UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2017

OR

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

For the transition period from              to              

Commission file numbers: 001-34465 and 001-31441

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its Charter)

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

4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055
(Address of Principal Executive Offices and Zip code)

(717) 972-1100

(Registrants’ telephone number, including area code)

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.   Yes 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 October 31, 2017, Select Medical Holdings Corporation had outstanding 133,824,559 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	6
	Condensed consolidated statements of cash flows	7
	Notes to condensed consolidated financial statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 4.	CONTROLS AND PROCEDURES	52
PART II	OTHER INFORMATION	53
ITEM 1.	LEGAL PROCEEDINGS	53
ITEM 1A.	RISK FACTORS	55
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57
ITEM 4.	MINE SAFETY DISCLOSURES	57
ITEM 5.	OTHER INFORMATION	57
ITEM 6.	EXHIBITS	57
SIGNATURES

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		September 30,		December 31,			September 30,
	2016		2017		2016			2017
ASSETS
Current Assets:
Cash and cash equivalents	$	99,029	$	107,300	$	99,029		$	107,300
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively	573,752		716,426		573,752			716,426
Prepaid income taxes	12,423		—		12,423			—
Other current assets	77,699		80,324		77,699			80,324
Total Current Assets	762,903		904,050		762,903			904,050
Property and equipment, net	892,217		946,063		892,217			946,063
Goodwill	2,751,000		2,767,896		2,751,000			2,767,896
Identifiable intangible assets, net	340,562		331,036		340,562			331,036
Other assets	173,944		174,762		173,944			174,762
Total Assets	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	39,362	$	18,923	$	39,362		$	18,923
Current portion of long-term debt and notes payable	13,656		37,560		13,656			37,560
Accounts payable	126,558		133,321		126,558			133,321
Accrued payroll	146,397		139,402		146,397			139,402
Accrued vacation	83,261		89,171		83,261			89,171
Accrued interest	22,325		30,998		22,325			30,998
Accrued other	140,076		143,443		140,076			143,443
Income taxes payable	—		6,718		—			6,718
Total Current Liabilities	571,635		599,536		571,635			599,536
Long-term debt, net of current portion	2,685,333		2,752,742		2,685,333			2,752,742
Non-current deferred tax liability	199,078		191,441		199,078			191,441
Other non-current liabilities	136,520		138,118		136,520			138,118
Total Liabilities	3,592,566		3,681,837		3,592,566			3,681,837
Commitments and contingencies (Note 8)
Redeemable non-controlling interests	422,159		621,515		422,159			621,515
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 shares issued and outstanding at 2016 and 2017, respectively	132		133		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Capital in excess of par	443,908		459,004		925,111			942,142
Retained earnings (accumulated deficit)	371,685		262,505		(109,386		)	(220,500		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	815,725		721,642		815,725			721,642
Non-controlling interests	90,176		98,813		90,176			98,813
Total Equity	905,901		820,455		905,901			820,455
Total Liabilities and Equity	$	4,920,626	$	5,123,807	$	4,920,626		$	5,123,807

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 September 30,						For the Three Months Ended September 30,
	2016			2017			2016			2017
Net operating revenues	$	1,053,795		$	1,097,166		$	1,053,795		$	1,097,166
Costs and expenses:
Cost of services	915,703			938,910			915,703			938,910
General and administrative	27,088			27,065			27,088			27,065
Bad debt expense	17,677			20,321			17,677			20,321
Depreciation and amortization	37,165			38,772			37,165			38,772
Total costs and expenses	997,633			1,025,068			997,633			1,025,068
Income from operations	56,162			72,098			56,162			72,098
Other income and expense:
Loss on early retirement of debt	(10,853		)	—			(10,853		)	—
Equity in earnings of unconsolidated subsidiaries	5,268			4,431			5,268			4,431
Non-operating loss	(1,028		)	—			(1,028		)	—
Interest expense	(44,482		)	(37,688		)	(44,482		)	(37,688		)
Income before income taxes	5,067			38,841			5,067			38,841
Income tax expense	1,075			14,017			1,075			14,017
Net income	3,992			24,824			3,992			24,824
Less: Net income (loss) attributable to non-controlling interests	(2,479		)	6,362			(2,479		)	6,362
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	6,471		$	18,462		$	6,471		$	18,462
Income per common share:
Basic	$	0.05		$	0.14
Diluted	$	0.05		$	0.14
Weighted average shares outstanding:
Basic	127,848			129,142
Diluted	127,989			129,322

