficit)	(129,932		)	1,318,340		(40,858		)	6,668		(1,284,150		) (c)	(129,932		)
Subsidiary investment	—			3,182,101		142,123			5,137		(3,329,361		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	801,729			4,500,441		101,265			11,805		(4,613,511		)	801,729
Non-controlling interests	—			—		87,008			3,674		—			90,682
Total Equity	801,729			4,500,441		188,273			15,479		(4,613,511		)	892,411
Total Liabilities and Equity	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937

(a)  Elimination of intercompany balances.

(b)  Elimination of investments in consolidated subsidiaries.

(c)  Elimination of investments in consolidated subsidiaries’ earnings.

(d)  Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

20

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	608		$	684,902		$	169,702		$	256,149		$	—		$	1,111,361
Costs and expenses:
Cost of services	532			577,885			141,648			208,292			—			928,357
General and administrative	28,036			39			—			—			—			28,075
Bad debt expense	—			11,699			3,355			5,571			—			20,625
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Total costs and expenses	30,143			610,844			148,623			229,986			—			1,019,596
Income (loss) from operations	(29,535		)	74,058			21,079			26,163			—			91,765
Other income and expense:
Intercompany interest and royalty fees	(1,896		)	3,415			(1,519		)	—			—			—
Intercompany management fees	61,698			(52,421		)	(9,277		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			5,493			28			—			—			5,521
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest expense	(22,808		)	(8,070		)	(2,476		)	(7,499		)	—			(40,853		)
Income (loss) before income taxes	(12,260		)	22,426			7,835			18,664			—			36,665
Income tax expense	126			5,936			304			6,836			—			13,202
Equity in earnings of subsidiaries	28,256			6,247			—			—			(34,503		)(a)	—
Net income	15,870			22,737			7,531			11,828			(34,503		)	23,463
Less: Net income attributable to non-controlling interests	—			—			1,069			6,524			—			7,593
Net income attributable to Select Medical Corporation	$	15,870		$	22,737		$	6,462		$	5,304		$	(34,503	)	$	15,870

(a) Elimination of equity in earnings of subsidiaries.

21

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	15,870		$	22,737		$	7,531		$	11,828		$	(34,503	)(a)	$	23,463
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			4,893			18			—			—			4,911
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Provision for bad debts	—			11,699			3,355			5,571			—			20,625
Equity in earnings of unconsolidated subsidiaries	—			(5,493		)	(28		)	—			—			(5,521		)
Equity in earnings of consolidated subsidiaries	(28,256		)	(6,247		)	—			—			34,503		(a)	—
Loss on early retirement of debt	6,527			—			—			—			—			6,527
Loss (gain) on sale of assets and businesses	—			62			(4,671		)	—			—			(4,609		)
Stock compensation expense	4,280			—			—			306			—			4,586
Amortization of debt discount, premium and issuance costs	2,590			—			—			832			—			3,422
Deferred income taxes	1,005			—			—			(4,430		)	—			(3,425		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(92,404		)	(28,521		)	(17,188		)	—			(138,113		)
Other current assets	(5,761		)	(1,129		)	(1,511		)	780			—			(7,621		)
Other assets	(3,753		)	(11,531		)	15,072			164			—			(48		)
Accounts payable	2,574			694			(5,410		)	2,554			—			412
Accrued expenses	(13,406		)	(3,673		)	3,940			(5,290		)	—			(18,429		)
Income taxes	4,256			—			—			11,164			—			15,420
Net cash provided by (used in) operating activities	(12,499		)	(59,171		)	(6,605		)	22,414			—			(55,861		)
Investing activities
Acquisition of businesses, net of cash acquired	—			(445		)	—			(9,121		)	—			(9,566		)
Purchases of property and equipment	(2,937		)	(29,268		)	(9,762		)	(8,686		)	—			(50,653		)
Investment in businesses	—			(500		)	—			—			—			(500		)
Proceeds from sale of assets and businesses	—			7			19,505			—			—			19,512
Net cash provided by (used in) investing activities	(2,937		)	(30,206		)	9,743			(17,807		)	—			(41,207		)
Financing activities
Borrowings on revolving facilities	530,000			—			—			—			—			530,000
Payments on revolving facilities	(415,000		)	—			—			—			—			(415,000		)
Proceeds from term loans	1,139,822			—			—			—			—			1,139,822
Payments on term loans	(1,147,752		)	—			—			(23,065		)	—			(1,170,817		)
Revolving facility debt issuance costs	(3,887		)	—			—			—			—			(3,887		)
Borrowings of other debt	6,571			—			—			—			—			6,571
Principal payments on other debt	(3,704		)	(80		)	(695		)	(796		)	—			(5,275		)
Repayments of bank overdrafts	(17,062		)	—			—			—			—			(17,062		)
Dividends paid to Holdings	(156		)	—			—			—			—			(156		)
Equity investment by Holdings	617			—			—			—			—			617
Intercompany	(85,012		)	89,876			(4,864		)	—			—			—
Proceeds from issuance of non-controlling interests	—			—			2,094			—			—			2,094
Purchase of non-controlling interests	—			(50		)	—			—			—			(50		)
Distributions to non-controlling interests	—			—			(1,324		)	(2,283		)	—			(3,607		)
Net cash provided by (used in) financing activities	4,437			89,746			(4,789		)	(26,144		)	—			63,250
Net increase (decrease) in cash and cash equivalents	(10,999		)	369			(1,651		)	(21,537		)	—			(33,818		)
Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—			99,029
Cash and cash equivalents at end of period	$	72		$	6,836		$	3,405		$	54,898		$	—		$	65,211

(a)  Elimination of equity in earnings of consolidated subsidiaries.

22

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	11,071		$	6,467	$	5,056		$	76,435	$	—		$	99,029
Accounts receivable, net	—			361,327		99,913			112,512		—			573,752
Intercompany receivables	—			2,237,362		157,324			—		(2,394,686		) (a)	—
Prepaid income taxes	6,658			—		—			5,765		—			12,423
Other current assets	11,953			33,860		10,367			21,519		—			77,699
Total Current Assets	29,682			2,639,016		272,660			216,231		(2,394,686		)	762,903
Property and equipment, net	48,697			601,426		52,851			189,243		—			892,217
Investment in affiliates	4,515,998			92,389		—			—		(4,608,387		) (b) (c)	—
Goodwill	—			2,090,963		—			660,037		—			2,751,000
Identifiable intangible assets, net	—			109,132		—			231,430		—			340,562
Other assets	45,636			84,803		53,954			16,235		(26,684		) (d)	173,944
Total Assets	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	39,362		$	—	$	—		$	—	$	—		$	39,362
Current portion of long-term debt and notes payable	7,227			445		1,324			4,660		—			13,656
Accounts payable	10,775			78,166		22,839			14,778		—			126,558
Intercompany payables	2,237,362			157,324		—			—		(2,394,686		) (a)	—
Accrued payroll	16,963			92,187		4,275			32,972		—			146,397
Accrued vacation	3,440			55,297		10,857			13,667		—			83,261
Accrued interest	20,114			—		—			2,211		—			22,325
Accrued other	39,155			60,871		6,152			33,898		—			140,076
Total Current Liabilities	2,374,398			444,290		45,447			102,186		(2,394,686		)	571,635
Long-term debt, net of current portion	1,407,066			513,938		137,436			626,893		—			2,685,333
Non-current deferred tax liability	—			133,852		596			91,314		(26,684		) (d)	199,078
Other non-current liabilities	42,824			53,399		5,865			34,432		—			136,520
Total Liabilities	3,824,288			1,145,479		189,344			854,825		(2,421,370		)	3,592,566
Redeemable non-controlling interests	—			—		10,169			411,990		—			422,159
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	925,111			—		—			—		—			925,111
Retained earnings (accumulated deficit)	(109,386		)	1,295,603		(39,546		)	1,364		(1,257,421		) (c)	(109,386		)
Subsidiary investment	—			3,176,647		132,890			41,429		(3,350,966		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	815,725			4,472,250		93,344			42,793		(4,608,387		)	815,725
Non-controlling interests	—			—		86,608			3,568		—			90,176
Total Equity	815,725			4,472,250		179,952			46,361		(4,608,387		)	905,901
Total Liabilities and Equity	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626

(a)  Elimination of intercompany balances.

(b)  Elimination of investments in consolidated subsidiaries.

(c)  Elimination of investments in consolidated subsidiaries’ earnings.

(d)  Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

23

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	417		$	711,868		$	125,168		$	250,877		$	—		$	1,088,330
Costs and expenses:
Cost of services	344			602,521			106,195			213,202			—			922,262
General and administrative	28,387			(119		)	—			—			—			28,268
Bad debt expense	—			10,698			1,985			3,714			—			16,397
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Total costs and expenses	29,942			628,311			110,899			232,292			—			1,001,444
Income (loss) from operations	(29,525		)	83,557			14,269			18,585			—			86,886
Other income and expense:
Intercompany interest and royalty fees	(1,058		)	2,854			(1,796		)	—			—			—
Intercompany management fees	55,357			(49,525		)	(5,832		)	—			—			—
Loss on early retirement of debt	(773		)	—			—			—			—			(773		)
Equity in earnings of unconsolidated subsidiaries	—			4,627			25			—			—			4,652
Non-operating gain (loss)	30,432			(5,345		)	—			—			—			25,087
Interest expense	(20,346		)	(6,634		)	(1,639		)	(10,229		)	—			(38,848		)
Income before income taxes	34,087			29,534			5,027			8,356			—			77,004
Income tax expense (benefit)	8,612			5,615			(65		)	2,898			—			17,060
Equity in earnings of subsidiaries	29,358			3,117			—			—			(32,475		) (a)	—
Net income	54,833			27,036			5,092			5,458			(32,475		)	59,944
Less: Net income attributable to non-controlling interests	—			—			1,886			3,225			—			5,111
Net income attributable to Select Medical Corporation	$	54,833		$	27,036		$	3,206		$	2,233		$	(32,475	)	$	54,833

(a) Elimination of equity in earnings of subsidiaries.

24

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	54,833		$	27,036		$	5,092		$	5,458		$	(32,475	)(a)	$	59,944
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			8,283			22			—			—			8,305
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Provision for bad debts	—			10,698			1,985			3,714			—			16,397
Equity in earnings of unconsolidated subsidiaries	—			(4,627		)	(25		)	—			—			(4,652		)
Equity in earnings of consolidated subsidiaries	(29,358		)	(3,117		)	—			—			32,475		(a)	—
Loss on early retirement of debt	773			—			—			—			—			773
Loss (gain) on sale of assets and business	(30,432		)	23			16			—			—			(30,393		)
Impairment of equity investment	—			5,339			—			—			—			5,339
Stock compensation expense	3,784			—			—			192			—			3,976
Amortization of debt discount, premium and issuance costs	2,838			—			—			853			—			3,691
Deferred income taxes	(3,294		)	—			—			(181		)	—			(3,475		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(18,362		)	(13,913		)	(6,889		)	—			(39,164		)
Other current assets	(5,472		)	4,411			(522		)	9,143			—			7,560
Other assets	155			(70		)	19			(995		)	—			(891		)
Accounts payable	(12		)	(18,456		)	(4,242		)	1,388			—			(21,322		)
Accrued expenses	(2,149		)	50,917			1,040			1,385			—			51,193
Income taxes	16,483			—			—			2,887			—			19,370
Net cash provided by (used in) operating activities	9,360			77,286			(7,809		)	32,331			—			111,168
Investing activities
Acquisition of businesses, net of cash acquired	(408,654		)	(605		)	—			(3,624		)	—			(412,883		)
Purchases of property and equipment	(4,909		)	(32,571		)	(6,078		)	(3,210		)	—			(46,768		)
Investment in businesses	—			(623		)	—			—			—			(623		)
Proceeds from sale of assets and business	62,597			—			3			—			—			62,600
Net cash used in investing activities	(350,966		)	(33,799		)	(6,075		)	(6,834		)	—			(397,674		)
Financing activities
Borrowings on revolving facilities	190,000			—			—			—			—			190,000
Payments on revolving facilities	(170,000		)	—			—			(5,000		)	—			(175,000		)
Proceeds from term loans	600,127			—			—			—			—			600,127
Payments on term loans	(225,837		)	—			—			(1,125		)	—			(226,962		)
Borrowings of other debt	6,727			—			—			—			—			6,727
Principal payments on other debt	(3,028		)	(37		)	(557		)	(842		)	—			(4,464		)
Repayments of bank overdrafts	(28,615		)	—			—			—			—			(28,615		)
Equity investment by Holdings	21			—			—			—			—			21
Intercompany	17,341			(36,170		)	18,829			—			—			—
Purchase of non-controlling interests	—			(1,294		)	—			—			—			(1,294		)
Distributions to non-controlling interests	(2,432		)	—			—			(629		)	—			(3,061		)
Net cash provided by (used in) financing activities	384,304			(37,501		)	18,272			(7,596		)	—			357,479
Net increase in cash and cash equivalents	42,698			5,986			4,388			17,901			—			70,973
Cash and cash equivalents at beginning of period	4,070			3,706			625			6,034			—			14,435
Cash and cash equivalents at end of period	$	46,768		$	9,692		$	5,013		$	23,935		$	—		$	85,408

(a)  Elimination of equity in earnings of consolidated subsidiaries.

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

You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.

Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

·changes in government reimbursement for our services due to the implementation of healthcare reform legislation, deficit reduction measures, and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a long term acute care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

·the impact of the Bipartisan Budget Act of 2013 (the “BBA of 2013”), which established payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and profitability of our long term acute care hospitals (“LTCHs”);

·the failure of our specialty hospitals to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;

·the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;

·a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;

·acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;

·private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;

·the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;

·shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;

·competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;

·the loss of key members of our management team could significantly disrupt our operations;

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·the effect of claims asserted against us could subject us to substantial uninsured liabilities; and

·other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, as such risk factors may be updated from time to time in our periodic filings with the SEC.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of specialty hospitals, outpatient rehabilitation clinics, and occupational medicine centers in the United States. As of March 31, 2017, we had operations in 46 states and the District of Columbia. As of March 31, 2017, we operated 122 specialty hospitals in 27 states and 1,610 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated 308 medical centers in 38 states as of March 31, 2017. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics, or “CBOCs.”

We manage our Company through three business segments: specialty hospitals, outpatient rehabilitation, and Concentra. We had net operating revenues of $1,111.4 million for the three months ended March 31, 2017. Of this total, we earned approximately 54% of our net operating revenues from our specialty hospitals segment, approximately 23% from our outpatient rehabilitation segment, and approximately 23% from our Concentra segment. Patients are typically admitted to our specialty hospitals from general acute care hospitals. These patients have specialized needs, with serious and often complex medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of medical centers and contract services provided at employer worksites and Department of Veterans Affairs CBOCs that deliver occupational medicine, physical therapy, veteran’s healthcare, and consumer health services.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation, or as an alternative to or substitute for net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The below table reconciles net income and income from operations to Adjusted EBITDA and should be referred to when we discuss Adjusted EBITDA.

	Three Months Ended March 31,
	2016			2017
	(in thousands)
Net income	$	59,944		$	23,463
Income tax expense	17,060			13,202
Interest expense	38,848			40,853
Non-operating loss (gain)	(25,087		)	49
Equity in earnings of unconsolidated subsidiaries	(4,652		)	(5,521		)
Loss on early retirement of debt	773			19,719
Income from operations	86,886			91,765
Stock compensation expense:
Included in general and administrative	3,248			3,749
Included in cost of services	728			837
Depreciation and amortization	34,517			42,539
Physiotherapy acquisition costs	3,236			—
Adjusted EBITDA	$	128,615		$	138,890

Summary Financial Results

Three Months Ended March 31, 2017

For the three months ended March 31, 2017, our net operating revenues increased 2.1% to $1,111.4 million, compared to $1,088.3 million for the three months ended March 31, 2016. Income from operations increased 5.6% to $91.8 million for the three months ended March 31, 2017, compared to $86.9 million for the three months ended March 31, 2016. Net income was $23.5 million for the three months ended March 31, 2017, which includes a pre-tax loss on early retirement of debt of $19.7 million. Net income was $59.9 million for the three months ended March 31, 2016, which includes a pre-tax non-operating gain of $25.1 million and a pre-tax loss on early retirement of debt of $0.8 million. Our Adjusted EBITDA increased 8.0% to $138.9 million for the three months ended March 31, 2017, compared to $128.6 million for the three months ended March 31, 2016. Our Adjusted EBITDA margin was 12.5% for the three months ended March 31, 2017, compared to 11.8% for the three months ended March 31, 2016.

Significant Events

Refinancing

On March 6, 2017, Select entered into a new senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of standby letters of credit. Select used borrowings under the new Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and (ii) pay fees and expenses in connection with the refinancing.

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Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 23, 2017, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately 30% of our net operating revenues for both the three months ended March 31, 2017 and for the year ended December 31, 2016.

Medicare Reimbursement of LTCH Services

There have been significant regulatory changes affecting LTCHs that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our LTCHs are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCHs are generally published in April or May, finalized in August, and effective on October 1st of each year.

The following is a summary of significant changes to the Medicare prospective payment system for LTCHs which have affected our financial performance in the periods covered by this report or may affect our financial performance and financial condition in the future.

Fiscal Year 2016.  On August 17, 2015, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an increase from the standard federal rate applicable during fiscal year 2015 of $41,044. The update to the standard federal rate for fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the Affordable Care Act (“ACA”). The fixed loss amount for high cost outlier cases paid under LTCH-PPS was set at $16,423, an increase from the fixed loss amount in the 2015 fiscal year of $14,972. The fixed loss amount for high cost outlier cases paid under the site neutral payment rate described below was set at $22,538.

Fiscal Year 2017.  On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the 2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.

Fiscal Year 2018. On April 14, 2017, CMS released an advanced copy of the proposed policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard federal rate would be set at $41,497, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018, if adopted, would include a market basket increase of 2.8%, less a productivity adjustment of 0.4%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate would be further reduced by the proposed short-stay outlier changes, as described below. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS, if adopted, would be set at $30,081, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate, if adopted, would be set at $26,713, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

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Patient Criteria

The BBA of 2013, enacted December 26, 2013, establishes a dual-rate LTCH-PPS for Medicare patients discharged from an LTCH. Specifically, for Medicare patients discharged in cost reporting periods beginning on or after October 1, 2015, LTCHs will be reimbursed at the LTCH-PPS standard federal payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged from a “subsection (d) hospital” (generally, a short-term acute care hospital paid under the inpatient prospective payment system, or “IPPS”) and either the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d) hospital, or the patient was assigned to Medicare severity diagnosis-related group (“MS-LTC-DRG”) for LTCHs for cases receiving at least 96 hours of ventilator services in the LTCH. In addition, to be paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH will be paid a lower “site neutral” payment rate, which will be the lower of: (i) IPPS comparable per diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) payment rate plus any outlier payments; or (ii) 100 percent of the estimated costs for services.

The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid at the LTCH-PPS standard federal payment rate. During the transition period (applicable to hospital cost reporting periods beginning on or after October 1, 2015 and on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral payment rate amount and 50% of the standard federal payment rate amount. Thereafter, an LTCH will be paid solely based on the site-neutral payment rate for Medicare patients not meeting the patient criteria. For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral payment rate will apply for Medicare patients not meeting the new criteria.

In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the number of discharges for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the LTCH for that period. If the number of discharges for which payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment rate to be reinstated for payment under the dual-rate LTCH-PPS.

Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below), apply to LTCH discharges regardless of whether the case is paid at the standard federal payment rate or the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid at the site-neutral payment rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from the site-neutral payment rate. In addition, CMS applies the IPPS fixed-loss amount for high cost outliers to site-neutral cases, rather than the LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the site-neutral rate.

Medicare Market Basket Adjustments

The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.

25 Percent Rule

The “25 Percent Rule” is a downward payment adjustment that applies if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeds the applicable percentage admissions threshold during a particular cost reporting period. For Medicare patients above the applicable percentage admissions threshold, the LTCH is reimbursed at a rate equivalent to that under general acute care hospital IPPS, which is generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the admissions threshold and are paid under LTCH-PPS.

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Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges occurring on or after October 1, 2016 and before October 1, 2017. In addition, current law applies higher percentage admissions thresholds under the 25 Percent Rule for most hospitals within hospitals (“HIHs”) for cost reporting years beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs are exempt from the 25 Percent Rule regulations.

After the expiration of the statutory relief, as described above, our LTCHs (whether freestanding, HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes will have an adverse financial impact on the net operating revenues and profitability of many of these hospitals for discharges on or after October 1, 2017.

For fiscal year 2018, CMS is proposing a regulatory moratorium on the implementation of the 25 Percent Rule. If adopted in the final rule, the 25 Percent Rule would apply to discharges occurring on or after October 1, 2018. Moreover, if this proposal is not finalized, CMS proposes to apply the 25 Percent Rule to discharges occurring on or after October 1, 2017.

Short Stay Outlier Policy

CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” SSO cases are paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.

For fiscal year 2018, CMS is proposing to change SSO policy such that all SSO cases discharged on or after October 1, 2017 would be paid using only the last of these four options - a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS. If adopted, CMS anticipates that this proposed change to the payment formula for SSO cases would result in a net increase in aggregate Medicare LTCH payments compared to aggregate Medicare LTCH payments under the current methodology, which would be offset by a budget neutrality adjustment decreasing payment to non-SSO cases.

Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH beds

Current law imposes a moratorium on the establishment and classification of new LTCHs or LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities through September 30, 2017. There are three exceptions to the moratorium for projects that were under development when the moratorium began on April 1, 2014. Only one exception needs to apply.

Medicare Reimbursement of Inpatient Rehabilitation Facility Services

The following is a summary of significant changes to the Medicare prospective payment system for inpatient rehabilitation facilities (“IRFs”) which have affected our financial performance in the periods covered by this report or may affect our financial performance and financial condition in the future. Medicare payments to our IRFs are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).

Fiscal Year 2016.  On August 6, 2015, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard payment conversion factor for discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.

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Fiscal Year 2017.  On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.

Fiscal Year 2018.   On April 27, 2017, CMS released an advanced copy of the proposed policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 would be set at $15,835, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018, if adopted, would include a market basket increase of 2.7%, less a productivity adjustment of 0.4%, and less a reduction of 0.75% mandated by the ACA. As noted below, the proposed update to the standard payment conversion factor for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. CMS proposed to increase the outlier threshold amount for fiscal year 2018 to $8,656 from $7,984 established in the final rule for fiscal year 2017.

Medicare Market Basket Adjustments

The ACA instituted a market basket payment adjustment for IRFs. In fiscal years 2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.

Patient Classification Criteria

In order to qualify as an IRF a hospital must demonstrate that during its most recent twelve month cost reporting period it served an inpatient population of whom at least 60% required intensive rehabilitation services for one or more of 13 conditions specified by regulation. Compliance with the 60% rule is demonstrated through either medical review or the “presumptive” method, in which a patient’s diagnosis codes are compared to a “presumptive compliance” list.  For fiscal year 2018, CMS is proposing changes to the 60% rule’s presumptive methodology, including (i) addressing certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes for patients with traumatic brain injury and hip fracture conditions; (ii) identifying major multiple trauma codes that did not translate exactly (one-for-one) between International Classification of Diseases, Ninth Revision, Clinical Modification (“ICD-9-CM”) and ICD-10-CM; (iii) removing certain non-specific and arthritis diagnosis codes that were inadvertently re-introduced through the ICD-10-CM conversion process; and (iv) removing one ICD-10-CM code, G72.89—Other specified myopathies.

Medicare Reimbursement of Outpatient Rehabilitation Services

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit-Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.

Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements a provider’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019 through 2024 professionals who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and comment rule-making.

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Operating Statistics

The following table sets forth operating statistics for our operating segments for each of the periods presented. The operating statistics reflect data for the period of time we managed these operations:

	Three Months Ended March 31,
	2016			2017
Specialty hospitals data:(1)
Number of hospitals owned—start of period	118			115
Number of hospitals acquired	—			—
Number of hospital start-ups	—			—
Number of hospitals closed/sold	—			(1		)
Number of hospitals owned—end of period	118			114
Number of hospitals managed—end of period	9			8
Total number of hospitals (all)—end of period	127			122
Long term acute care hospitals	109			102
Rehabilitation hospitals	18			20
Available licensed beds(2)	5,172			5,148
Admissions(2)	13,861			13,895
Patient days(2)	337,971			317,365
Average length of stay (days)(2)	24			23
Net revenue per patient day(2)(3)	$	1,632		$	1,716
Occupancy rate(2)	72		%	68		%
Percent patient days—Medicare(2)	57		%	55		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	896			1,445
Number of clinics acquired	543			1
Number of clinic start-ups	6			8
Number of clinics closed/sold	(4		)	(9		)
Number of clinics owned—end of period	1,441			1,445
Number of clinics managed—end of period	160			165
Total number of clinics (all)—end of period	1,601			1,610
Number of visits(2)	1,576,554			2,075,790
Net revenue per visit(2)(4)	$	103		$	102
Concentra data:
Number of centers owned—start of period	300			300
Number of centers acquired	2			6
Number of center start-ups	—			2
Number of centers closed/sold	(1		)	—
Number of centers owned—end of period	301			308
Number of visits(5)	1,845,715			1,886,815
Net revenue per visit(5)(6)	$	118		$	118

(1)Specialty hospitals consist of LTCHs and IRFs.

(2)Data excludes specialty hospitals and outpatient clinics managed by the Company.

(3)Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenues by the total number of patient days.

(4)Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy revenue.

(5)Data excludes onsite clinics and CBOCs.

(6)Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits.

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Results of Operations

The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:

	Three Months Ended March 31,
	2016		2017
Net operating revenues	100.0	%	100.0	%
Cost of services(1)	84.7		83.5
General and administrative	2.6		2.5
Bad debt expense	1.5		1.9
Depreciation and amortization	3.2		3.8
Income from operations	8.0		8.3
Loss on early retirement of debt	(0.1	)	(1.8	)
Equity in earnings of unconsolidated subsidiaries	0.4		0.5
Non-operating gain (loss)	2.3		(0.0	)
Interest expense	(3.5	)	(3.7	)
Income before income taxes	7.1		3.3
Income tax expense	1.6		1.2
Net income	5.5		2.1
Net income attributable to non-controlling interests	0.5		0.7
Net income attributable to Holdings and Select	5.0	%	1.4	%

(1)Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.

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The following table summarizes selected financial data by business segment for the periods indicated:

	Three Months Ended March 31,
	2016			2017			% Change
	(in thousands)
Net operating revenues:
Specialty hospitals	$	598,954		$	598,787		(0.0	)%
Outpatient rehabilitation(1)	238,082			255,817			7.4
Concentra	250,877			256,149			2.1
Other(2)	417			608			N/M
Total Company	$	1,088,330		$	1,111,361		2.1	%
Income (loss) from operations:
Specialty hospitals	$	72,863		$	70,165		(3.7	)%
Outpatient rehabilitation(1)	24,843			25,011			0.7
Concentra	18,585			26,163			40.8
Other(2)	(29,405		)	(29,574		)	(0.6	)
Total Company	$	86,886		$	91,765		5.6	%
Adjusted EBITDA:
Specialty hospitals	$	86,756		$	88,665		2.2	%
Outpatient rehabilitation(1)	28,879			31,351			8.6
Concentra	34,153			42,592			24.7
Other(2)	(21,173		)	(23,718		)	(12.0	)
Total Company	$	128,615		$	138,890		8.0	%
Adjusted EBITDA margins:
Specialty hospitals	14.5		%	14.8		%
Outpatient rehabilitation(1)	12.1			12.3
Concentra	13.6			16.6
Other(2)	N/M			N/M
Total Company	11.8		%	12.5		%
Total assets: (3)
Specialty hospitals	$	2,434,405		$	2,622,220
Outpatient rehabilitation(1)	974,264			980,261
Concentra	1,310,317			1,297,672
Other(2)	103,878			102,784
Total Company	$	4,822,864		$	5,002,937
Purchases of property and equipment, net:
Specialty hospitals	$	33,675		$	32,357
Outpatient rehabilitation(1)	4,974			6,673
Concentra	3,210			8,686
Other(2)	4,909			2,937
Total Company	$	46,768		$	50,653

N/M—Not Meaningful.

(1)The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

(2)Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses.

(3)Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.

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Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain, interest expense, income taxes, and non-controlling interest, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased 2.1% to $1,111.4 million for the three months ended March 31, 2017, compared to $1,088.3 million for the three months ended March 31, 2016. The principal changes in our net operating revenues for the three months ended March 31, 2017 were caused by increases at our outpatient rehabilitation segment, which were driven by our acquisition of Physiotherapy on March 4, 2016, offset in part by a decrease in net operating revenues due to the sale of our contract therapy businesses on March 31, 2016, and increases in net operating revenues at our Concentra segment.

Specialty Hospitals Segment.  Net operating revenues were $598.8 million for the three months ended March 31, 2017, compared to $599.0 million for the three months ended March 31, 2016 for our specialty hospitals segment. Net operating revenues for the three months ended March 31, 2017 were substantially unchanged compared to the three months ended March 31, 2016. We continue to experience transitions, as described below, in our specialty hospitals operations which we expect to positively impact our net operating revenues in the future.

We recently commenced specialty hospital operations at four new inpatient rehabilitation facilities which are now contributing to our specialty hospital net operating revenues; however, during the three months ended March 31, 2017, the contributions from these hospitals were offset by decreases in our net operating revenues at our LTCHs, as discussed above under “Regulatory Changes—Medicare Reimbursement of LTCH Services—Patient Criteria,” and closed specialty hospitals. The implementation of the Medicare patient criteria regulatory changes afforded us an opportunity to adjust our LTCH operations to better align to those patients which meet LTCH patient criteria. This has resulted in increases in occupancy of higher acuity patient populations at our LTCHs, as our LTCHs became subject to the new rules beginning October 1, 2015. Our LTCH occupancy rates, as illustrated in the table below, reveal the sequential trend showing our occupancy rate decline as our hospitals phased in the new patient criteria eligibility requirements and the subsequent case mix index improvements we experienced to date as we transitioned our services towards higher acuity patients in our LTCH operations.

	2015			2016			2017
	Occupancy Percentage		Case Mix Index	Occupancy Percentage		Case Mix Index	Occupancy Percentage		Case Mix Index
Three months ended:
March 31	71	%	1.22	71	%	1.24	68	%	1.28
June 30	70	%	1.21	67	%	1.27
September 30	70	%	1.18	61	%	1.26
December 31	70	%	1.21	63	%	1.26

Our overall specialty hospitals average net operating revenue per patient day increased 5.1% to $1,716 for the three months ended March 31, 2017, compared to $1,632 for the three months ended March 31, 2016.

Outpatient Rehabilitation Segment.  Net operating revenues increased 7.4% to $255.8 million for the three months ended March 31, 2017, compared to $238.1 million for the three months ended March 31, 2016 for our outpatient rehabilitation segment. The increase in net operating revenues was principally due to an increase in visits from our Physiotherapy outpatient rehabilitation clinics, which we acquired on March 4, 2016, and growth in visits at our other outpatient rehabilitation clinics. Visits increased 31.7% to 2,075,790 visits for the three months ended March 31, 2017, compared to 1,576,554 visits for the three months ended March 31, 2016. Net revenue per visit was $102 for the three months ended March 31, 2017, compared to $103 for the three months ended March 31, 2016. The decrease in net revenue per visit is the result of lower per visit rates at our Physiotherapy clinics.

Concentra Segment.  Net operating revenues increased 2.1% to $256.1 million for the three months ended March 31, 2017, compared to $250.9 million for the three months ended March 31, 2016 for our Concentra segment. The increase in net operating revenues was due to an increase in visits principally from newly acquired and developed medical centers. We had 1,886,815 visits in our centers for the three months ended March 31, 2017, compared to 1,845,715 visits for the three months ended March 31, 2016. Net revenue per visit was $118 for both the three months ended March 31, 2017 and 2016.

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Operating Expenses

Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses increased to $977.1 million, or 87.9% of net operating revenues, for the three months ended March 31, 2017, compared to $966.9 million, or 88.8% of net operating revenues, for the three months ended March 31, 2016. Our cost of services, a major component of which is labor expense, was $928.4 million, or 83.5% of net operating revenues, for the three months ended March 31, 2017, compared to $922.3 million, or 84.7% of net operating revenues, for the three months ended March 31, 2016. The decrease in our relative operating expenses is principally due to the sale of our contract therapy businesses on March 31, 2016, specialty hospital closures, and cost reductions achieved by Concentra. Facility rent expense, a component of cost of services, was $56.5 million for the three months ended March 31, 2017, compared to $52.0 million for the three months ended March 31, 2016. General and administrative expenses were $28.1 million for the three months ended March 31, 2017, compared $28.3 million for the three months ended March 31, 2016, which included $3.2 million of Physiotherapy acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended March 31, 2017, compared to 2.6% for the three months ended March 31, 2016. Our bad debt expense was $20.6 million, or 1.9% of net operating revenues, for the three months ended March 31, 2017, compared to $16.4 million, or 1.5% of net operating revenues, for the three months ended March 31, 2016. The increase was principally the result of increases in bad debt expense in our outpatient rehabilitation segment, primarily due to Physiotherapy, and in our Concentra segment.

Adjusted EBITDA

Specialty Hospitals Segment.  Adjusted EBITDA increased 2.2% to $88.7 million for the three months ended March 31, 2017, compared to $86.8 million for the three months ended March 31, 2016 for our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 14.8% for the three months ended March 31, 2017, compared to 14.5% for the three months ended March 31, 2016. The increase in Adjusted EBITDA for our specialty hospitals segment was primarily driven by reductions in Adjusted EBITDA losses in our start-up specialty hospitals. Adjusted EBITDA losses in our start-up specialty hospitals were $2.0 million for the three months ended March 31, 2017, compared to $3.8 million for the three months ended March 31, 2016.

Outpatient Rehabilitation Segment.  Adjusted EBITDA increased 8.6% to $31.4 million for the three months ended March 31, 2017, compared to $28.9 million for the three months ended March 31, 2016 for our outpatient rehabilitation segment. The increase in Adjusted EBITDA for our outpatient rehabilitation segment was principally the result of increases in net operating revenues, as discussed above under “Net Operating Revenues.” Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 12.3% for the three months ended March 31, 2017, compared to 12.1% for the three months ended March 31, 2016. The increase was principally due to the sale of our contract therapy businesses on March 31, 2016, which operated at lower Adjusted EBITDA margins than our outpatient rehabilitation clinics.

Concentra Segment.  Adjusted EBITDA increased 24.7% to $42.6 million for the three months ended March 31, 2017, compared to $34.2 million for the three months ended March 31, 2016 for our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 16.6% for the three months ended March 31, 2017, compared to 13.6% for the three months ended March 31, 2016. The increase in Adjusted EBITDA for our Concentra segment was principally the result of cost reductions we have achieved.

Other.  The Adjusted EBITDA loss was $23.7 million for the three months ended March 31, 2017, compared to an Adjusted EBITDA loss was $21.2 million for the three months ended March 31, 2016.

Depreciation and Amortization

Depreciation and amortization expense was $42.5 million for the three months ended March 31, 2017, compared to $34.5 million for the three months ended March 31, 2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment and Physiotherapy, which we acquired on March 4, 2016.

Income from Operations

For the three months ended March 31, 2017, we had income from operations of $91.8 million, compared to $86.9 million for the three months ended March 31, 2016. The increase resulted principally from the improved operating performance in our Concentra segment.

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Loss on Early Retirement of Debt

During the three months ended March 31, 2017, we refinanced Select’s senior secured credit facilities, which consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018, which resulted in losses on early retirement of debt of $19.7 million.

Equity in Earnings of Unconsolidated Subsidiaries

For the three months ended March 31, 2017, we had equity in earnings of unconsolidated subsidiaries of $5.5 million, compared $4.7 million for the three months ended March 31, 2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from improved performance in our inpatient rehabilitation businesses in which we have a minority interest.

Non-Operating Gain

We recognized a non-operating gain of $25.1 million during the three months ended March 31, 2016, principally due to the sale of our contract therapy businesses.

Interest Expense

Interest expense was $40.9 million for the three months ended March 31, 2017, compared to $38.8 million for the three months ended March 31, 2016. The increase in interest expense was principally the result of increases in our indebtedness as a result of the acquisition of Physiotherapy.

Income Taxes

We recorded income tax expense of $13.2 million for the three months ended March 31, 2017, which represented an effective tax rate of 36.0%. We recorded income tax expense of $17.1 million for the three months ended March 31, 2016, which represented an effective tax rate of 22.2%. Our effective tax rate for the three months March 31, 2016 benefited from the sale of our contract therapy businesses. Our tax basis in our contract therapy businesses exceeded our selling price. As a result, we had no tax expense related to the gain on the sale of our contract therapy businesses.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was $7.6 million for the three months ended March 31, 2017, compared to $5.1 million for the three months ended March 31, 2016. The increase is principally due the minority interest owners’ share of income from Concentra.

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Liquidity and Capital Resources

Cash Flows for the Three Months Ended March 31, 2017 and Three Months Ended March 31, 2016

In the following, we discuss cash flows from operating activities, investing activities, and financing activities, which, in each case, are the same for Holdings and Select.

	Three Months Ended March 31,
	2016			2017
	(in thousands)
Cash flows provided by (used in) operating activities	$	111,168		$	(55,861	)
Cash flows used in investing activities	(397,674		)	(41,207		)
Cash flows provided by financing activities	357,479			63,250
Net increase (decrease) in cash and cash equivalents	70,973			(33,818		)
Cash and cash equivalents at beginning of period	14,435			99,029
Cash and cash equivalents at end of period	$	85,408		$	65,211

Operating activities used $55.9 million of cash flows for the three months ended March 31, 2017. The decrease in operating cash flows for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 is principally due to increases in our accounts receivable. Our days sales outstanding was 56 days at March 31, 2017, compared to 51 days at December 31, 2016 and 52 days at March 31, 2016. Our days sales outstanding will fluctuate based upon variability in our collection cycles. The increase in our days sales outstanding and related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

Investing activities used $41.2 million for the three months ended March 31, 2017. The principal use of cash was $50.7 million for purchases of property and equipment and $9.6 million for the acquisition of Concentra centers and outpatient rehabilitation clinics, offset in part by $19.5 million of proceeds from the sale of assets. Investing activities used $397.7 million of cash flow for the three months ended March 31, 2016, principally due to the acquisition of Physiotherapy.

Financing activities provided $63.3 million of cash flows for the three months ended March 31, 2017. The principal source of cash was net borrowings under the Select revolving facility of $115.0 million, offset by cash used for financing costs, and $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities.

Financing activities provided $357.5 million of cash flows for the three months ended March 31, 2016. The principal source of cash was the issuance of $625.0 million aggregate principal amount of series F tranche B term loans, net of discounts and debt issuance costs of $24.9 million, offset by $215.7 million of cash used to repay the series D tranche B term loans.

Capital Resources

Working capital.  We had net working capital of $305.7 million at March 31, 2017, compare to $191.3 million at December 31, 2016. The increase in net working capital is primarily due to an increase in our accounts receivable.

Select credit facilities.  On March 6, 2017, Select entered into a new senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of standby letters of credit.  Select used borrowings under the Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility due March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

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The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

Select will be required to prepay borrowings under the Select credit facilities 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, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00.  Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

The Select credit facilities also contain a number of other 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 Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

At March 31, 2017, Select had outstanding borrowings under the Select credit facilities of the $1,150.0 million Select term loan (excluding unamortized discounts and debt issuance costs of $27.9 million) and borrowings of $335.0 million (excluding letters of credit) under the Select revolving facility. At March 31, 2017, Select had $74.1 million of availability under the Select revolving facility after giving effect to $40.9 million of outstanding letters of credit.