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

4

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Net operating revenues	$	3,239,756		$	3,329,202		$	3,239,756		$	3,329,202
Costs and expenses:
Cost of services	2,754,950			2,787,497			2,754,950			2,787,497
General and administrative	81,226			83,415			81,226			83,415
Bad debt expense	51,591			59,120			51,591			59,120
Depreciation and amortization	107,887			119,644			107,887			119,644
Total costs and expenses	2,995,654			3,049,676			2,995,654			3,049,676
Income from operations	244,102			279,526			244,102			279,526
Other income and expense:
Loss on early retirement of debt	(11,626		)	(19,719		)	(11,626		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	14,466			15,618			14,466			15,618
Non-operating gain (loss)	37,094			(49		)	37,094			(49		)
Interest expense	(127,662		)	(116,196		)	(127,662		)	(116,196		)
Income before income taxes	156,374			159,180			156,374			159,180
Income tax expense	51,585			59,593			51,585			59,593
Net income	104,789			99,587			104,789			99,587
Less: Net income attributable to non-controlling interests	9,550			23,200			9,550			23,200
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	95,239		$	76,387		$	95,239		$	76,387
Income per common share:
Basic	$	0.72		$	0.57
Diluted	$	0.72		$	0.57
Weighted average shares outstanding:
Basic	127,659			128,745
Diluted	127,804			128,916

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

5

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											76,387			76,387						76,387
Net income attributable to non-controlling interests	18,519													—			4,681			4,681
Issuance and vesting of restricted stock				1,323		1		13,445						13,446						13,446
Repurchase of common shares				(220	)	0		(1,934		)	(1,669		)	(3,603		)				(3,603		)
Exercise of stock options				185		0		1,634						1,634						1,634
Issuance of non-controlling interests								1,951						1,951			8,944			10,895
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(4,003		)											—			(5,153		)	(5,153		)
Redemption adjustment on non-controlling interests	184,294										(184,294		)	(184,294		)				(184,294		)
Other	673										389			389			165			554
Balance at September 30, 2017	$	621,515		133,885		$	133	$	459,004		$	262,505		$	721,642		$	98,813		$	820,455

				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									76,387			76,387						76,387
Net income attributable to non-controlling interests	18,519											—			4,681			4,681
Additional investment by Holdings							1,634					1,634						1,634
Dividends declared and paid to Holdings									(3,603		)	(3,603		)				(3,603		)
Contribution related to restricted stock awards and stock option issuances by Holdings							13,446					13,446						13,446
Issuance of non-controlling interests							1,951					1,951			8,944			10,895
Purchase of non-controlling interests	(127		)						7			7						7
Distributions to non-controlling interests	(4,003		)									—			(5,153		)	(5,153		)
Redemption adjustment on non-controlling interests	184,294								(184,294		)	(184,294		)				(184,294		)
Other	673								389			389			165			554
Balance at September 30, 2017	$	621,515		0	$	0	$	942,142	$	(220,500	)	$	721,642		$	98,813		$	820,455

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

6

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Operating activities
Net income	$	104,789		$	99,587		$	104,789		$	99,587
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	16,145			14,542			16,145			14,542
Depreciation and amortization	107,887			119,644			107,887			119,644
Provision for bad debts	51,591			59,120			51,591			59,120
Equity in earnings of unconsolidated subsidiaries	(14,466		)	(15,618		)	(14,466		)	(15,618		)
Loss on extinguishment of debt	11,626			6,527			11,626			6,527
Gain on sale or disposal of assets and businesses	(41,910		)	(9,499		)	(41,910		)	(9,499		)
Gain on sale of equity investment	(241		)	—			(241		)	—
Impairment of equity investment	5,339			—			5,339			—
Stock compensation expense	12,924			14,227			12,924			14,227
Amortization of debt discount, premium and issuance costs	11,845			8,546			11,845			8,546
Deferred income taxes	(13,088		)	(6,126		)	(13,088		)	(6,126		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(40,776		)	(201,514		)	(40,776		)	(201,514		)
Other current assets	12,094			(2,677		)	12,094			(2,677		)
Other assets	5,146			1,407			5,146			1,407
Accounts payable	(17,752		)	3,913			(17,752		)	3,913
Accrued expenses	52,996			18,752			52,996			18,752
Due to third party payors	11,065			—			11,065			—
Income taxes	5,547			19,141			5,547			19,141
Net cash provided by operating activities	280,761			129,972			280,761			129,972
Investing activities
Business combinations, net of cash acquired	(414,231		)	(19,371		)	(414,231		)	(19,371		)
Purchases of property and equipment	(118,260		)	(173,800		)	(118,260		)	(173,800		)
Investment in businesses	(3,140		)	(11,374		)	(3,140		)	(11,374		)
Proceeds from sale of assets, businesses, and equity investment	72,629			34,555			72,629			34,555
Net cash used in investing activities	(463,002		)	(169,990		)	(463,002		)	(169,990		)
Financing activities
Borrowings on revolving facilities	420,000			805,000			420,000			805,000
Payments on revolving facilities	(545,000		)	(705,000		)	(545,000		)	(705,000		)
Proceeds from term loans	795,344			1,139,487			795,344			1,139,487
Payments on term loans	(434,842		)	(1,176,567		)	(434,842		)	(1,176,567		)
Revolving facility debt issuance costs	—			(4,392		)	—			(4,392		)
Borrowings of other debt	23,801			27,571			23,801			27,571
Principal payments on other debt	(15,477		)	(15,112		)	(15,477		)	(15,112		)
Repurchase of common stock	(1,939		)	(3,603		)	—			—
Dividends paid to Holdings	—			—			(1,939		)	(3,603		)
Proceeds from exercise of stock options	1,488			1,634			—			—
Equity investment by Holdings	—			—			1,488			1,634
Repayments of overdrafts	(8,464		)	(20,439		)	(8,464		)	(20,439		)
Proceeds from issuance of non-controlling interests	11,846			8,986			11,846			8,986
Purchase of non-controlling interests	(1,530		)	(120		)	(1,530		)	(120		)
Distributions to non-controlling interests	(9,198		)	(9,156		)	(9,198		)	(9,156		)
Net cash provided by financing activities	236,029			48,289			236,029			48,289
Net increase in cash and cash equivalents	53,788			8,271			53,788			8,271
Cash and cash equivalents at beginning of period	14,435			99,029			14,435			99,029
Cash and cash equivalents at end of period	$	68,223		$	107,300		$	68,223		$	107,300
Supplemental Information
Cash paid for interest	$	92,928		$	101,341		$	92,928		$	101,341
Cash paid for taxes	$	59,937		$	46,553		$	59,937		$	46,553