Concentra credit facilities.  Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated financial statements.

On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with its first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

At March 31, 2017, Concentra had outstanding borrowings under the Concentra credit facilities of $619.2 million (excluding unamortized discounts and debt issuance costs of $15.1 million) of first lien term loans. Concentra did not have any borrowings under the Concentra revolving facility. At March 31, 2017, Concentra had $43.4 million of availability under its revolving facility after giving effect to $6.6 million of outstanding letters of credit.

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Stock Repurchase Program.  Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2017, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. Holdings did not repurchase shares during the three months ended March 31, 2017. Since the inception of the program through March 31, 2017, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.

Liquidity.  We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Use of Capital Resources.  We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers, and from time to time we may also develop new inpatient rehabilitation hospitals and occupational medicine centers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions.

Recent Accounting Pronouncements

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.  The standard  provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits 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 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.

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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 a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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.

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.

In May 2014, March 2016, April 2016, and December 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, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), 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 retrospective or cumulative effect transition method.

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

The Company’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.

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Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626
Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.

As of March 31, 2017, Select had a $1,150.0 million term loan (excluding unamortized discounts and debt issuance discounts) outstanding and $335.0 million in revolving borrowings outstanding under the Select credit facilities, which bear interest at variable rates.

As of March 31, 2017, Concentra had $619.2 million (excluding unamortized discounts and debt issuance costs) in term loans outstanding under the Concentra credit facilities, which bear interest at variable rates. Concentra did not have any outstanding revolving borrowings at March 31, 2017.

Certain of Select’s and Concentra’s outstanding borrowings that bear interest at variable rates may be effectively fixed based upon then current interest rates if the Adjusted LIBO Rate does not exceed the applicable Adjusted LIBO Rate floors for such borrowings:

·The $1,150.0 million Select term loan is subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 4.50%.

·The $619.2 million Concentra first lien term loans are subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Concentra’s interest rate on this indebtedness is effectively fixed at 4.00%.

However, the Select and Concentra revolving borrowings are not subject to an Adjusted LIBO Rate floor.

The following table summarizes the impact of hypothetical increases in market interest rates as of March 31, 2017 on our consolidated interest expense over the subsequent twelve month period:

Increase in Market Interest Rate		Interest Rate Expense Increases Per Annum (in thousands)(1)
0.25	%	$	5,260
0.50	%	10,521
0.75	%	15,781
1.00	%	21,042

(1)Based on the 3-month LIBOR rate of 1.15% as of March 31, 2017, an increase in interest rates would impact the interest rate paid on Select’s and Concentra’s variable rate debt, as indicated in the table above.

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ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective as of March 31, 2017 to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the first quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

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PART IIOTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

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

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

Evansville Litigation

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

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation

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and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Knoxville Litigation

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

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Wilmington Litigation

On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. The Company intends to vigorously defend this action if the plaintiff-relator pursues it, but at this time the Company is unable to predict the timing and outcome of this matter.

ITEM 1A.RISK FACTORS

There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2017 and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings did not repurchase shares during the three months ended March 31, 2017 under the authorized common stock repurchase program.

The following table provides information regarding repurchases of our common stock during the three months ended March 31, 2017:

	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 1 - January 31, 2017	1,868	$	13.25	—	$	185,249,408
February 1 - February 28, 2017	10,350	12.70		—	185,249,408
March 1 - March 31, 2017	—	—		—	185,249,408
Total	12,218	$	12.78	—	$	185,249,408

(1)Represents shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

The exhibits to this report are listed in the Exhibit Index appearing on page 49 hereof.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.

	SELECT MEDICAL CORPORATION
	By:	/s/ Martin F. Jackson
		Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)
	By:	/s/ Scott A. Romberger
		Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)
Dated: May 4, 2017
	SELECT MEDICAL HOLDINGS CORPORATION
	By:	/s/ Martin F. Jackson
		Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)
	By:	/s/ Scott A. Romberger
		Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)
Dated: May 4, 2017

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EXHIBIT INDEX

Number	Description
10.1	Credit Agreement, dated as of March 6, 2017, among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative and Collateral Agent, Wells Fargo Securities, LLC and Deutsche Bank Securities Inc., as Co-Syndication Agents and RBC Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs Bank USA, PNC Bank, National Association and Morgan Stanley Senior Funding, Inc., as Co­Documentation Agents and the other lenders and issuing banks party thereto, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on March 7, 2017 (Reg Nos. 001- 34465 and 001-314411).
10.2	Change of Control Agreement, dated February 16, 2017, between Select Medical Corporation and John A. Saich.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016, (ii) Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the three months ended March 31, 2017 and (v) Notes to Condensed Consolidated Financial Statements.

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EX-10.2

Exhibit 10.2

SELECT MEDICAL CORPORATION

4714 Gettysburg Road

Mechanicsburg, Pennsylvania 17055

February 16, 2017

Mr. John A. Saich

[Address Redacted]

Re:Agreement in the Event of a Change of Control of SMC

Dear Mr. Saich:

The following will confirm the agreement of Select Medical Corporation, a Delaware corporation (the “Company”), with you concerning the consequences upon certain terminations of your employment in connection with a change in control of the Company.

In consideration of your future service to the Company and in consideration of the mutual covenants and agreements contained in this letter (this “Letter Agreement”), the Company and you hereby agree, intending to be legally bound hereby, as follows:

1.  Payment Events.

(a)Post-Change of Control Termination.  A “Post-Change of Control Termination” shall be deemed to occur if (i) within the five-year period immediately following a Change of Control (as defined below), (A) your employment with the Company is terminated by the Company without Cause (as defined below) or (B) you terminate your employment with the Company because there is a reduction, by the Company, in your compensation from that in effect immediately prior to such Change of Control, or (ii) within the six-month period immediately following a Change of Control, you terminate your employment with the Company for Good Reason (as defined below).

(b)Pre-Change of Control Termination.  A “Pre-Change of Control Termination” shall be deemed to occur if within the six-month period preceding a Change of Control, your employment is terminated by the Company other than for Cause, and you reasonably demonstrate that such termination of employment was at the request of a third party who has taken steps reasonably calculated to effect such Change of Control.

2.  Payment Amounts.

(a)Post-Change of Control Termination.  If a Post-Change of Control Termination occurs, then (i) the Company agrees that (A) such termination is not a voluntary termination or a termination “for cause” as contemplated by any of the Company’s or Select Medical Holdings Corporation’s (“Holdings”) stock option or other incentive plans and any stock option or other

award agreements entered into between you and the Company or Holdings (including agreements that may be entered into in the future in connection with additional awards granted pursuant to any of the Company’s or Holdings’ plans) (the “Award Agreements”) and (B) all unvested, unexercised stock options held by you which were granted to you by the Company or Holdings and are outstanding immediately prior to such Post-Change of Control Termination shall become fully vested and exercisable as of the date of such Post-Change of Control Termination and you will have the right to exercise, at any time prior to the earlier of three months after the date of such Post-Change of Control Termination or the expiration date of such options, all such options to purchase the Company’s or Holdings’ stock notwithstanding any contrary vesting schedule that may be contained in the applicable plan or Award Agreement and (ii) the Company shall pay to you, on the first business day of the seventh month following such Post-Change of Control Termination, in lieu of any other rights to cash compensation other than the payment of your salary for services performed before the date of termination and as a severance benefit, a lump-sum cash payment equal to your total base salary plus bonus compensation from the Company for the preceding three years (or, if you shall have been employed by the Company for less than three years at the time of such Post-Change of Control Termination, an amount equal to three times your average total annual cash compensation for base salary and bonus for your years of service to the Company).

(b)Pre-Change of Control Termination.  If a Pre-Change of Control Termination occurs, then the Company shall pay to you, on the first business day of the seventh month following such Pre-Change of Control Termination, in lieu of any other rights to cash compensation other than the payment of your salary for services performed before the date of termination and as a severance benefit, a lump-sum cash payment equal to your total base salary plus bonus compensation from the Company for the preceding three years (or, if you shall have been employed by the Company for less than three years at the time of such termination, an amount equal to three times your average total annual cash compensation for base salary and bonus for your years of service to the Company).  In addition, in the event that your employment with the Company is terminated by the Company without Cause (other than pursuant to Section 1(a)) then, notwithstanding any contrary vesting schedule that may be contained in any of the Company’s or Holdings’ stock option or other incentive plans or any Award Agreement, all unvested, unexercised stock options held by you immediately prior to such termination of employment which were granted to you by the Company or Holdings shall continue to be held by you, but shall cease to further vest except as specifically provided in this Section 2(b), as follows:  if (i) a Change of Control does not occur during the six-month period immediately following such termination of employment, or the expiration date of any such options occurs prior to the occurrence of a Change of Control, such options shall be forfeited with no further compensation due to you or (ii) a Change of Control occurs during the six-month period immediately following such termination of employment and you reasonably demonstrate that such termination of employment was at the request of a third party who has taken steps reasonably calculated to effect such Change of Control, all such options that have not otherwise expired shall become vested and fully exercisable immediately prior to such Change of Control and you shall have the right to exercise such options at any time prior to the earlier of the date that is three months following such Change of Control or the expiration date of such options.

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3.  Definitions.

(a)  Change of Control.

(i)  A Change of Control shall mean:

(1)  any person including a group, but excluding any stockholder of the Company or Holdings who immediately prior to the Public Offering beneficially owned 12% or more of the Company’s or Holdings’ outstanding shares, becomes the beneficial owner of shares of more than 50% of the total number of votes that may be cast for the election of directors of the Company or Holdings, as applicable;

(2) during any period of twelve consecutive months, beginning immediately after the effective date of the Public Offering, any person including a group, other than you or any group of which you are a party, increases their beneficial ownership of voting securities of the Company or Holdings by a number of voting securities of the Company or Holdings equal to at least 33% of the total number of votes that may be cast for the election of directors of the Company or Holdings, as applicable;

(3)  during any period of twelve consecutive months, the individuals who served on the Board of Directors of the Company as of January 1, 2017 (the “Incumbent Directors”) or who served on the Board of Directors of Holdings (the “Holdings Board”) as of January 1, 2017 (the “Holdings Incumbent Directors”) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Holdings Board, as applicable; provided, however, that any person who becomes a director subsequent to January 1, 2017, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors or the Holdings Incumbent Directors, as applicable, shall for purposes of this clause (3) be considered an Incumbent Director or a Holdings Incumbent Director, as applicable;

(4)  the consummation of a merger or consolidation of the Company or Holdings in which the stockholders of the Company or Holdings, as applicable, immediately prior to such merger or consolidation, would not, immediately after such merger or consolidation, beneficially own, directly or indirectly, shares representing in the aggregate at least 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent corporation, if any); or

(5)  during any period of twelve consecutive months, the Company or Holdings sells or otherwise disposes of all or substantially all of such entity’s assets (on a consolidated basis), other than a sale or disposition by the Company or Holdings of all or substantially all of such entity’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company or Holdings, as applicable, immediately prior to such sale or disposition.

(ii)  For purposes of this Section 3(a), (A) the terms “person,” “group,” “beneficial owner,” and “beneficially own” have the meanings set forth in Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term “Public Offering” shall mean the public offering of shares of common stock of Holdings in 2009, and (C) the term “voting securities” shall mean securities, the holders of which are

3

ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).

(b)  Cause.  For purposes of this Letter Agreement, “Cause” shall mean (i) your willful and continued failure to substantially perform your duties hereunder (other than any such failure resulting from incapacity due to physical or mental illness); (ii) your engaging in willful or reckless misconduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (iii) your conviction of a felony involving moral turpitude; provided that an act, or failure to act, on your part shall be considered “willful” or “reckless” only if done, or omitted to be done, by you not in good faith and without a reasonable belief that his action or omission was in the best interest of the Company.  Your employment shall not be deemed to have been terminated for Cause unless the Company shall have given or delivered to you (i) reasonable notice setting forth the reasons for the Company’s intention to terminate your employment for Cause; (ii) an opportunity to cure any such breach during the 30-day period after your receipt of such notice; (iii) a reasonable opportunity, at any time during the 30-day period after your receipt of such notice, together with your counsel, to be heard before the Board of Directors; and (iv) a notice of termination stating that, in the good faith opinion of not less than a majority of the entire membership of the Board of Directors of the Company, you are guilty of the conduct set forth in any of clauses (i), (ii) or (iii) of the definition of Cause above.

(c)  Good Reason.  For purposes of this Letter Agreement, you shall have “Good Reason” to terminate your employment after a Change of Control if (i) you make a good faith determination that, as a result of such Change of Control, you are unable to perform your services effectively or there is any significant adverse change in your authority or responsibilities, as performed immediately prior to such Change of Control or (ii) the Company’s obligations under this Letter Agreement are not assumed by the acquiring entity or any of its affiliates in the event of a Change of Control described in Section 3(a)(i)(5).

4.  Miscellaneous.

(a)  The Company will require any purchaser of all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you, to expressly assume and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place.  Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if a Covered Termination had occurred.  As used in this Letter Agreement, “Company” shall mean the Company as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.

(b)  This Letter Agreement shall remain in effect for so long as you are employed by the Company.  This Letter Agreement may not be modified or waived except in writing and agreed to by the Company and you.  This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and shall inure to the benefit of your heirs.

4

(c)  The Company represents that this Letter Agreement has been duly authorized and is binding on and enforceable against the Company.  The invalidity or unenforceability of any provision of this Letter Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect.

(d)  As a condition to payment of any amount required under Section 1 hereof, you shall deliver to the Company a general release of liability of the Company and its officers and directors in a form reasonably satisfactory to the Company, such that such release is effective, with all revocation periods having expired unexercised, by no later than the (i) 60th day after such termination, in the event of a Post-Change of Control Termination and (ii) first business day of the seventh month following such termination, in the event of a Pre-Change of Control Termination.

(e)  All payments made pursuant to this Letter Agreement shall be subject to withholding of applicable deductions and income and employment taxes.

(f)  Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid.  Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:

If to Employee:

Mr. John A. Saich

[Address Redacted]

If to the Company:

Select Medical Corporation

4714 Gettysburg Road

Mechanicsburg, PA 17055

Attention: General Counsel

(g)  Notwithstanding any other provision of this Letter Agreement to the contrary, if you are a “specified employee” within the meaning of Code Section 409A and the regulations issued thereunder, and a payment or benefit provided for in this Letter Agreement would be subject to additional tax under Code Section 409A if such payment or benefit is paid within six months after your “separation from service” (within the meaning of Code Section 409A), then such payment or benefit required under this Letter Agreement shall not be paid (or commence) during the six- month period immediately following your separation from service except as provided in the immediately following sentence. In such an event, any payments or benefits that would otherwise have been made or provided during such six-month period and which would have incurred such additional tax under Code Section 409A shall instead be paid to you in a lump-sum cash payment on the earlier of (i) the first regular payroll date of the seventh month following your separation from service or (ii) the 10th business day following your

5

death. In addition, if your termination of employment hereunder does not constitute a “separation from service” within the meaning of Code Section 409A, then any amounts payable hereunder on account of a termination of your employment and which are subject to Code Section 409A shall not be paid until you have experienced a “separation from service” within the meaning of Code Section 409A. This Letter Agreement is intended to comply with Code Section 409A (to the extent applicable) and the parties hereto agree to interpret, apply and administer this Letter Agreement in the least restrictive manner necessary to comply therewith and without resulting in any increase in the amounts owed hereunder by the Company.

5.  Claims Procedure.  Any claim for benefits under this Letter Agreement by you shall be made in writing and sent to the Company at its principal offices in Mechanicsburg, Pennsylvania, or such other place as the Company shall hereafter designate in writing.  If you, or any beneficiary following your death (collectively, the “Claimant”), believes he has been denied any benefits or payments under this Letter Agreement, either in total or in an amount less than the full benefit or payment to which the Claimant would normally be entitled, the Company shall advise the Claimant in writing of the amount of the benefit, or payment, if any, and the specific reasons for the denial within thirty (30) days of the receipt of the Claimant’s claim.  The Company shall also furnish the Claimant at that time with a written notice containing:

(a)A specific reference to pertinent provisions of this Letter Agreement;

(b)A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and

(c)An explanation of the claim review procedure set forth in this Section 5.

Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Company’s decision with the Appeal Committee.  The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Company immediately prior to the Change of Control.  The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions.  In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Company prior to the Change of Control (“Prior Board Member”).  So long as the Claimant’s request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee.  A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration.  The Appeal Committee’s decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Letter Agreement on which the decision is based.  The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Company) for or

6

against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under this Letter Agreement, including reasonable expenses.  Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his or her claim for determination to any court having competent jurisdiction regardless of whether he has first exercised his or her right to have the Company’s decision reconsidered by the Appeal Committee.

6.   Entire Agreement.  This writing represents the entire agreement and understanding of the parties with respect to the subject matter hereof, and supersedes all prior agreements, written or oral, with respect thereto.  This Letter Agreement may not be altered or amended except by an agreement in writing.

Please indicate your acceptance of the above agreement by signing below in the space indicated.

	Very truly yours,
	SELECT MEDICAL CORPORATION, a Delaware corporation
	By:	/s/ David S. Chernow
		David S. Chernow,
		President & Chief Executive Officer
Agreed to and accepted:
/s/ John A. Saich
John A. Saich

7

EX-31.1

EXHIBIT 31.1

SELECT MEDICAL HOLDINGS CORPORATION AND
SELECT MEDICAL CORPORATION
CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, David S. Chernow, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2017	/s/ David S. Chernow
	David S. Chernow
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

SELECT MEDICAL HOLDINGS CORPORATION AND
SELECT MEDICAL CORPORATION
CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Martin F. Jackson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2017	/s/ Martin F. Jackson
	Martin F. Jackson
	Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation (the “Company”) for the period ended March 31, 2017 filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David S. Chernow and Martin F. Jackson, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

May 4, 2017

/s/ David S. Chernow

David S. Chernow

President and Chief Executive Officer

/s/ Martin F. Jackson

Martin F. Jackson

Executive Vice President and Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 30, 2017
Document and Entity Information
Entity Registrant Name	SELECT MEDICAL HOLDINGS CORP
Entity Central Index Key	0001320414
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		132,759,535
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current Assets:
Cash and cash equivalents	$ 65,211	$ 99,029
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively	691,520	573,752
Prepaid income taxes	2,402	12,423
Other current assets	85,081	77,699
Total Current Assets	844,214	762,903
Property and equipment, net	897,146	892,217
Goodwill	2,759,764	2,751,000
Identifiable intangible assets, net	337,076	340,562
Other assets	164,737	173,944
Total Assets	5,002,937	4,920,626
Current Liabilities:
Bank overdrafts	22,299	39,362
Current portion of long-term debt and notes payable	22,013	13,656
Accounts payable	125,118	126,558
Accrued payroll	110,196	146,397
Accrued vacation	88,736	83,261
Accrued interest	21,558	22,325
Accrued other	143,180	140,076
Income taxes payable	5,399
Total Current Liabilities	538,499	571,635
Long-term debt, net of current portion	2,771,410	2,685,333
Non-current deferred tax liability	195,729	199,078
Other non-current liabilities	142,208	136,520
Total Liabilities	3,647,846	3,592,566
Commitments and contingencies (Note 9)
Redeemable non-controlling interests	462,680	422,159
Stockholders' Equity:
Common stock	132	132
Capital in excess of par	450,373	443,908
Retained earnings (accumulated deficit)	351,224	371,685
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	801,729	815,725
Non-controlling interest	90,682	90,176
Total Equity	892,411	905,901
Total Liabilities and Equity	5,002,937	4,920,626
Select
Current Assets:
Cash and cash equivalents	65,211	99,029
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively	691,520	573,752
Prepaid income taxes	2,402	12,423
Other current assets	85,081	77,699
Total Current Assets	844,214	762,903
Property and equipment, net	897,146	892,217
Goodwill	2,759,764	2,751,000
Identifiable intangible assets, net	337,076	340,562
Other assets	164,737	173,944
Total Assets	5,002,937	4,920,626
Current Liabilities:
Bank overdrafts	22,299	39,362
Current portion of long-term debt and notes payable	22,013	13,656
Accounts payable	125,118	126,558
Accrued payroll	110,196	146,397
Accrued vacation	88,736	83,261
Accrued interest	21,558	22,325
Accrued other	143,180	140,076
Income taxes payable	5,399
Total Current Liabilities	538,499	571,635
Long-term debt, net of current portion	2,771,410	2,685,333
Non-current deferred tax liability	195,729	199,078
Other non-current liabilities	142,208	136,520
Total Liabilities	3,647,846	3,592,566
Commitments and contingencies (Note 9)
Redeemable non-controlling interests	462,680	422,159
Stockholders' Equity:
Common stock	0	0
Capital in excess of par	931,661	925,111
Retained earnings (accumulated deficit)	(129,932)	(109,386)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	801,729	815,725
Non-controlling interest	90,682	90,176
Total Equity	892,411	905,901
Total Liabilities and Equity	$ 5,002,937	$ 4,920,626

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 67,792	$ 63,787
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	700,000,000	700,000,000
Common stock, shares issued	132,753,444	132,596,758
Common stock, shares outstanding	132,753,444	132,596,758
Select
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 67,792	$ 63,787
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares issued	100	100
Common stock, shares outstanding	100	100

XML

Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net operating revenues	$ 1,111,361	$ 1,088,330
Costs and expenses:
Cost of services	928,357	922,262
General and administrative	28,075	28,268
Bad debt expense	20,625	16,397
Depreciation and amortization	42,539	34,517
Total costs and expenses	1,019,596	1,001,444
Income from operations	91,765	86,886
Other income and expense:
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	77,004
Income tax expense	13,202	17,060
Net income	23,463	59,944
Less: Net income attributable to non-controlling interests	7,593	5,111
Net income attributable to Select Medical Holdings Corporation	$ 15,870	$ 54,833
Basic (in dollars per share)	$ 0.12	$ 0.42
Diluted (in dollars per share)	$ 0.12	$ 0.42
Weighted average shares outstanding:
Basic (in shares)	128,464	127,500
Diluted (in shares)	128,628	127,581
Select
Net operating revenues	$ 1,111,361	$ 1,088,330
Costs and expenses:
Cost of services	928,357	922,262
General and administrative	28,075	28,268
Bad debt expense	20,625	16,397
Depreciation and amortization	42,539	34,517
Total costs and expenses	1,019,596	1,001,444
Income from operations	91,765	86,886
Other income and expense:
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	77,004
Income tax expense	13,202	17,060
Net income	23,463	59,944
Less: Net income attributable to non-controlling interests	7,593	5,111
Net income attributable to Select Medical Holdings Corporation	$ 15,870	$ 54,833

XML

Condensed Consolidated Statements of Changes in Equity and Income - 3 months ended Mar. 31, 2017 - USD ($) $ in Thousands	Parent Select	Parent	Common Stock Select	Common Stock	Capital in Excess of Par Select	Capital in Excess of Par	Retained Earnings Select	Retained Earnings	Non-controlling Interests Select	Non-controlling Interests	Select	Total
Balance at Dec. 31, 2016	$ 815,725	$ 815,725	$ 0	$ 132	$ 925,111	$ 443,908	$ (109,386)	$ 371,685	$ 90,176	$ 90,176	$ 905,901	$ 905,901
Balance (in shares) at Dec. 31, 2016			0	132,597,000							100	132,596,758
Increase (Decrease) in Stockholders' Equity
Net income attributable to Select Medical Holdings Corporation	15,870	15,870					15,870	15,870			$ 15,870	$ 15,870
Net income attributable to non-controlling interests									1,503	1,503	1,503	1,503
Issuance and vesting of restricted stock		4,280		$ 0		4,280						4,280
Issuance and vesting of restricted stock (in shares)				101,000
Additional investment by Holdings	617				617						617
Repurchase of common shares		(156)		$ 0		(85)		(71)				(156)
Repurchase of common shares (in shares)				(12,000)
Dividends declared and paid to Holdings	(156)						(156)				(156)
Contribution related to restricted stock awards and stock option issuances by Holdings	4,280				4,280						4,280
Exercise of stock options		617		$ 0		617						617
Exercise of stock options (in shares)				67,000
Issuance of non-controlling interests	1,653	1,653			1,653	1,653			441	441	2,094	2,094
Purchase of non-controlling interests	7	7					7	7			7	7
Distributions to non-controlling interests									(1,532)	(1,532)	(1,532)	(1,532)
Redemption adjustment on non-controlling interests	(36,292)	(36,292)					(36,292)	(36,292)			(36,292)	(36,292)
Other	25	25					25	25	94	94	119	119
Balance at Mar. 31, 2017	$ 801,729	$ 801,729	$ 0	$ 132	$ 931,661	$ 450,373	$ (129,932)	$ 351,224	$ 90,682	$ 90,682	$ 892,411	$ 892,411
Balance (in shares) at Mar. 31, 2017			0	132,753,000							100	132,753,444
Balance - Redeemable Non-controlling Interests at Dec. 31, 2016											$ 422,159	$ 422,159
Redeemable Non-controlling interests
Net income attributable to redeemable non-controlling interests											6,090	6,090
Purchase of non-controlling interests											(57)	(57)
Distributions to non-controlling interests											(2,075)	(2,075)
Redemption adjustment on non-controlling interests											36,292	36,292
Other											271	271
Balance - Redeemable Non-controlling Interests at Mar. 31, 2017											$ 462,680	$ 462,680

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating activities
Net income	$ 23,463	$ 59,944
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	4,911	8,305
Depreciation and amortization	42,539	34,517
Provision for bad debts	20,625	16,397
Equity in earnings of unconsolidated subsidiaries	(5,521)	(4,652)
Losses on early retirement of debt	6,527	773
Gain on sale of assets and businesses	(4,609)	(30,393)
Impairment of equity investment		5,339
Stock compensation expense	4,586	3,976
Amortization of debt discount, premium and issuance costs	3,422	3,691
Deferred income taxes	(3,425)	(3,475)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(138,113)	(39,164)
Other current assets	(7,621)	7,560
Other assets	(48)	(891)
Accounts payable	412	(21,322)
Accrued expenses	(18,429)	51,193
Income taxes	15,420	19,370
Net cash provided by (used in) operating activities	(55,861)	111,168
Investing activities
Acquisition of businesses, net of cash acquired	(9,566)	(412,883)
Purchases of property and equipment	(50,653)	(46,768)
Investment in businesses	(500)	(623)
Proceeds from sale of assets and businesses	19,512	62,600
Net cash used in investing activities	(41,207)	(397,674)
Financing activities
Borrowings on revolving facilities	530,000	190,000
Payments on revolving facilities	(415,000)	(175,000)
Proceeds from term loans	1,139,822	600,127
Payments on term loans	(1,170,817)	(226,962)
Revolving facility debt issuance costs	(3,887)
Borrowings of other debt	6,571	6,727
Principal payments on other debt	(5,275)	(4,464)
Repayments of bank overdrafts	(17,062)	(28,615)
Repurchase of common stock	(156)
Proceeds from exercise of stock options	617	21
Proceeds from issuance of non-controlling interests	2,094
Purchase of non-controlling interests	(50)	(1,294)
Distributions to non-controlling interests	(3,607)	(3,061)
Net cash provided by financing activities	63,250	357,479
Net increase (decrease) in cash and cash equivalents	(33,818)	70,973
Cash and cash equivalents at beginning of period	99,029	14,435
Cash and cash equivalents at end of period	65,211	85,408
Supplemental Information
Cash paid for interest	38,565	21,544
Cash paid for taxes	1,207	1,209
Select
Operating activities
Net income	23,463	59,944
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	4,911	8,305
Depreciation and amortization	42,539	34,517
Provision for bad debts	20,625	16,397
Equity in earnings of unconsolidated subsidiaries	(5,521)	(4,652)
Losses on early retirement of debt	6,527	773
Gain on sale of assets and businesses	(4,609)	(30,393)
Impairment of equity investment		5,339
Stock compensation expense	4,586	3,976
Amortization of debt discount, premium and issuance costs	3,422	3,691
Deferred income taxes	(3,425)	(3,475)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(138,113)	(39,164)
Other current assets	(7,621)	7,560
Other assets	(48)	(891)
Accounts payable	412	(21,322)
Accrued expenses	(18,429)	51,193
Income taxes	15,420	19,370
Net cash provided by (used in) operating activities	(55,861)	111,168
Investing activities
Acquisition of businesses, net of cash acquired	(9,566)	(412,883)
Purchases of property and equipment	(50,653)	(46,768)
Investment in businesses	(500)	(623)
Proceeds from sale of assets and businesses	19,512	62,600
Net cash used in investing activities	(41,207)	(397,674)
Financing activities
Borrowings on revolving facilities	530,000	190,000
Payments on revolving facilities	(415,000)	(175,000)
Proceeds from term loans	1,139,822	600,127
Payments on term loans	(1,170,817)	(226,962)
Revolving facility debt issuance costs	(3,887)
Borrowings of other debt	6,571	6,727
Principal payments on other debt	(5,275)	(4,464)
Repayments of bank overdrafts	(17,062)	(28,615)
Dividends paid to Holdings	(156)
Equity investment by Holdings	617	21
Proceeds from issuance of non-controlling interests	2,094
Purchase of non-controlling interests	(50)	(1,294)
Distributions to non-controlling interests	(3,607)	(3,061)
Net cash provided by financing activities	63,250	357,479
Net increase (decrease) in cash and cash equivalents	(33,818)	70,973
Cash and cash equivalents at beginning of period	99,029	14,435
Cash and cash equivalents at end of period	65,211	85,408
Supplemental Information
Cash paid for interest	38,565	21,544
Cash paid for taxes	$ 1,207	$ 1,209

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Basis of Presentation

3 Months Ended

Mar. 31, 2017

Basis of Presentation

Basis of Presentation

1.Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of March 31, 2017, and for the three month periods ended March 31, 2016 and 2017, have been prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. 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, 2016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2017.

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Accounting Policies

3 Months Ended

Mar. 31, 2017

Accounting Policies

Accounting Policies

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 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 from those estimates.

Recent Accounting Pronouncements

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.  The standard  provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits 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 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 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 a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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.

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.

In May 2014, March 2016, April 2016, and December 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, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), 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 retrospective or cumulative effect transition method.

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

The Company’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626
Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the prior year balance sheet presentation has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes.

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Acquisitions

3 Months Ended

Mar. 31, 2017

Acquisitions

Acquisitions

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.

For the Physiotherapy acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. During the three months ended March 31, 2017, the Company finalized the purchase price allocation.

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

Cash and cash equivalents	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	87,832
Identifiable intangible assets	32,484
Goodwill	343,187
Total assets	475,843
Total liabilities	54,685
Acquired non-controlling interests	2,514
Net assets acquired	418,644
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	406,304

Goodwill of $343.2 million has been recognized in 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 Physiotherapy’s future earnings potential and its assembled workforce. Goodwill has been assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8 million, which the Company will deduct through 2030.

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

The following pro forma unaudited results of operations have been prepared assuming the acquisition of Physiotherapy occurred on January 1, 2015. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisition been consummated on the aforementioned date. The Company’s results of operations for the three months ended March 31, 2017 include 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 March 31, 2016
	(in thousands, except per share amounts)
Net revenue	$	1,141,860
Net income	53,014
Income per common share:
Basic	$	0.40
Diluted	$	0.40

The net income tax impact was calculated at a statutory rate, as if Physiotherapy had been a subsidiary of the Company as of January 1, 2015. Pro forma results for the three months ended March 31, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

The Company completed acquisitions within our Concentra and outpatient rehabilitation segments during the three months ended March 31, 2017. Consideration given for these acquisitions consisted of $9.6 million of cash, net of cash received. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $8.6 million and $0.3 million of goodwill was recognized in our Concentra and outpatient rehabilitation reporting units, respectively.

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Intangible Assets and Liabilities

3 Months Ended

Mar. 31, 2017

Intangible Assets and Liabilities

Intangible Assets and Liabilities

4.Intangible Assets and Liabilities

The Company’s goodwill and identifiable intangible assets and liabilities consist of the following:

	December 31,							March 31,
	2016							2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Goodwill	$	2,751,000	$	—		$	2,751,000	$	2,759,764	$	—		$	2,759,764
Identifiable intangibles—Indefinite lived assets:
Trademarks	166,698		—			166,698		166,698		—			166,698
Certificates of need	17,026		—			17,026		17,152		—			17,152
Accreditations	2,235		—			2,235		2,143		—			2,143
Identifiable intangibles—Finite lived assets:
Customer relationships	142,198		(23,185		)	119,013		142,890		(26,908		)	115,982
Favorable leasehold interests	13,089		(2,317		)	10,772		13,177		(2,796		)	10,381
Non-compete agreements	26,655		(1,837		)	24,818		27,057		(2,337		)	24,720
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	369,117	$	(32,041	)	$	337,076
Identifiable intangibles—Finite lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(1,690	)	$	3,653

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $3.8 million and $4.4 million for the three months ended March 31, 2016 and 2017, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million annually.

The Company’s favorable leasehold interest assets and unfavorable leasehold interest 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 Company’s unfavorable leasehold interests are presented as part of accrued other and other non-current liabilities on the condensed consolidated balance sheets.

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.6 years, respectively.

The changes in goodwill for the three months ended March 31, 2017 are as follows:

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	—			311		8,627		8,938
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of March 31, 2017	$	1,447,064		$	644,036	$	668,664	$	2,759,764

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

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Long-Term Debt and Notes Payable

3 Months Ended

Mar. 31, 2017

Long-Term Debt and Notes Payable

Long-Term Debt and Notes Payable

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.

The Company’s long-term debt and notes payable consist of the following:

	December 31, 2016		March 31, 2017
	(in thousands)
Select 6.375% senior notes(1)	$	702,545	$	702,966
Select credit facilities:
Select revolving facility	220,000		335,000
Select term loan(2)	1,122,203		1,122,052
Other—Select	22,688		24,842
Total Select debt	2,067,436		2,184,860
Less: Select current maturities	8,996		21,641
Select long-term debt maturities	$	2,058,440	$	2,163,219
Concentra credit facilities:
Concentra term loans(3)	$	626,375	$	604,068
Other—Concentra	5,178		4,495
Total Concentra debt	631,553		608,563
Less: Concentra current maturities	4,660		372
Concentra long-term debt maturities	$	626,893	$	608,191
Total current maturities	$	13,656	$	22,013
Total long-term debt maturities	2,685,333		2,771,410
Total debt	$	2,698,989	$	2,793,423

(1) Includes unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2) Includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3) Includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt and notes payable for the period April 1, 2017 through December 31, 2017 and for the years after 2017 are approximately as follows:

	Select			Concentra			Total
	(in thousands)
April 1, 2017 — December 31, 2017	$	18,072		$	343		$	18,415
2018	14,976			128			15,104
2019	23,327			144			23,471
2020	11,568			3,177			14,745
2021	721,514			6,680			728,194
2022 and beyond	1,430,385			613,198			2,043,583
Total principal	2,219,842			623,670			2,843,512
Unamortized discounts and premiums	(13,051		)	(2,641		)	(15,692		)
Unamortized debt issuance costs	(21,931		)	(12,466		)	(34,397		)
Total	$	2,184,860		$	608,563		$	2,793,423

Select Credit Facilities

On March 6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Select used borrowings under the Select credit facilities to: (i) refinance in full the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017.  The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

Select will be required to prepay borrowings under the Select credit facilities 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, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year.  Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00.  Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

The Select credit facilities also contain a number of other 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 Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

Loss on Early Retirement of Debt

During the three months ended March 31, 2017, the Company refinanced its senior secured credit facilities, which consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018, which resulted in losses on early retirement of debt of $19.7 million.

Excess Cash Flow Payment

On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with the Concentra first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow.

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Fair Value

3 Months Ended

Mar. 31, 2017

Fair Value

Fair Value

6.  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.

The face values, carrying values, and fair values of the Company’s 6.375% senior notes and credit facilities are as follows:

	December 31, 2016						March 31, 2017
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	702,545	$	710,000	$	710,000	$	702,966	$	715,325
Select credit facilities(2)	1,367,751		1,342,203		1,370,460		1,485,000		1,457,052		1,474,013
Concentra credit facilities(3)	642,239		626,375		644,648		619,175		604,068		622,271

(1) The carrying value includes an unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2) The carrying value includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3) The carrying value includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

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 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.

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Segment Information

3 Months Ended

Mar. 31, 2017

Segment Information

Segment Information

7.Segment Information

The Company’s reportable segments consist of: 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 accounting policies of the segments are the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2016. 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, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

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

	Three Months Ended March 31, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,954	$	238,082	$	250,877	$	417		$	1,088,330
Adjusted EBITDA	86,756		28,879		34,153		(21,173		)	128,615
Total assets(2)	2,434,405		974,264		1,310,317		103,878			4,822,864
Capital expenditures	33,675		4,974		3,210		4,909			46,768

	Three Months Ended March 31, 2017
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,787	$	255,817	$	256,149	$	608		$	1,111,361
Adjusted EBITDA	88,665		31,351		42,592		(23,718		)	138,890
Total assets	2,622,220		980,261		1,297,672		102,784			5,002,937
Capital expenditures	32,357		6,673		8,686		2,937			50,653

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

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

	Three Months Ended March 31, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	88,665		$	31,351		$	42,592		$	(23,718	)
Depreciation and amortization	(18,500		)	(6,340		)	(16,123		)	(1,576		)
Stock compensation expense	—			—			(306		)	(4,280		)
Income (loss) from operations	$	70,165		$	25,011		$	26,163		$	(29,574	)	$	91,765
Loss on early retirement of debt													(19,719		)
Equity in earnings of unconsolidated subsidiaries													5,521
Non-operating loss													(49		)
Interest expense													(40,853		)
Income before income taxes													$	36,665

(1) The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

(2) Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.

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Income per Common Share

3 Months Ended

Mar. 31, 2017

Income per Common Share

Income per Common Share

8.  Income per Common Share

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.

The following table sets forth the calculation of income per share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted earnings per share, respectively.

	Three Months Ended March 31,
	2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	54,833	$	15,870
Less: Earnings allocated to unvested restricted stockholders	1,582		507
Net income available to common stockholders	$	53,251	$	15,363
Denominator:
Weighted average shares—basic	127,500		128,464
Effect of dilutive securities:
Stock options	81		164
Weighted average shares—diluted	127,581		128,628
Basic income per common share:	$	0.42	$	0.12
Diluted income per common share:	$	0.42	$	0.12

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Commitments and Contingencies

Commitments and Contingencies

9.Commitments and Contingencies

Litigation

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

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

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

Evansville Litigation

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

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Knoxville Litigation

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

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Wilmington Litigation

On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. The Company intends to vigorously defend this action if the plaintiff-relator pursues it, but at this time the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At March 31, 2017, the Company had outstanding commitments under construction contracts related to new construction, improvements, and renovations totaling approximately $69.9 million.

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

3 Months Ended

Mar. 31, 2017

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

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

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

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

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 2016 and March 31, 2017 and for the three months ended March 31, 2016 and March 31, 2017.

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

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

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	72		$	6,836	$	3,405		$	54,898	$	—		$	65,211
Accounts receivable, net	—			442,132		125,079			124,309		—			691,520
Intercompany receivables	—			2,183,527		169,816			—		(2,353,343		) (a)	—
Prepaid income taxes	2,402			—		—			—		—			2,402
Other current assets	17,714			34,693		11,878			20,796		—			85,081
Total Current Assets	20,188			2,667,188		310,178			200,003		(2,353,343		)	844,214
Property and equipment, net	49,309			609,822		54,118			183,897		—			897,146
Investment in affiliates	4,513,416			100,095		—			—		(4,613,511		) (b) (c)	—
Goodwill	—			2,091,100		—			668,664		—			2,759,764
Identifiable intangible assets, net	—			108,545		—			228,531		—			337,076
Other assets	50,355			86,384		38,882			16,577		(27,461		) (d)	164,737
Total Assets	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	22,299		$	—	$	—		$	—	$	—		$	22,299
Current portion of long-term debt and notes payable	20,506			502		633			372					22,013
Accounts payable	13,349			78,195		17,429			16,145		—			125,118
Intercompany payables	2,183,527			169,816		—			—		(2,353,343		) (a)	—
Accrued payroll	4,268			76,290		2,488			27,150		—			110,196
Accrued vacation	3,740			57,763		11,968			15,265		—			88,736
Accrued interest	19,390			—		4			2,164		—			21,558
Accrued other	38,937			62,607		9,780			31,856		—			143,180
Income taxes payable	—			—		—			5,399		—			5,399
Total Current Liabilities	2,306,016			445,173		42,302			98,351		(2,353,343		)	538,499
Long-term debt, net of current portion	1,482,768			525,263		155,188			608,191		—			2,771,410
Non-current deferred tax liability	—			135,640		667			86,883		(27,461		) (d)	195,729
Other non-current liabilities	42,755			56,617		6,849			35,987		—			142,208
Total Liabilities	3,831,539			1,162,693		205,006			829,412		(2,380,804		)	3,647,846
Redeemable non-controlling interests	—			—		9,899			452,781		—			462,680
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	931,661			—		—			—		—			931,661
Retained earnings (accumulated deficit)	(129,932		)	1,318,340		(40,858		)	6,668		(1,284,150		) (c)	(129,932		)
Subsidiary investment	—			3,182,101		142,123			5,137		(3,329,361		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	801,729			4,500,441		101,265			11,805		(4,613,511		)	801,729
Non-controlling interests	—			—		87,008			3,674		—			90,682
Total Equity	801,729			4,500,441		188,273			15,479		(4,613,511		)	892,411
Total Liabilities and Equity	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937

(a) Elimination of intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(c) Elimination of investments in consolidated subsidiaries’ earnings.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	608		$	684,902		$	169,702		$	256,149		$	—		$	1,111,361
Costs and expenses:
Cost of services	532			577,885			141,648			208,292			—			928,357
General and administrative	28,036			39			—			—			—			28,075
Bad debt expense	—			11,699			3,355			5,571			—			20,625
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Total costs and expenses	30,143			610,844			148,623			229,986			—			1,019,596
Income (loss) from operations	(29,535		)	74,058			21,079			26,163			—			91,765
Other income and expense:
Intercompany interest and royalty fees	(1,896		)	3,415			(1,519		)	—			—			—
Intercompany management fees	61,698			(52,421		)	(9,277		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			5,493			28			—			—			5,521
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest expense	(22,808		)	(8,070		)	(2,476		)	(7,499		)	—			(40,853		)
Income (loss) before income taxes	(12,260		)	22,426			7,835			18,664			—			36,665
Income tax expense	126			5,936			304			6,836			—			13,202
Equity in earnings of subsidiaries	28,256			6,247			—			—			(34,503		)(a)	—
Net income	15,870			22,737			7,531			11,828			(34,503		)	23,463
Less: Net income attributable to non-controlling interests	—			—			1,069			6,524			—			7,593
Net income attributable to Select Medical Corporation	$	15,870		$	22,737		$	6,462		$	5,304		$	(34,503	)	$	15,870

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	15,870		$	22,737		$	7,531		$	11,828		$	(34,503	)(a)	$	23,463
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			4,893			18			—			—			4,911
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Provision for bad debts	—			11,699			3,355			5,571			—			20,625
Equity in earnings of unconsolidated subsidiaries	—			(5,493		)	(28		)	—			—			(5,521		)
Equity in earnings of consolidated subsidiaries	(28,256		)	(6,247		)	—			—			34,503		(a)	—
Loss on early retirement of debt	6,527			—			—			—			—			6,527
Loss (gain) on sale of assets and businesses	—			62			(4,671		)	—			—			(4,609		)
Stock compensation expense	4,280			—			—			306			—			4,586
Amortization of debt discount, premium and issuance costs	2,590			—			—			832			—			3,422
Deferred income taxes	1,005			—			—			(4,430		)	—			(3,425		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(92,404		)	(28,521		)	(17,188		)	—			(138,113		)
Other current assets	(5,761		)	(1,129		)	(1,511		)	780			—			(7,621		)
Other assets	(3,753		)	(11,531		)	15,072			164			—			(48		)
Accounts payable	2,574			694			(5,410		)	2,554			—			412
Accrued expenses	(13,406		)	(3,673		)	3,940			(5,290		)	—			(18,429		)
Income taxes	4,256			—			—			11,164			—			15,420
Net cash provided by (used in) operating activities	(12,499		)	(59,171		)	(6,605		)	22,414			—			(55,861		)
Investing activities
Acquisition of businesses, net of cash acquired	—			(445		)	—			(9,121		)	—			(9,566		)
Purchases of property and equipment	(2,937		)	(29,268		)	(9,762		)	(8,686		)	—			(50,653		)
Investment in businesses	—			(500		)	—			—			—			(500		)
Proceeds from sale of assets and businesses	—			7			19,505			—			—			19,512
Net cash provided by (used in) investing activities	(2,937		)	(30,206		)	9,743			(17,807		)	—			(41,207		)
Financing activities
Borrowings on revolving facilities	530,000			—			—			—			—			530,000
Payments on revolving facilities	(415,000		)	—			—			—			—			(415,000		)
Proceeds from term loans	1,139,822			—			—			—			—			1,139,822
Payments on term loans	(1,147,752		)	—			—			(23,065		)	—			(1,170,817		)
Revolving facility debt issuance costs	(3,887		)	—			—			—			—			(3,887		)
Borrowings of other debt	6,571			—			—			—			—			6,571
Principal payments on other debt	(3,704		)	(80		)	(695		)	(796		)	—			(5,275		)
Repayments of bank overdrafts	(17,062		)	—			—			—			—			(17,062		)
Dividends paid to Holdings	(156		)	—			—			—			—			(156		)
Equity investment by Holdings	617			—			—			—			—			617
Intercompany	(85,012		)	89,876			(4,864		)	—			—			—
Proceeds from issuance of non-controlling interests	—			—			2,094			—			—			2,094
Purchase of non-controlling interests	—			(50		)	—			—			—			(50		)
Distributions to non-controlling interests	—			—			(1,324		)	(2,283		)	—			(3,607		)
Net cash provided by (used in) financing activities	4,437			89,746			(4,789		)	(26,144		)	—			63,250
Net increase (decrease) in cash and cash equivalents	(10,999		)	369			(1,651		)	(21,537		)	—			(33,818		)
Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—			99,029
Cash and cash equivalents at end of period	$	72		$	6,836		$	3,405		$	54,898		$	—		$	65,211

(a) Elimination of equity in earnings of consolidated subsidiaries.

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	11,071		$	6,467	$	5,056		$	76,435	$	—		$	99,029
Accounts receivable, net	—			361,327		99,913			112,512		—			573,752
Intercompany receivables	—			2,237,362		157,324			—		(2,394,686		) (a)	—
Prepaid income taxes	6,658			—		—			5,765		—			12,423
Other current assets	11,953			33,860		10,367			21,519		—			77,699
Total Current Assets	29,682			2,639,016		272,660			216,231		(2,394,686		)	762,903
Property and equipment, net	48,697			601,426		52,851			189,243		—			892,217
Investment in affiliates	4,515,998			92,389		—			—		(4,608,387		) (b) (c)	—
Goodwill	—			2,090,963		—			660,037		—			2,751,000
Identifiable intangible assets, net	—			109,132		—			231,430		—			340,562
Other assets	45,636			84,803		53,954			16,235		(26,684		) (d)	173,944
Total Assets	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	39,362		$	—	$	—		$	—	$	—		$	39,362
Current portion of long-term debt and notes payable	7,227			445		1,324			4,660		—			13,656
Accounts payable	10,775			78,166		22,839			14,778		—			126,558
Intercompany payables	2,237,362			157,324		—			—		(2,394,686		) (a)	—
Accrued payroll	16,963			92,187		4,275			32,972		—			146,397
Accrued vacation	3,440			55,297		10,857			13,667		—			83,261
Accrued interest	20,114			—		—			2,211		—			22,325
Accrued other	39,155			60,871		6,152			33,898		—			140,076
Total Current Liabilities	2,374,398			444,290		45,447			102,186		(2,394,686		)	571,635
Long-term debt, net of current portion	1,407,066			513,938		137,436			626,893		—			2,685,333
Non-current deferred tax liability	—			133,852		596			91,314		(26,684		) (d)	199,078
Other non-current liabilities	42,824			53,399		5,865			34,432		—			136,520
Total Liabilities	3,824,288			1,145,479		189,344			854,825		(2,421,370		)	3,592,566
Redeemable non-controlling interests	—			—		10,169			411,990		—			422,159
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	925,111			—		—			—		—			925,111
Retained earnings (accumulated deficit)	(109,386		)	1,295,603		(39,546		)	1,364		(1,257,421		) (c)	(109,386		)
Subsidiary investment	—			3,176,647		132,890			41,429		(3,350,966		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	815,725			4,472,250		93,344			42,793		(4,608,387		)	815,725
Non-controlling interests	—			—		86,608			3,568		—			90,176
Total Equity	815,725			4,472,250		179,952			46,361		(4,608,387		)	905,901
Total Liabilities and Equity	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626

(a) Elimination of intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(c) Elimination of investments in consolidated subsidiaries’ earnings.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	417		$	711,868		$	125,168		$	250,877		$	—		$	1,088,330
Costs and expenses:
Cost of services	344			602,521			106,195			213,202			—			922,262
General and administrative	28,387			(119		)	—			—			—			28,268
Bad debt expense	—			10,698			1,985			3,714			—			16,397
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Total costs and expenses	29,942			628,311			110,899			232,292			—			1,001,444
Income (loss) from operations	(29,525		)	83,557			14,269			18,585			—			86,886
Other income and expense:
Intercompany interest and royalty fees	(1,058		)	2,854			(1,796		)	—			—			—
Intercompany management fees	55,357			(49,525		)	(5,832		)	—			—			—
Loss on early retirement of debt	(773		)	—			—			—			—			(773		)
Equity in earnings of unconsolidated subsidiaries	—			4,627			25			—			—			4,652
Non-operating gain (loss)	30,432			(5,345		)	—			—			—			25,087
Interest expense	(20,346		)	(6,634		)	(1,639		)	(10,229		)	—			(38,848		)
Income before income taxes	34,087			29,534			5,027			8,356			—			77,004
Income tax expense (benefit)	8,612			5,615			(65		)	2,898			—			17,060
Equity in earnings of subsidiaries	29,358			3,117			—			—			(32,475		) (a)	—
Net income	54,833			27,036			5,092			5,458			(32,475		)	59,944
Less: Net income attributable to non-controlling interests	—			—			1,886			3,225			—			5,111
Net income attributable to Select Medical Corporation	$	54,833		$	27,036		$	3,206		$	2,233		$	(32,475	)	$	54,833

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	54,833		$	27,036		$	5,092		$	5,458		$	(32,475	)(a)	$	59,944
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			8,283			22			—			—			8,305
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Provision for bad debts	—			10,698			1,985			3,714			—			16,397
Equity in earnings of unconsolidated subsidiaries	—			(4,627		)	(25		)	—			—			(4,652		)
Equity in earnings of consolidated subsidiaries	(29,358		)	(3,117		)	—			—			32,475		(a)	—
Loss on early retirement of debt	773			—			—			—			—			773
Loss (gain) on sale of assets and business	(30,432		)	23			16			—			—			(30,393		)
Impairment of equity investment	—			5,339			—			—			—			5,339
Stock compensation expense	3,784			—			—			192			—			3,976
Amortization of debt discount, premium and issuance costs	2,838			—			—			853			—			3,691
Deferred income taxes	(3,294		)	—			—			(181		)	—			(3,475		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(18,362		)	(13,913		)	(6,889		)	—			(39,164		)
Other current assets	(5,472		)	4,411			(522		)	9,143			—			7,560
Other assets	155			(70		)	19			(995		)	—			(891		)
Accounts payable	(12		)	(18,456		)	(4,242		)	1,388			—			(21,322		)
Accrued expenses	(2,149		)	50,917			1,040			1,385			—			51,193
Income taxes	16,483			—			—			2,887			—			19,370
Net cash provided by (used in) operating activities	9,360			77,286			(7,809		)	32,331			—			111,168
Investing activities
Acquisition of businesses, net of cash acquired	(408,654		)	(605		)	—			(3,624		)	—			(412,883		)
Purchases of property and equipment	(4,909		)	(32,571		)	(6,078		)	(3,210		)	—			(46,768		)
Investment in businesses	—			(623		)	—			—			—			(623		)
Proceeds from sale of assets and business	62,597			—			3			—			—			62,600
Net cash used in investing activities	(350,966		)	(33,799		)	(6,075		)	(6,834		)	—			(397,674		)
Financing activities
Borrowings on revolving facilities	190,000			—			—			—			—			190,000
Payments on revolving facilities	(170,000		)	—			—			(5,000		)	—			(175,000		)
Proceeds from term loans	600,127			—			—			—			—			600,127
Payments on term loans	(225,837		)	—			—			(1,125		)	—			(226,962		)
Borrowings of other debt	6,727			—			—			—			—			6,727
Principal payments on other debt	(3,028		)	(37		)	(557		)	(842		)	—			(4,464		)
Repayments of bank overdrafts	(28,615		)	—			—			—			—			(28,615		)
Equity investment by Holdings	21			—			—			—			—			21
Intercompany	17,341			(36,170		)	18,829			—			—			—
Purchase of non-controlling interests	—			(1,294		)	—			—			—			(1,294		)
Distributions to non-controlling interests	(2,432		)	—			—			(629		)	—			(3,061		)
Net cash provided by (used in) financing activities	384,304			(37,501		)	18,272			(7,596		)	—			357,479
Net increase in cash and cash equivalents	42,698			5,986			4,388			17,901			—			70,973
Cash and cash equivalents at beginning of period	4,070			3,706			625			6,034			—			14,435
Cash and cash equivalents at end of period	$	46,768		$	9,692		$	5,013		$	23,935		$	—		$	85,408

(a) Elimination of equity in earnings of consolidated subsidiaries.

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Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Accounting Policies

Use of Estimates

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 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 from those estimates.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.  The standard  provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits 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 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 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 a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

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.

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.

In May 2014, March 2016, April 2016, and December 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, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), 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 retrospective or cumulative effect transition method.

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

The Company’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626
Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

Reclassifications

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the prior year balance sheet presentation has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes.

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Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2017

Accounting Policies

Schedule of adoption of the new standard impacted our previously reported results

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626
Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

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Acquisitions (Tables)

3 Months Ended

Mar. 31, 2017

Acquisitions

Schedule of pro forma unaudited results of operations

	For the Three Months Ended March 31, 2016
	(in thousands, except per share amounts)
Net revenue	$	1,141,860
Net income	53,014
Income per common share:
Basic	$	0.40
Diluted	$	0.40

Physiotherapy

Acquisitions

Schedule of reconciliation of the allocation of the consideration given for identifiable net assets and goodwill acquired to the net cash paid for the acquired business

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

Cash and cash equivalents	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	87,832
Identifiable intangible assets	32,484
Goodwill	343,187
Total assets	475,843
Total liabilities	54,685
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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Intangible Assets and Liabilities (Tables)

3 Months Ended

Mar. 31, 2017

Intangible Assets and Liabilities

Schedule of the Company's goodwill and identifiable intangible assets and liabilities

	December 31,							March 31,
	2016							2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Goodwill	$	2,751,000	$	—		$	2,751,000	$	2,759,764	$	—		$	2,759,764
Identifiable intangibles—Indefinite lived assets:
Trademarks	166,698		—			166,698		166,698		—			166,698
Certificates of need	17,026		—			17,026		17,152		—			17,152
Accreditations	2,235		—			2,235		2,143		—			2,143
Identifiable intangibles—Finite lived assets:
Customer relationships	142,198		(23,185		)	119,013		142,890		(26,908		)	115,982
Favorable leasehold interests	13,089		(2,317		)	10,772		13,177		(2,796		)	10,381
Non-compete agreements	26,655		(1,837		)	24,818		27,057		(2,337		)	24,720
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	369,117	$	(32,041	)	$	337,076
Identifiable intangibles—Finite lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(1,690	)	$	3,653

Schedule of changes in goodwill

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	—			311		8,627		8,938
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of March 31, 2017	$	1,447,064		$	644,036	$	668,664	$	2,759,764

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Long-Term Debt and Notes Payable (Tables)

3 Months Ended

Mar. 31, 2017

Long-Term Debt and Notes Payable

Schedule of Company's long-term debt and notes payable

	December 31, 2016		March 31, 2017
	(in thousands)
Select 6.375% senior notes(1)	$	702,545	$	702,966
Select credit facilities:
Select revolving facility	220,000		335,000
Select term loan(2)	1,122,203		1,122,052
Other—Select	22,688		24,842
Total Select debt	2,067,436		2,184,860
Less: Select current maturities	8,996		21,641
Select long-term debt maturities	$	2,058,440	$	2,163,219
Concentra credit facilities:
Concentra term loans(3)	$	626,375	$	604,068
Other—Concentra	5,178		4,495
Total Concentra debt	631,553		608,563
Less: Concentra current maturities	4,660		372
Concentra long-term debt maturities	$	626,893	$	608,191
Total current maturities	$	13,656	$	22,013
Total long-term debt maturities	2,685,333		2,771,410
Total debt	$	2,698,989	$	2,793,423

(1) Includes unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2) Includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3) Includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

Schedule of maturities of the Company's long-term debt and notes payable

	Select			Concentra			Total
	(in thousands)
April 1, 2017 — December 31, 2017	$	18,072		$	343		$	18,415
2018	14,976			128			15,104
2019	23,327			144			23,471
2020	11,568			3,177			14,745
2021	721,514			6,680			728,194
2022 and beyond	1,430,385			613,198			2,043,583
Total principal	2,219,842			623,670			2,843,512
Unamortized discounts and premiums	(13,051		)	(2,641		)	(15,692		)
Unamortized debt issuance costs	(21,931		)	(12,466		)	(34,397		)
Total	$	2,184,860		$	608,563		$	2,793,423

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Fair Value (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value

Schedule of face values, carrying values and fair values of financial instruments

	December 31, 2016						March 31, 2017
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	702,545	$	710,000	$	710,000	$	702,966	$	715,325
Select credit facilities(2)	1,367,751		1,342,203		1,370,460		1,485,000		1,457,052		1,474,013
Concentra credit facilities(3)	642,239		626,375		644,648		619,175		604,068		622,271

(1) The carrying value includes an unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

(2) The carrying value includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

(3) The carrying value includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2017

Segment Information

Schedule of selected financial data for the Company's reportable segments

	Three Months Ended March 31, 2016
	Specialty Hospitals		Outpatient Rehabilitation(1)		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,954	$	238,082	$	250,877	$	417		$	1,088,330
Adjusted EBITDA	86,756		28,879		34,153		(21,173		)	128,615
Total assets(2)	2,434,405		974,264		1,310,317		103,878			4,822,864
Capital expenditures	33,675		4,974		3,210		4,909			46,768

	Three Months Ended March 31, 2017
	Specialty Hospitals		Outpatient Rehabilitation		Concentra		Other			Total
	(in thousands)
Net revenue	$	598,787	$	255,817	$	256,149	$	608		$	1,111,361
Adjusted EBITDA	88,665		31,351		42,592		(23,718		)	138,890
Total assets	2,622,220		980,261		1,297,672		102,784			5,002,937
Capital expenditures	32,357		6,673		8,686		2,937			50,653

Schedule of reconciliation of Adjusted EBITDA to income before income taxes

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

	Three Months Ended March 31, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	88,665		$	31,351		$	42,592		$	(23,718	)
Depreciation and amortization	(18,500		)	(6,340		)	(16,123		)	(1,576		)
Stock compensation expense	—			—			(306		)	(4,280		)
Income (loss) from operations	$	70,165		$	25,011		$	26,163		$	(29,574	)	$	91,765
Loss on early retirement of debt													(19,719		)
Equity in earnings of unconsolidated subsidiaries													5,521
Non-operating loss													(49		)
Interest expense													(40,853		)
Income before income taxes													$	36,665

(1) The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

(2) Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.

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Income per Common Share (Tables)

3 Months Ended

Mar. 31, 2017

Income per Common Share

Schedule of computation of basic and diluted earnings per share

	Three Months Ended March 31,
	2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	54,833	$	15,870
Less: Earnings allocated to unvested restricted stockholders	1,582		507
Net income available to common stockholders	$	53,251	$	15,363
Denominator:
Weighted average shares—basic	127,500		128,464
Effect of dilutive securities:
Stock options	81		164
Weighted average shares—diluted	127,581		128,628
Basic income per common share:	$	0.42	$	0.12
Diluted income per common share:	$	0.42	$	0.12

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Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select's 6.375% Senior Notes (Tables) - Select

3 Months Ended

Mar. 31, 2017

Schedule of Condensed Consolidating Balance Sheet

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	72		$	6,836	$	3,405		$	54,898	$	—		$	65,211
Accounts receivable, net	—			442,132		125,079			124,309		—			691,520
Intercompany receivables	—			2,183,527		169,816			—		(2,353,343		) (a)	—
Prepaid income taxes	2,402			—		—			—		—			2,402
Other current assets	17,714			34,693		11,878			20,796		—			85,081
Total Current Assets	20,188			2,667,188		310,178			200,003		(2,353,343		)	844,214
Property and equipment, net	49,309			609,822		54,118			183,897		—			897,146
Investment in affiliates	4,513,416			100,095		—			—		(4,613,511		) (b) (c)	—
Goodwill	—			2,091,100		—			668,664		—			2,759,764
Identifiable intangible assets, net	—			108,545		—			228,531		—			337,076
Other assets	50,355			86,384		38,882			16,577		(27,461		) (d)	164,737
Total Assets	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	22,299		$	—	$	—		$	—	$	—		$	22,299
Current portion of long-term debt and notes payable	20,506			502		633			372					22,013
Accounts payable	13,349			78,195		17,429			16,145		—			125,118
Intercompany payables	2,183,527			169,816		—			—		(2,353,343		) (a)	—
Accrued payroll	4,268			76,290		2,488			27,150		—			110,196
Accrued vacation	3,740			57,763		11,968			15,265		—			88,736
Accrued interest	19,390			—		4			2,164		—			21,558
Accrued other	38,937			62,607		9,780			31,856		—			143,180
Income taxes payable	—			—		—			5,399		—			5,399
Total Current Liabilities	2,306,016			445,173		42,302			98,351		(2,353,343		)	538,499
Long-term debt, net of current portion	1,482,768			525,263		155,188			608,191		—			2,771,410
Non-current deferred tax liability	—			135,640		667			86,883		(27,461		) (d)	195,729
Other non-current liabilities	42,755			56,617		6,849			35,987		—			142,208
Total Liabilities	3,831,539			1,162,693		205,006			829,412		(2,380,804		)	3,647,846
Redeemable non-controlling interests	—			—		9,899			452,781		—			462,680
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	931,661			—		—			—		—			931,661
Retained earnings (accumulated deficit)	(129,932		)	1,318,340		(40,858		)	6,668		(1,284,150		) (c)	(129,932		)
Subsidiary investment	—			3,182,101		142,123			5,137		(3,329,361		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	801,729			4,500,441		101,265			11,805		(4,613,511		)	801,729
Non-controlling interests	—			—		87,008			3,674		—			90,682
Total Equity	801,729			4,500,441		188,273			15,479		(4,613,511		)	892,411
Total Liabilities and Equity	$	4,633,268		$	5,663,134	$	403,178		$	1,297,672	$	(6,994,315	)	$	5,002,937

(a) Elimination of intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(c) Elimination of investments in consolidated subsidiaries’ earnings.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	11,071		$	6,467	$	5,056		$	76,435	$	—		$	99,029
Accounts receivable, net	—			361,327		99,913			112,512		—			573,752
Intercompany receivables	—			2,237,362		157,324			—		(2,394,686		) (a)	—
Prepaid income taxes	6,658			—		—			5,765		—			12,423
Other current assets	11,953			33,860		10,367			21,519		—			77,699
Total Current Assets	29,682			2,639,016		272,660			216,231		(2,394,686		)	762,903
Property and equipment, net	48,697			601,426		52,851			189,243		—			892,217
Investment in affiliates	4,515,998			92,389		—			—		(4,608,387		) (b) (c)	—
Goodwill	—			2,090,963		—			660,037		—			2,751,000
Identifiable intangible assets, net	—			109,132		—			231,430		—			340,562
Other assets	45,636			84,803		53,954			16,235		(26,684		) (d)	173,944
Total Assets	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	39,362		$	—	$	—		$	—	$	—		$	39,362
Current portion of long-term debt and notes payable	7,227			445		1,324			4,660		—			13,656
Accounts payable	10,775			78,166		22,839			14,778		—			126,558
Intercompany payables	2,237,362			157,324		—			—		(2,394,686		) (a)	—
Accrued payroll	16,963			92,187		4,275			32,972		—			146,397
Accrued vacation	3,440			55,297		10,857			13,667		—			83,261
Accrued interest	20,114			—		—			2,211		—			22,325
Accrued other	39,155			60,871		6,152			33,898		—			140,076
Total Current Liabilities	2,374,398			444,290		45,447			102,186		(2,394,686		)	571,635
Long-term debt, net of current portion	1,407,066			513,938		137,436			626,893		—			2,685,333
Non-current deferred tax liability	—			133,852		596			91,314		(26,684		) (d)	199,078
Other non-current liabilities	42,824			53,399		5,865			34,432		—			136,520
Total Liabilities	3,824,288			1,145,479		189,344			854,825		(2,421,370		)	3,592,566
Redeemable non-controlling interests	—			—		10,169			411,990		—			422,159
Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	925,111			—		—			—		—			925,111
Retained earnings (accumulated deficit)	(109,386		)	1,295,603		(39,546		)	1,364		(1,257,421		) (c)	(109,386		)
Subsidiary investment	—			3,176,647		132,890			41,429		(3,350,966		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	815,725			4,472,250		93,344			42,793		(4,608,387		)	815,725
Non-controlling interests	—			—		86,608			3,568		—			90,176
Total Equity	815,725			4,472,250		179,952			46,361		(4,608,387		)	905,901
Total Liabilities and Equity	$	4,640,013		$	5,617,729	$	379,465		$	1,313,176	$	(7,029,757	)	$	4,920,626

(a) Elimination of intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(c) Elimination of investments in consolidated subsidiaries’ earnings.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Schedule of Condensed Consolidating Statement of Operations

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	608		$	684,902		$	169,702		$	256,149		$	—		$	1,111,361
Costs and expenses:
Cost of services	532			577,885			141,648			208,292			—			928,357
General and administrative	28,036			39			—			—			—			28,075
Bad debt expense	—			11,699			3,355			5,571			—			20,625
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Total costs and expenses	30,143			610,844			148,623			229,986			—			1,019,596
Income (loss) from operations	(29,535		)	74,058			21,079			26,163			—			91,765
Other income and expense:
Intercompany interest and royalty fees	(1,896		)	3,415			(1,519		)	—			—			—
Intercompany management fees	61,698			(52,421		)	(9,277		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			5,493			28			—			—			5,521
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest expense	(22,808		)	(8,070		)	(2,476		)	(7,499		)	—			(40,853		)
Income (loss) before income taxes	(12,260		)	22,426			7,835			18,664			—			36,665
Income tax expense	126			5,936			304			6,836			—			13,202
Equity in earnings of subsidiaries	28,256			6,247			—			—			(34,503		)(a)	—
Net income	15,870			22,737			7,531			11,828			(34,503		)	23,463
Less: Net income attributable to non-controlling interests	—			—			1,069			6,524			—			7,593
Net income attributable to Select Medical Corporation	$	15,870		$	22,737		$	6,462		$	5,304		$	(34,503	)	$	15,870

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	417		$	711,868		$	125,168		$	250,877		$	—		$	1,088,330
Costs and expenses:
Cost of services	344			602,521			106,195			213,202			—			922,262
General and administrative	28,387			(119		)	—			—			—			28,268
Bad debt expense	—			10,698			1,985			3,714			—			16,397
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Total costs and expenses	29,942			628,311			110,899			232,292			—			1,001,444
Income (loss) from operations	(29,525		)	83,557			14,269			18,585			—			86,886
Other income and expense:
Intercompany interest and royalty fees	(1,058		)	2,854			(1,796		)	—			—			—
Intercompany management fees	55,357			(49,525		)	(5,832		)	—			—			—
Loss on early retirement of debt	(773		)	—			—			—			—			(773		)
Equity in earnings of unconsolidated subsidiaries	—			4,627			25			—			—			4,652
Non-operating gain (loss)	30,432			(5,345		)	—			—			—			25,087
Interest expense	(20,346		)	(6,634		)	(1,639		)	(10,229		)	—			(38,848		)
Income before income taxes	34,087			29,534			5,027			8,356			—			77,004
Income tax expense (benefit)	8,612			5,615			(65		)	2,898			—			17,060
Equity in earnings of subsidiaries	29,358			3,117			—			—			(32,475		) (a)	—
Net income	54,833			27,036			5,092			5,458			(32,475		)	59,944
Less: Net income attributable to non-controlling interests	—			—			1,886			3,225			—			5,111
Net income attributable to Select Medical Corporation	$	54,833		$	27,036		$	3,206		$	2,233		$	(32,475	)	$	54,833

(a) Elimination of equity in earnings of subsidiaries.

Schedule of Condensed Consolidating Statement of Cash Flows

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	15,870		$	22,737		$	7,531		$	11,828		$	(34,503	)(a)	$	23,463
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			4,893			18			—			—			4,911
Depreciation and amortization	1,575			21,221			3,620			16,123			—			42,539
Provision for bad debts	—			11,699			3,355			5,571			—			20,625
Equity in earnings of unconsolidated subsidiaries	—			(5,493		)	(28		)	—			—			(5,521		)
Equity in earnings of consolidated subsidiaries	(28,256		)	(6,247		)	—			—			34,503		(a)	—
Loss on early retirement of debt	6,527			—			—			—			—			6,527
Loss (gain) on sale of assets and businesses	—			62			(4,671		)	—			—			(4,609		)
Stock compensation expense	4,280			—			—			306			—			4,586
Amortization of debt discount, premium and issuance costs	2,590			—			—			832			—			3,422
Deferred income taxes	1,005			—			—			(4,430		)	—			(3,425		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(92,404		)	(28,521		)	(17,188		)	—			(138,113		)
Other current assets	(5,761		)	(1,129		)	(1,511		)	780			—			(7,621		)
Other assets	(3,753		)	(11,531		)	15,072			164			—			(48		)
Accounts payable	2,574			694			(5,410		)	2,554			—			412
Accrued expenses	(13,406		)	(3,673		)	3,940			(5,290		)	—			(18,429		)
Income taxes	4,256			—			—			11,164			—			15,420
Net cash provided by (used in) operating activities	(12,499		)	(59,171		)	(6,605		)	22,414			—			(55,861		)
Investing activities
Acquisition of businesses, net of cash acquired	—			(445		)	—			(9,121		)	—			(9,566		)
Purchases of property and equipment	(2,937		)	(29,268		)	(9,762		)	(8,686		)	—			(50,653		)
Investment in businesses	—			(500		)	—			—			—			(500		)
Proceeds from sale of assets and businesses	—			7			19,505			—			—			19,512
Net cash provided by (used in) investing activities	(2,937		)	(30,206		)	9,743			(17,807		)	—			(41,207		)
Financing activities
Borrowings on revolving facilities	530,000			—			—			—			—			530,000
Payments on revolving facilities	(415,000		)	—			—			—			—			(415,000		)
Proceeds from term loans	1,139,822			—			—			—			—			1,139,822
Payments on term loans	(1,147,752		)	—			—			(23,065		)	—			(1,170,817		)
Revolving facility debt issuance costs	(3,887		)	—			—			—			—			(3,887		)
Borrowings of other debt	6,571			—			—			—			—			6,571
Principal payments on other debt	(3,704		)	(80		)	(695		)	(796		)	—			(5,275		)
Repayments of bank overdrafts	(17,062		)	—			—			—			—			(17,062		)
Dividends paid to Holdings	(156		)	—			—			—			—			(156		)
Equity investment by Holdings	617			—			—			—			—			617
Intercompany	(85,012		)	89,876			(4,864		)	—			—			—
Proceeds from issuance of non-controlling interests	—			—			2,094			—			—			2,094
Purchase of non-controlling interests	—			(50		)	—			—			—			(50		)
Distributions to non-controlling interests	—			—			(1,324		)	(2,283		)	—			(3,607		)
Net cash provided by (used in) financing activities	4,437			89,746			(4,789		)	(26,144		)	—			63,250
Net increase (decrease) in cash and cash equivalents	(10,999		)	369			(1,651		)	(21,537		)	—			(33,818		)
Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—			99,029
Cash and cash equivalents at end of period	$	72		$	6,836		$	3,405		$	54,898		$	—		$	65,211

(a) Elimination of equity in earnings of consolidated subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Operating activities
Net income	$	54,833		$	27,036		$	5,092		$	5,458		$	(32,475	)(a)	$	59,944
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			8,283			22			—			—			8,305
Depreciation and amortization	1,211			15,211			2,719			15,376			—			34,517
Provision for bad debts	—			10,698			1,985			3,714			—			16,397
Equity in earnings of unconsolidated subsidiaries	—			(4,627		)	(25		)	—			—			(4,652		)
Equity in earnings of consolidated subsidiaries	(29,358		)	(3,117		)	—			—			32,475		(a)	—
Loss on early retirement of debt	773			—			—			—			—			773
Loss (gain) on sale of assets and business	(30,432		)	23			16			—			—			(30,393		)
Impairment of equity investment	—			5,339			—			—			—			5,339
Stock compensation expense	3,784			—			—			192			—			3,976
Amortization of debt discount, premium and issuance costs	2,838			—			—			853			—			3,691
Deferred income taxes	(3,294		)	—			—			(181		)	—			(3,475		)
Changes in operating assets and liabilities, net of
effects of business combinations:
Accounts receivable	—			(18,362		)	(13,913		)	(6,889		)	—			(39,164		)
Other current assets	(5,472		)	4,411			(522		)	9,143			—			7,560
Other assets	155			(70		)	19			(995		)	—			(891		)
Accounts payable	(12		)	(18,456		)	(4,242		)	1,388			—			(21,322		)
Accrued expenses	(2,149		)	50,917			1,040			1,385			—			51,193
Income taxes	16,483			—			—			2,887			—			19,370
Net cash provided by (used in) operating activities	9,360			77,286			(7,809		)	32,331			—			111,168
Investing activities
Acquisition of businesses, net of cash acquired	(408,654		)	(605		)	—			(3,624		)	—			(412,883		)
Purchases of property and equipment	(4,909		)	(32,571		)	(6,078		)	(3,210		)	—			(46,768		)
Investment in businesses	—			(623		)	—			—			—			(623		)
Proceeds from sale of assets and business	62,597			—			3			—			—			62,600
Net cash used in investing activities	(350,966		)	(33,799		)	(6,075		)	(6,834		)	—			(397,674		)
Financing activities
Borrowings on revolving facilities	190,000			—			—			—			—			190,000
Payments on revolving facilities	(170,000		)	—			—			(5,000		)	—			(175,000		)
Proceeds from term loans	600,127			—			—			—			—			600,127
Payments on term loans	(225,837		)	—			—			(1,125		)	—			(226,962		)
Borrowings of other debt	6,727			—			—			—			—			6,727
Principal payments on other debt	(3,028		)	(37		)	(557		)	(842		)	—			(4,464		)
Repayments of bank overdrafts	(28,615		)	—			—			—			—			(28,615		)
Equity investment by Holdings	21			—			—			—			—			21
Intercompany	17,341			(36,170		)	18,829			—			—			—
Purchase of non-controlling interests	—			(1,294		)	—			—			—			(1,294		)
Distributions to non-controlling interests	(2,432		)	—			—			(629		)	—			(3,061		)
Net cash provided by (used in) financing activities	384,304			(37,501		)	18,272			(7,596		)	—			357,479
Net increase in cash and cash equivalents	42,698			5,986			4,388			17,901			—			70,973
Cash and cash equivalents at beginning of period	4,070			3,706			625			6,034			—			14,435
Cash and cash equivalents at end of period	$	46,768		$	9,692		$	5,013		$	23,935		$	—		$	85,408

(a) Elimination of equity in earnings of consolidated subsidiaries.

XML

Accounting Policies (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Recently Adopted Accounting Pronouncements
Total current assets	$ 844,214	$ 762,903
Other assets	164,737	173,944
Total assets	5,002,937	4,920,626	$ 4,822,864
Non-current deferred tax liability	195,729	199,078
Total liabilities	3,647,846	3,592,566
Total liabilities and equity	$ 5,002,937	4,920,626
ASU 2015-17
Recently Adopted Accounting Pronouncements
Total current assets		762,903
Other assets		173,944
Total assets		4,920,626
Non-current deferred tax liability		199,078
Total liabilities		3,592,566
Total liabilities and equity		4,920,626
As Reported | ASU 2015-17
Recently Adopted Accounting Pronouncements
Current deferred tax asset		45,165
Total current assets		808,068
Other assets		152,548
Total assets		4,944,395
Non-current deferred tax liability		222,847
Total liabilities		3,616,335
Total liabilities and equity		$ 4,944,395
Restatement Adjustment | ASU 2015-17
Recently Adopted Accounting Pronouncements
Total assets			$ 25,100

XML

Acquisitions - Physiotherapy Acquisition (Details) - USD ($) $ in Thousands		3 Months Ended
	Mar. 04, 2016	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Mar. 03, 2016
Consideration given for identifiable net assets and goodwill acquired to the net cash paid
Goodwill		$ 2,759,764		$ 2,751,000
Net cash paid		9,566	$ 412,883
Physiotherapy
Acquisitions
Voting equity interests acquired	100.00%
Consideration given for identifiable net assets and goodwill acquired to the net cash paid
Cash and cash equivalents	$ 12,300	12,340
Identifiable tangible assets, excluding cash and cash equivalents		87,832
Identifiable intangible assets		32,484
Goodwill		343,187
Total assets		475,843
Total liabilities		54,685
Acquired non-controlling interests		2,514
Net assets acquired		418,644
Net cash paid	$ 406,300	$ 406,304
Estimated value of goodwill, deductible for tax purposes					$ 8,800

XML

Acquisitions - Proforma Results and Other Acquisitions (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended
	Mar. 04, 2016	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Acquisitions
Net cash paid		$ 9,566	$ 412,883
Goodwill		2,759,764		$ 2,751,000
Pro Forma
Pro forma results of operations
Net revenue		1,141,860
Net income		$ 53,014
Income per common share:
Basic (in dollars per share)		$ 0.40
Diluted (in dollars per share)		$ 0.40
Concentra
Acquisitions
Goodwill		$ 668,664		660,037
Outpatient Rehabilitation
Acquisitions
Goodwill		644,036		$ 643,557
Physiotherapy
Acquisitions
Net cash paid	$ 406,300	406,304
Goodwill		343,187
Physiotherapy | Pro Forma
Proforma acquisition costs
Acquisition costs excluded from proforma results		3,200
Other Acquisitions
Acquisitions
Net cash paid		9,600
Other Acquisitions | Concentra
Acquisitions
Goodwill		8,600
Other Acquisitions | Outpatient Rehabilitation
Acquisitions
Goodwill		$ 300

XML

Intangible Assets and Liabilities - Carrying Value and Amortization (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Intangible Assets and Liabilities
Goodwill	$ 2,759,764		$ 2,751,000
Identifiable intangibles-Finite lived assets:
Accumulated Amortization	(32,041)		(27,339)
Total identifiable intangible assets, Gross Carrying Amount	369,117		367,901
Total identifiable intangible assets, Net (Excluding Goodwill), Total	337,076		340,562
Identifiable intangibles-Finite lived liabilities:
Unfavorable leasehold interests, Gross Carrying Amount	5,343		5,139
Unfavorable leasehold interests, Accumulated Amortization	(1,690)		(1,410)
Unfavorable leasehold interests, Net Carrying Amount	3,653		3,729
Customer relationships
Identifiable intangibles-Finite lived assets:
Identifiable intangibles - Finite lived assets, Gross Carrying Amount	142,890		142,198
Accumulated Amortization	(26,908)		(23,185)
Identifiable intangibles - Finite lived assets, Net Carrying Amount	115,982		119,013
Leasehold interests
Identifiable intangibles-Finite lived assets:
Identifiable intangibles - Finite lived assets, Gross Carrying Amount	13,177		13,089
Accumulated Amortization	(2,796)		(2,317)
Identifiable intangibles - Finite lived assets, Net Carrying Amount	10,381		10,772
Non-compete agreements
Identifiable intangibles-Finite lived assets:
Identifiable intangibles - Finite lived assets, Gross Carrying Amount	27,057		26,655
Accumulated Amortization	(2,337)		(1,837)
Identifiable intangibles - Finite lived assets, Net Carrying Amount	24,720		24,818
Customer relationships and non-compete agreements
Identifiable intangibles-Finite lived assets:
Amortization expense	4,400	$ 3,800
Estimated amortization expense, rolling maturity
12 months ending March 31, 2018	16,400
12 months ending March 31, 2019	16,400
12 months ending March 31, 2020	16,400
12 months ending March 31, 2021	16,400
12 months ending March 31, 2022	$ 16,400
Trademarks
Intangible Assets and Liabilities
Weighted average time until next renewal	2 years 7 months 6 days
Identifiable intangibles-Indefinite lived assets
Identifiable intangibles - Indefinite lived assets	$ 166,698		166,698
Certificates of need
Identifiable intangibles-Indefinite lived assets
Identifiable intangibles - Indefinite lived assets	$ 17,152		17,026
Accreditations
Intangible Assets and Liabilities
Weighted average time until next renewal	1 year 6 months
Identifiable intangibles-Indefinite lived assets
Identifiable intangibles - Indefinite lived assets	$ 2,143		$ 2,235

XML

Intangible Assets - Changes in the Carrying Amount of Goodwill (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($)
Goodwill
Balance at the beginning of the year	$ 2,751,000
Acquired	8,938
Measurement period adjustment	(174)
Balance at the end of the year	2,759,764
Specialty Hospitals
Goodwill
Balance at the beginning of the year	1,447,406
Measurement period adjustment	(342)
Balance at the end of the year	1,447,064
Outpatient Rehabilitation
Goodwill
Balance at the beginning of the year	643,557
Acquired	311
Measurement period adjustment	168
Balance at the end of the year	644,036
Concentra
Goodwill
Balance at the beginning of the year	660,037
Acquired	8,627
Balance at the end of the year	$ 668,664

XML

Long-Term Debt and Notes Payable - Components of Long-Term Debt And Notes Payable (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Long-term debt and notes payable
Total debt	$ 2,793,423	$ 2,698,989
Current portion of long-term debt and notes payable	22,013	13,656
Long-term debt, net of current portion	2,771,410	2,685,333
Select Excluding Concentra
Long-term debt and notes payable
Total debt	2,184,860	2,067,436
Current portion of long-term debt and notes payable	21,641	8,996
Long-term debt, net of current portion	2,163,219	$ 2,058,440
Unamortized debt issuance costs	$ 21,931
Select Excluding Concentra | 6.375% senior notes
Long-term debt and notes payable
Interest rate of debt (as a percent)	6.375%	6.375%
Total debt	$ 702,966	$ 702,545
Unamortized premiums	900	1,000
Unamortized debt issuance costs	8,000	8,500
Select Excluding Concentra | Revolving credit facility
Long-term debt and notes payable
Total debt	335,000	220,000
Select Excluding Concentra | Term loans
Long-term debt and notes payable
Total debt	1,122,052	1,122,203
Unamortized discounts	14,000	12,000
Unamortized debt issuance costs	13,900	13,600
Select Excluding Concentra | Other
Long-term debt and notes payable
Total debt	24,842	22,688
Concentra Inc
Long-term debt and notes payable
Total debt	608,563	631,553
Current portion of long-term debt and notes payable	372	4,660
Long-term debt, net of current portion	608,191	626,893
Unamortized debt issuance costs	12,466
Concentra Inc | Term loans
Long-term debt and notes payable
Total debt	604,068	626,375
Unamortized discounts	2,600	2,800
Unamortized debt issuance costs	12,500	13,100
Concentra Inc | Other
Long-term debt and notes payable
Total debt	$ 4,495	$ 5,178

XML

Long-Term Debt and Notes Payable - Maturities Of Long-Term Debt (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Long-term debt and notes payable
Total debt	$ 2,793,423	$ 2,698,989
Select Excluding Concentra
Long-term debt and notes payable
April 1, 2017 - December 31, 2017	18,072
2018	14,976
2019	23,327
2020	11,568
2021	721,514
2022 and beyond	1,430,385
Total principal	2,219,842
Unamortized discounts and premiums	(13,051)
Unamortized debt issuance costs	(21,931)
Total debt	2,184,860	2,067,436
Concentra Inc
Long-term debt and notes payable
April 1, 2017 - December 31, 2017	343
2018	128
2019	144
2020	3,177
2021	6,680
2022 and beyond	613,198
Total principal	623,670
Unamortized discounts and premiums	(2,641)
Unamortized debt issuance costs	(12,466)
Total debt	608,563	$ 631,553
Select
Long-term debt and notes payable
April 1, 2017 - December 31, 2017	18,415
2018	15,104
2019	23,471
2020	14,745
2021	728,194
2022 and beyond	2,043,583
Total principal	2,843,512
Unamortized discounts and premiums	(15,692)
Unamortized debt issuance costs	(34,397)
Total debt	$ 2,793,423

XML

Long-Term Debt and Notes Payable - Select Credit Facilities (Details) - Select - USD ($) $ in Millions	Apr. 01, 2019	Mar. 31, 2017	Mar. 06, 2017
Long-term debt and notes payable
Capital stock of foreign subsidiaries pledged (as a percent)			65.00%
Credit agreement
Long-term debt and notes payable
Current borrowing capacity			$ 1,600.0
Percentage of net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation to be used for prepayment of debt			100.00%
Percentage of net proceeds received from the issuance of debt obligations other than certain permitted debt obligations to be used for prepayment of debt			100.00%
Leverage ratio of financial maintenance covenant		6.01%
Credit agreement | Leverage ratio greater than 4.50 to 1.00
Long-term debt and notes payable
Percentage of excess cash flow to be used for prepayment of debt			50.00%
Leverage ratio of financial maintenance covenant			4.50%
Credit agreement | Leverage ratio less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00
Long-term debt and notes payable
Percentage of excess cash flow to be used for prepayment of debt			25.00%
Leverage ratio of financial maintenance covenant			4.00%
Credit agreement | Leverage ratio less than 6.25 to 1.00
Long-term debt and notes payable
Leverage ratio of financial maintenance covenant			6.25%
Credit agreement | Future leverage ratio less than 6.00 to 1.00
Long-term debt and notes payable
Leverage ratio of financial maintenance covenant	6.00%
Credit agreement | Term loans
Long-term debt and notes payable
Aggregate principal amount			$ 1,150.0
Debt instrument term (in years)			7 years
Percentage of amortization of term loan			0.25%
Credit agreement | Term loans | Adjusted LIBO
Long-term debt and notes payable
Variable rate basis			Adjusted LIBO
Interest rate margin (as a percent)			3.50%
Credit agreement | Term loans | Alternate Base Rate
Long-term debt and notes payable
Variable rate basis			Alternate Base Rate
Interest rate margin (as a percent)			2.50%
Credit agreement | Term loans | Alternate Base Rate floor
Long-term debt and notes payable
Variable rate basis			Alternate Base Rate floor
Interest rate margin (as a percent)			2.00%
Credit agreement | Term loans | Adjusted LIBO Rate floor
Long-term debt and notes payable
Variable rate basis			Adjusted LIBO floor
Interest rate margin (as a percent)			1.00%
Credit agreement | Revolving credit facility
Long-term debt and notes payable
Current borrowing capacity			$ 450.0
Debt instrument term (in years)			5 years
Credit agreement | Revolving credit facility | Adjusted LIBO
Long-term debt and notes payable
Variable rate basis			Adjusted LIBO
Credit agreement | Revolving credit facility | Adjusted LIBO | Minimum
Long-term debt and notes payable
Interest rate margin (as a percent)			3.00%
Credit agreement | Revolving credit facility | Adjusted LIBO | Maximum
Long-term debt and notes payable
Interest rate margin (as a percent)			3.25%
Credit agreement | Revolving credit facility | Alternate Base Rate
Long-term debt and notes payable
Variable rate basis			Alternate Base Rate
Credit agreement | Revolving credit facility | Alternate Base Rate | Minimum
Long-term debt and notes payable
Interest rate margin (as a percent)			2.00%
Credit agreement | Revolving credit facility | Alternate Base Rate | Maximum
Long-term debt and notes payable
Interest rate margin (as a percent)			2.25%
Credit agreement | Standby letter of credit
Long-term debt and notes payable
Current borrowing capacity			$ 75.0

XML

Long-Term Debt and Notes Payable - Loss on Early Retirement of Debt and Excess Cash Flow Payment (Details) - USD ($) $ in Thousands		3 Months Ended
	Mar. 01, 2017	Mar. 31, 2017	Mar. 31, 2016
Long-term debt and notes payable
Losses on early retirement of debt		$ 19,719	$ 773
Select
Long-term debt and notes payable
Losses on early retirement of debt		19,719	$ 773
Select | Credit agreement
Long-term debt and notes payable
Losses on early retirement of debt		$ 19,700
Select | First Lien Credit Agreement - Term Loan
Long-term debt and notes payable
Principal prepayments from excess cash flow	$ 23,100

XML

Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Select Excluding Concentra
Fair Value
Unamortized debt issuance costs	$ 21,931
Concentra Inc
Fair Value
Unamortized debt issuance costs	12,466
Credit facility | Select Excluding Concentra
Fair Value
Face Value	1,485,000	$ 1,367,751
Carrying Value	1,457,052	1,342,203
Fair Value	1,474,013	1,370,460
Unamortized discounts	14,000	12,000
Unamortized debt issuance costs	13,900	13,600
Credit facility | Concentra Inc
Fair Value
Face Value	619,175	642,239
Carrying Value	604,068	626,375
Fair Value	622,271	644,648
Unamortized discounts	2,600	2,800
Unamortized debt issuance costs	$ 12,500	$ 13,100
6.375% senior notes | Select Excluding Concentra
Fair Value
Interest rate of debt (as a percent)	6.375%	6.375%
Face Value	$ 710,000	$ 710,000
Carrying Value	702,966	702,545
Fair Value	715,325	710,000
Unamortized premium	900	1,000
Unamortized debt issuance costs	$ 8,000	$ 8,500

XML

Segment Information - Selected Financial Data (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Segment information
Net revenue	$ 1,111,361	$ 1,088,330
Adjusted EBITDA	138,890	128,615
Total assets	5,002,937	4,822,864	$ 4,920,626
Capital expenditures	50,653	46,768
Operating Segments | Specialty Hospitals
Segment information
Net revenue	598,787	598,954
Adjusted EBITDA	88,665	86,756
Total assets	2,622,220	2,434,405
Capital expenditures	32,357	33,675
Operating Segments | Outpatient Rehabilitation
Segment information
Net revenue	255,817	238,082
Adjusted EBITDA	31,351	28,879
Total assets	980,261	974,264
Capital expenditures	6,673	4,974
Operating Segments | Concentra
Segment information
Net revenue	256,149	250,877
Adjusted EBITDA	42,592	34,153
Total assets	1,297,672	1,310,317
Capital expenditures	8,686	3,210
Other
Segment information
Net revenue	608	417
Adjusted EBITDA	(23,718)	(21,173)
Total assets	102,784	103,878
Capital expenditures	$ 2,937	$ 4,909

XML

Segment Information - Reconciliation of Adjusted EBITDA to Income Before Taxes (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Segment information
Adjusted EBITDA	$ 138,890	$ 128,615
Depreciation and amortization	(42,539)	(34,517)
Income from operations	91,765	86,886
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	77,004
Total assets	5,002,937	4,822,864	$ 4,920,626
ASU 2015-17
Segment information
Total assets			4,920,626
ASU 2015-17 | Restatement Adjustment
Segment information
Total assets		25,100
Operating Segments | Specialty Hospitals
Segment information
Adjusted EBITDA	88,665	86,756
Depreciation and amortization	(18,500)	(13,893)
Income from operations	70,165	72,863
Total assets	2,622,220	2,434,405
Operating Segments | Outpatient Rehabilitation
Segment information
Adjusted EBITDA	31,351	28,879
Depreciation and amortization	(6,340)	(4,036)
Income from operations	25,011	24,843
Total assets	980,261	974,264
Operating Segments | Concentra
Segment information
Adjusted EBITDA	42,592	34,153
Depreciation and amortization	(16,123)	(15,376)
Stock compensation expense	(306)	(192)
Income from operations	26,163	18,585
Total assets	1,297,672	1,310,317
Other
Segment information
Adjusted EBITDA	(23,718)	(21,173)
Depreciation and amortization	(1,576)	(1,212)
Stock compensation expense	(4,280)	(3,784)
Income from operations	(29,574)	(29,405)
Total assets	102,784	103,878
Other | Physiotherapy
Segment information
Acquisition costs		(3,236)
Select
Segment information
Depreciation and amortization	(42,539)	(34,517)
Income from operations	91,765	86,886
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	$ 77,004
Total assets	$ 5,002,937		$ 4,920,626

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Income per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Numerator:
Net income attributable to Select Medical Holdings Corporation	$ 15,870	$ 54,833
Less: Earnings allocated to unvested restricted stockholders	507	1,582
Net income available to common stockholders	$ 15,363	$ 53,251
Denominator:
Basic (in shares)	128,464	127,500
Effect of dilutive securities: Stock options (in shares)	164	81
Weighted average shares - diluted	128,628	127,581
Income per common share
Basic income per common share: (in dollars per share)	$ 0.12	$ 0.42
Diluted income per common share: (in dollars per share)	$ 0.12	$ 0.42

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Commitments and Contingencies - Litigation (Details) $ in Millions			3 Months Ended
	Oct. 19, 2015 item	Jul. 13, 2015 item	Mar. 31, 2017 USD ($)
Select, SSH-Knoxville, and SSH-North Knoxville
Commitments and Contingencies
Number of current or former employees named as defendants | item		10
Professional liability claims
Commitments and Contingencies
Self insurance retention per occurrence | $			$ 2.0
General liability claims
Commitments and Contingencies
Self insurance retention per occurrence | $			$ 2.0
Amended complaint | SSH-Evansville
Commitments and Contingencies
Number of case managers identified as plaintiff | item	2

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Commitments and Contingencies - Construction Commitments (Details) $ in Millions	3 Months Ended
	Mar. 31, 2017 USD ($)
Construction Commitments
Construction Commitments
Construction contract commitments	$ 69.9

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Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select's 6.375% Senior Notes (Details)	Mar. 31, 2017
6.375% senior notes | Select
Financial information for subsidiary guarantors and non-guarantor subsidiaries under select's 6.375% senior notes
Interest rate of debt (as a percent)	6.375%

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Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select's 6.375% Senior Notes - Condensed Consolidating Balance Sheet (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Current Assets:
Cash and cash equivalents	$ 65,211	$ 99,029	$ 85,408	$ 14,435
Accounts receivable, net	691,520	573,752
Prepaid income taxes	2,402	12,423
Other current assets	85,081	77,699
Total Current Assets	844,214	762,903
Property and equipment, net	897,146	892,217
Goodwill	2,759,764	2,751,000
Identifiable intangible assets, net	337,076	340,562
Other assets	164,737	173,944
Total Assets	5,002,937	4,920,626	4,822,864
Current Liabilities:
Bank overdrafts	22,299	39,362
Current portion of long-term debt and notes payable	22,013	13,656
Accounts payable	125,118	126,558
Accrued payroll	110,196	146,397
Accrued vacation	88,736	83,261
Accrued interest	21,558	22,325
Accrued other	143,180	140,076
Income taxes payable	5,399
Total Current Liabilities	538,499	571,635
Long-term debt, net of current portion	2,771,410	2,685,333
Non-current deferred tax liability	195,729	199,078
Other non-current liabilities	142,208	136,520
Total Liabilities	3,647,846	3,592,566
Redeemable non-controlling interests	462,680	422,159
Stockholder's Equity:
Common stock	132	132
Capital in excess of par	450,373	443,908
Retained earnings (accumulated deficit)	351,224	371,685
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	801,729	815,725
Non-controlling interests	90,682	90,176
Total Equity	892,411	905,901
Total Liabilities and Equity	5,002,937	4,920,626
Select
Current Assets:
Cash and cash equivalents	65,211	99,029	85,408	14,435
Accounts receivable, net	691,520	573,752
Prepaid income taxes	2,402	12,423
Other current assets	85,081	77,699
Total Current Assets	844,214	762,903
Property and equipment, net	897,146	892,217
Goodwill	2,759,764	2,751,000
Identifiable intangible assets, net	337,076	340,562
Other assets	164,737	173,944
Total Assets	5,002,937	4,920,626
Current Liabilities:
Bank overdrafts	22,299	39,362
Current portion of long-term debt and notes payable	22,013	13,656
Accounts payable	125,118	126,558
Accrued payroll	110,196	146,397
Accrued vacation	88,736	83,261
Accrued interest	21,558	22,325
Accrued other	143,180	140,076
Income taxes payable	5,399
Total Current Liabilities	538,499	571,635
Long-term debt, net of current portion	2,771,410	2,685,333
Non-current deferred tax liability	195,729	199,078
Other non-current liabilities	142,208	136,520
Total Liabilities	3,647,846	3,592,566
Redeemable non-controlling interests	462,680	422,159
Stockholder's Equity:
Common stock	0	0
Capital in excess of par	931,661	925,111
Retained earnings (accumulated deficit)	(129,932)	(109,386)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	801,729	815,725
Non-controlling interests	90,682	90,176
Total Equity	892,411	905,901
Total Liabilities and Equity	5,002,937	4,920,626
Select | Reportable legal entities | Select (Parent Company Only)
Current Assets:
Cash and cash equivalents	72	11,071	46,768	4,070
Prepaid income taxes	2,402	6,658
Other current assets	17,714	11,953
Total Current Assets	20,188	29,682
Property and equipment, net	49,309	48,697
Investment in affiliates	4,513,416	4,515,998
Other assets	50,355	45,636
Total Assets	4,633,268	4,640,013
Current Liabilities:
Bank overdrafts	22,299	39,362
Current portion of long-term debt and notes payable	20,506	7,227
Accounts payable	13,349	10,775
Intercompany payables	2,183,527	2,237,362
Accrued payroll	4,268	16,963
Accrued vacation	3,740	3,440
Accrued interest	19,390	20,114
Accrued other	38,937	39,155
Total Current Liabilities	2,306,016	2,374,398
Long-term debt, net of current portion	1,482,768	1,407,066
Other non-current liabilities	42,755	42,824
Total Liabilities	3,831,539	3,824,288
Stockholder's Equity:
Common stock	0	0
Capital in excess of par	931,661	925,111
Retained earnings (accumulated deficit)	(129,932)	(109,386)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	801,729	815,725
Total Equity	801,729	815,725
Total Liabilities and Equity	4,633,268	4,640,013
Select | Reportable legal entities | Subsidiary Guarantors
Current Assets:
Cash and cash equivalents	6,836	6,467	9,692	3,706
Accounts receivable, net	442,132	361,327
Intercompany receivables	2,183,527	2,237,362
Other current assets	34,693	33,860
Total Current Assets	2,667,188	2,639,016
Property and equipment, net	609,822	601,426
Investment in affiliates	100,095	92,389
Goodwill	2,091,100	2,090,963
Identifiable intangible assets, net	108,545	109,132
Other assets	86,384	84,803
Total Assets	5,663,134	5,617,729
Current Liabilities:
Current portion of long-term debt and notes payable	502	445
Accounts payable	78,195	78,166
Intercompany payables	169,816	157,324
Accrued payroll	76,290	92,187
Accrued vacation	57,763	55,297
Accrued other	62,607	60,871
Total Current Liabilities	445,173	444,290
Long-term debt, net of current portion	525,263	513,938
Non-current deferred tax liability	135,640	133,852
Other non-current liabilities	56,617	53,399
Total Liabilities	1,162,693	1,145,479
Stockholder's Equity:
Retained earnings (accumulated deficit)	1,318,340	1,295,603
Subsidiary investment	3,182,101	3,176,647
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	4,500,441	4,472,250
Total Equity	4,500,441	4,472,250
Total Liabilities and Equity	5,663,134	5,617,729
Select | Reportable legal entities | Non-Guarantor Subsidiaries
Current Assets:
Cash and cash equivalents	3,405	5,056	5,013	625
Accounts receivable, net	125,079	99,913
Intercompany receivables	169,816	157,324
Other current assets	11,878	10,367
Total Current Assets	310,178	272,660
Property and equipment, net	54,118	52,851
Other assets	38,882	53,954
Total Assets	403,178	379,465
Current Liabilities:
Current portion of long-term debt and notes payable	633	1,324
Accounts payable	17,429	22,839
Accrued payroll	2,488	4,275
Accrued vacation	11,968	10,857
Accrued interest	4
Accrued other	9,780	6,152
Total Current Liabilities	42,302	45,447
Long-term debt, net of current portion	155,188	137,436
Non-current deferred tax liability	667	596
Other non-current liabilities	6,849	5,865
Total Liabilities	205,006	189,344
Redeemable non-controlling interests	9,899	10,169
Stockholder's Equity:
Retained earnings (accumulated deficit)	(40,858)	(39,546)
Subsidiary investment	142,123	132,890
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	101,265	93,344
Non-controlling interests	87,008	86,608
Total Equity	188,273	179,952
Total Liabilities and Equity	403,178	379,465
Select | Reportable legal entities | Non-Guarantor Concentra
Current Assets:
Cash and cash equivalents	54,898	76,435	$ 23,935	$ 6,034
Accounts receivable, net	124,309	112,512
Prepaid income taxes		5,765
Other current assets	20,796	21,519
Total Current Assets	200,003	216,231
Property and equipment, net	183,897	189,243
Goodwill	668,664	660,037
Identifiable intangible assets, net	228,531	231,430
Other assets	16,577	16,235
Total Assets	1,297,672	1,313,176
Current Liabilities:
Current portion of long-term debt and notes payable	372	4,660
Accounts payable	16,145	14,778
Accrued payroll	27,150	32,972
Accrued vacation	15,265	13,667
Accrued interest	2,164	2,211
Accrued other	31,856	33,898
Income taxes payable	5,399
Total Current Liabilities	98,351	102,186
Long-term debt, net of current portion	608,191	626,893
Non-current deferred tax liability	86,883	91,314
Other non-current liabilities	35,987	34,432
Total Liabilities	829,412	854,825
Redeemable non-controlling interests	452,781	411,990
Stockholder's Equity:
Retained earnings (accumulated deficit)	6,668	1,364
Subsidiary investment	5,137	41,429
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	11,805	42,793
Non-controlling interests	3,674	3,568
Total Equity	15,479	46,361
Total Liabilities and Equity	1,297,672	1,313,176
Select | Eliminations
Current Assets:
Intercompany receivables	(2,353,343)	(2,394,686)
Total Current Assets	(2,353,343)	(2,394,686)
Investment in affiliates	(4,613,511)	(4,608,387)
Other assets	(27,461)	(26,684)
Total Assets	(6,994,315)	(7,029,757)
Current Liabilities:
Intercompany payables	(2,353,343)	(2,394,686)
Total Current Liabilities	(2,353,343)	(2,394,686)
Non-current deferred tax liability	(27,461)	(26,684)
Total Liabilities	(2,380,804)	(2,421,370)
Stockholder's Equity:
Retained earnings (accumulated deficit)	(1,284,150)	(1,257,421)
Subsidiary investment	(3,329,361)	(3,350,966)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders' Equity	(4,613,511)	(4,608,387)
Total Equity	(4,613,511)	(4,608,387)
Total Liabilities and Equity	$ (6,994,315)	$ (7,029,757)

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Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select's 6.375% Senior Notes - Condensed Consolidating Statement of Operations (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Condensed Consolidating Statement of Operations
Net operating revenues	$ 1,111,361	$ 1,088,330
Costs and expenses:
Cost of services	928,357	922,262
General and administrative	28,075	28,268
Bad debt expense	20,625	16,397
Depreciation and amortization	42,539	34,517
Total costs and expenses	1,019,596	1,001,444
Income from operations	91,765	86,886
Other income and expense:
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	77,004
Income tax expense	13,202	17,060
Net income	23,463	59,944
Less: Net income attributable to non-controlling interests	7,593	5,111
Net income attributable to Select Medical Holdings Corporation	15,870	54,833
Select
Condensed Consolidating Statement of Operations
Net operating revenues	1,111,361	1,088,330
Costs and expenses:
Cost of services	928,357	922,262
General and administrative	28,075	28,268
Bad debt expense	20,625	16,397
Depreciation and amortization	42,539	34,517
Total costs and expenses	1,019,596	1,001,444
Income from operations	91,765	86,886
Other income and expense:
Loss on early retirement of debt	(19,719)	(773)
Equity in earnings of unconsolidated subsidiaries	5,521	4,652
Non-operating gain (loss)	(49)	25,087
Interest expense	(40,853)	(38,848)
Income before income taxes	36,665	77,004
Income tax expense	13,202	17,060
Net income	23,463	59,944
Less: Net income attributable to non-controlling interests	7,593	5,111
Net income attributable to Select Medical Holdings Corporation	15,870	54,833
Select | Reportable legal entities | Select (Parent Company Only)
Condensed Consolidating Statement of Operations
Net operating revenues	608	417
Costs and expenses:
Cost of services	532	344
General and administrative	28,036	28,387
Depreciation and amortization	1,575	1,211
Total costs and expenses	30,143	29,942
Income from operations	(29,535)	(29,525)
Other income and expense:
Intercompany interest and royalty fees	(1,896)	(1,058)
Intercompany management fees	61,698	55,357
Loss on early retirement of debt	(19,719)	(773)
Non-operating gain (loss)		30,432
Interest expense	(22,808)	(20,346)
Income before income taxes	(12,260)	34,087
Income tax expense	126	8,612
Equity in earnings of subsidiaries	28,256	29,358
Net income	15,870	54,833
Net income attributable to Select Medical Holdings Corporation	15,870	54,833
Select | Reportable legal entities | Subsidiary Guarantors
Condensed Consolidating Statement of Operations
Net operating revenues	684,902	711,868
Costs and expenses:
Cost of services	577,885	602,521
General and administrative	39	(119)
Bad debt expense	11,699	10,698
Depreciation and amortization	21,221	15,211
Total costs and expenses	610,844	628,311
Income from operations	74,058	83,557
Other income and expense:
Intercompany interest and royalty fees	3,415	2,854
Intercompany management fees	(52,421)	(49,525)
Equity in earnings of unconsolidated subsidiaries	5,493	4,627
Non-operating gain (loss)	(49)	(5,345)
Interest expense	(8,070)	(6,634)
Income before income taxes	22,426	29,534
Income tax expense	5,936	5,615
Equity in earnings of subsidiaries	6,247	3,117
Net income	22,737	27,036
Net income attributable to Select Medical Holdings Corporation	22,737	27,036
Select | Reportable legal entities | Non-Guarantor Subsidiaries
Condensed Consolidating Statement of Operations
Net operating revenues	169,702	125,168
Costs and expenses:
Cost of services	141,648	106,195
Bad debt expense	3,355	1,985
Depreciation and amortization	3,620	2,719
Total costs and expenses	148,623	110,899
Income from operations	21,079	14,269
Other income and expense:
Intercompany interest and royalty fees	(1,519)	(1,796)
Intercompany management fees	(9,277)	(5,832)
Equity in earnings of unconsolidated subsidiaries	28	25
Interest expense	(2,476)	(1,639)
Income before income taxes	7,835	5,027
Income tax expense	304	(65)
Net income	7,531	5,092
Less: Net income attributable to non-controlling interests	1,069	1,886
Net income attributable to Select Medical Holdings Corporation	6,462	3,206
Select | Reportable legal entities | Non-Guarantor Concentra
Condensed Consolidating Statement of Operations
Net operating revenues	256,149	250,877
Costs and expenses:
Cost of services	208,292	213,202
Bad debt expense	5,571	3,714
Depreciation and amortization	16,123	15,376
Total costs and expenses	229,986	232,292
Income from operations	26,163	18,585
Other income and expense:
Interest expense	(7,499)	(10,229)
Income before income taxes	18,664	8,356
Income tax expense	6,836	2,898
Net income	11,828	5,458
Less: Net income attributable to non-controlling interests	6,524	3,225
Net income attributable to Select Medical Holdings Corporation	5,304	2,233
Select | Eliminations
Other income and expense:
Equity in earnings of subsidiaries	(34,503)	(32,475)
Net income	(34,503)	(32,475)
Net income attributable to Select Medical Holdings Corporation	$ (34,503)	$ (32,475)

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Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select's 6.375% Senior Notes - Condensed Consolidating Statement of Cash Flows (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating activities
Net income	$ 23,463	$ 59,944
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	4,911	8,305
Depreciation and amortization	42,539	34,517
Provision for bad debts	20,625	16,397
Equity in earnings of unconsolidated subsidiaries	(5,521)	(4,652)
Losses on early retirement of debt	6,527	773
Loss (gain) on sale of assets and businesses	(4,609)	(30,393)
Impairment of equity investment		5,339
Stock compensation expense	4,586	3,976
Amortization of debt discount, premium and issuance costs	3,422	3,691
Deferred income taxes	(3,425)	(3,475)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(138,113)	(39,164)
Other current assets	(7,621)	7,560
Other assets	(48)	(891)
Accounts payable	412	(21,322)
Accrued expenses	(18,429)	51,193
Income taxes	15,420	19,370
Net cash provided by (used in) operating activities	(55,861)	111,168
Investing activities
Acquisition of businesses, net of cash acquired	(9,566)	(412,883)
Purchases of property and equipment	(50,653)	(46,768)
Investment in businesses	(500)	(623)
Proceeds from sale of assets and businesses	19,512	62,600
Net cash used in investing activities	(41,207)	(397,674)
Financing activities
Borrowings on revolving facilities	530,000	190,000
Payments on revolving facilities	(415,000)	(175,000)
Proceeds from term loans	1,139,822	600,127
Payments on term loans	(1,170,817)	(226,962)
Revolving facility debt issuance costs	(3,887)
Borrowings of other debt	6,571	6,727
Principal payments on other debt	(5,275)	(4,464)
Repayments of bank overdrafts	(17,062)	(28,615)
Proceeds from issuance of non-controlling interests	2,094
Purchase of non-controlling interests	(50)	(1,294)
Distributions to non-controlling interests	(3,607)	(3,061)
Net cash provided by financing activities	63,250	357,479
Net increase (decrease) in cash and cash equivalents	(33,818)	70,973
Cash and cash equivalents at beginning of period	99,029	14,435
Cash and cash equivalents at end of period	65,211	85,408
Select
Operating activities
Net income	23,463	59,944
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	4,911	8,305
Depreciation and amortization	42,539	34,517
Provision for bad debts	20,625	16,397
Equity in earnings of unconsolidated subsidiaries	(5,521)	(4,652)
Losses on early retirement of debt	6,527	773
Loss (gain) on sale of assets and businesses	(4,609)	(30,393)
Impairment of equity investment		5,339
Stock compensation expense	4,586	3,976
Amortization of debt discount, premium and issuance costs	3,422	3,691
Deferred income taxes	(3,425)	(3,475)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(138,113)	(39,164)
Other current assets	(7,621)	7,560
Other assets	(48)	(891)
Accounts payable	412	(21,322)
Accrued expenses	(18,429)	51,193
Income taxes	15,420	19,370
Net cash provided by (used in) operating activities	(55,861)	111,168
Investing activities
Acquisition of businesses, net of cash acquired	(9,566)	(412,883)
Purchases of property and equipment	(50,653)	(46,768)
Investment in businesses	(500)	(623)
Proceeds from sale of assets and businesses	19,512	62,600
Net cash used in investing activities	(41,207)	(397,674)
Financing activities
Borrowings on revolving facilities	530,000	190,000
Payments on revolving facilities	(415,000)	(175,000)
Proceeds from term loans	1,139,822	600,127
Payments on term loans	(1,170,817)	(226,962)
Revolving facility debt issuance costs	(3,887)
Borrowings of other debt	6,571	6,727
Principal payments on other debt	(5,275)	(4,464)
Repayments of bank overdrafts	(17,062)	(28,615)
Dividends paid to Holdings	(156)
Equity investment by Holdings	617	21
Proceeds from issuance of non-controlling interests	2,094
Purchase of non-controlling interests	(50)	(1,294)
Distributions to non-controlling interests	(3,607)	(3,061)
Net cash provided by financing activities	63,250	357,479
Net increase (decrease) in cash and cash equivalents	(33,818)	70,973
Cash and cash equivalents at beginning of period	99,029	14,435
Cash and cash equivalents at end of period	65,211	85,408
Select | Reportable legal entities | Select (Parent Company Only)
Operating activities
Net income	15,870	54,833
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,575	1,211
Equity in earnings of consolidated subsidiaries	(28,256)	(29,358)
Losses on early retirement of debt	6,527	773
Loss (gain) on sale of assets and businesses		(30,432)
Stock compensation expense	4,280	3,784
Amortization of debt discount, premium and issuance costs	2,590	2,838
Deferred income taxes	1,005	(3,294)
Changes in operating assets and liabilities, net of effects of business combinations:
Other current assets	(5,761)	(5,472)
Other assets	(3,753)	155
Accounts payable	2,574	(12)
Accrued expenses	(13,406)	(2,149)
Income taxes	4,256	16,483
Net cash provided by (used in) operating activities	(12,499)	9,360
Investing activities
Acquisition of businesses, net of cash acquired		(408,654)
Purchases of property and equipment	(2,937)	(4,909)
Proceeds from sale of assets and businesses		62,597
Net cash used in investing activities	(2,937)	(350,966)
Financing activities
Borrowings on revolving facilities	530,000	190,000
Payments on revolving facilities	(415,000)	(170,000)
Proceeds from term loans	1,139,822	600,127
Payments on term loans	(1,147,752)	(225,837)
Revolving facility debt issuance costs	(3,887)
Borrowings of other debt	6,571	6,727
Principal payments on other debt	(3,704)	(3,028)
Repayments of bank overdrafts	(17,062)	(28,615)
Dividends paid to Holdings	(156)
Equity investment by Holdings	617	21
Intercompany	(85,012)	17,341
Distributions to non-controlling interests		(2,432)
Net cash provided by financing activities	4,437	384,304
Net increase (decrease) in cash and cash equivalents	(10,999)	42,698
Cash and cash equivalents at beginning of period	11,071	4,070
Cash and cash equivalents at end of period	72	46,768
Select | Reportable legal entities | Subsidiary Guarantors
Operating activities
Net income	22,737	27,036
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	4,893	8,283
Depreciation and amortization	21,221	15,211
Provision for bad debts	11,699	10,698
Equity in earnings of unconsolidated subsidiaries	(5,493)	(4,627)
Equity in earnings of consolidated subsidiaries	(6,247)	(3,117)
Loss (gain) on sale of assets and businesses	62	23
Impairment of equity investment		5,339
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(92,404)	(18,362)
Other current assets	(1,129)	4,411
Other assets	(11,531)	(70)
Accounts payable	694	(18,456)
Accrued expenses	(3,673)	50,917
Net cash provided by (used in) operating activities	(59,171)	77,286
Investing activities
Acquisition of businesses, net of cash acquired	(445)	(605)
Purchases of property and equipment	(29,268)	(32,571)
Investment in businesses	(500)	(623)
Proceeds from sale of assets and businesses	7
Net cash used in investing activities	(30,206)	(33,799)
Financing activities
Principal payments on other debt	(80)	(37)
Intercompany	89,876	(36,170)
Purchase of non-controlling interests	(50)	(1,294)
Net cash provided by financing activities	89,746	(37,501)
Net increase (decrease) in cash and cash equivalents	369	5,986
Cash and cash equivalents at beginning of period	6,467	3,706
Cash and cash equivalents at end of period	6,836	9,692
Select | Reportable legal entities | Non-Guarantor Subsidiaries
Operating activities
Net income	7,531	5,092
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	18	22
Depreciation and amortization	3,620	2,719
Provision for bad debts	3,355	1,985
Equity in earnings of unconsolidated subsidiaries	(28)	(25)
Loss (gain) on sale of assets and businesses	(4,671)	16
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(28,521)	(13,913)
Other current assets	(1,511)	(522)
Other assets	15,072	19
Accounts payable	(5,410)	(4,242)
Accrued expenses	3,940	1,040
Net cash provided by (used in) operating activities	(6,605)	(7,809)
Investing activities
Purchases of property and equipment	(9,762)	(6,078)
Proceeds from sale of assets and businesses	19,505	3
Net cash used in investing activities	9,743	(6,075)
Financing activities
Principal payments on other debt	(695)	(557)
Intercompany	(4,864)	18,829
Proceeds from issuance of non-controlling interests	2,094
Distributions to non-controlling interests	(1,324)
Net cash provided by financing activities	(4,789)	18,272
Net increase (decrease) in cash and cash equivalents	(1,651)	4,388
Cash and cash equivalents at beginning of period	5,056	625
Cash and cash equivalents at end of period	3,405	5,013
Select | Reportable legal entities | Non-Guarantor Concentra
Operating activities
Net income	11,828	5,458
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	16,123	15,376
Provision for bad debts	5,571	3,714
Stock compensation expense	306	192
Amortization of debt discount, premium and issuance costs	832	853
Deferred income taxes	(4,430)	(181)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(17,188)	(6,889)
Other current assets	780	9,143
Other assets	164	(995)
Accounts payable	2,554	1,388
Accrued expenses	(5,290)	1,385
Income taxes	11,164	2,887
Net cash provided by (used in) operating activities	22,414	32,331
Investing activities
Acquisition of businesses, net of cash acquired	(9,121)	(3,624)
Purchases of property and equipment	(8,686)	(3,210)
Net cash used in investing activities	(17,807)	(6,834)
Financing activities
Payments on revolving facilities		(5,000)
Payments on term loans	(23,065)	(1,125)
Principal payments on other debt	(796)	(842)
Distributions to non-controlling interests	(2,283)	(629)
Net cash provided by financing activities	(26,144)	(7,596)
Net increase (decrease) in cash and cash equivalents	(21,537)	17,901
Cash and cash equivalents at beginning of period	76,435	6,034
Cash and cash equivalents at end of period	54,898	23,935
Select | Eliminations
Operating activities
Net income	(34,503)	(32,475)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of consolidated subsidiaries	$ 34,503	$ 32,475