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

7

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, 2017, and for the three and nine month periods ended September 30, 2016 and 2017, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 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 contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 will be applied prospectively and 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 plans to adopt the guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

8

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.

The Company will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

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 standards require the selection of a retrospective or cumulative effect transition method.

The Company will implement the new standard 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 is not expected to materially change upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.

The Company’s remaining implementation efforts are 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

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the condensed consolidated balance sheet at December 31, 2016 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 quarter 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

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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 September 30, 2016 and for the three and nine months ended September 30, 2017 include Physiotherapy for the entire period. There were no pro forma adjustments during these periods; therefore, no pro forma information is presented.

	Nine Months Ended September 30, 2016
	(in thousands, except per share amounts)
Net revenue	$	3,293,286
Net income attributable to Holdings	93,418
Income per common share:
Basic	$	0.71
Diluted	$	0.71

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 nine months ended September 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

The Company completed acquisitions within our specialty hospitals, outpatient rehabilitation, and Concentra segments during the nine months ended September 30, 2017. The Company provided total consideration of $21.7 million, consisting principally of $19.4 million of cash and the issuance of non-controlling interests. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $0.8 million, $1.8 million, and $14.5 million of goodwill was recognized in our specialty hospitals, outpatient rehabilitation, and Concentra reporting units, respectively.

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4.Intangible Assets and Liabilities

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, 2017:

	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	797			1,768		14,505		17,070
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of September 30, 2017	$	1,447,861		$	645,493	$	674,542	$	2,767,896

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

Identifiable Intangible Assets and Liabilities

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

	December 31, 2016							September 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Indefinite-lived assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	17,026		—			17,026		19,166		—			19,166
Accreditations	2,235		—			2,235		1,965		—			1,965
Finite-lived assets:
Customer relationships	142,198		(23,185		)	119,013		143,953		(34,482		)	109,471
Favorable leasehold interests	13,089		(2,317		)	10,772		13,295		(3,745		)	9,550
Non-compete agreements	26,655		(1,837		)	24,818		27,555		(3,369		)	24,186
Total identifiable intangible assets	$	367,901	$	(27,339	)	$	340,562	$	372,632	$	(41,596	)	$	331,036
Finite-lived liabilities:
Unfavorable leasehold interests	$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(2,529	)	$	2,814

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $4.1 million and $4.4 million for the three months ended September 30, 2016 and 2017, respectively. Amortization expense was $12.2 million and $13.1 million for the nine months ended September 30, 2016 and 2017, respectively.

The Company’s favorable and unfavorable leasehold interests 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 not separately presented on the condensed consolidated balance sheets but are included as a component of accrued other and other non-current liabilities.

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At September 30, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.1 years, respectively.

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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 as of September 30, 2017 are as follows (in thousands):

	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	835		$	(7,032	)	$	703,803	$	731,300
Credit facilities:
Revolving facility	320,000		—			—			320,000		294,400
Term loan	1,144,250		(12,962		)	(13,019		)	1,118,269		1,158,553
Other	35,184		—			—			35,184		35,184
Total Select debt	2,209,434		(12,127		)	(20,051		)	2,177,256		2,219,437
Concentra:
Credit facilities:
Term loan	619,175		(2,385		)	(11,268		)	605,522		620,917
Other	7,524		—			—			7,524		7,524
Total Concentra debt	626,699		(2,385		)	(11,268		)	613,046		628,441
Total debt	$	2,836,133	$	(14,512	)	$	(31,319	)	$	2,790,302	$	2,847,878

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

	2017		2018		2019		2020		2021		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	—	$	710,000	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		—		320,000		320,000
Term loan	2,875		11,500		11,500		11,500		11,500		1,095,375		1,144,250
Other	17,828		5,437		11,827		68		14		10		35,184
Total Select debt	20,703		16,937		23,327		11,568		721,514		1,415,385		2,209,434
Concentra:
Credit facilities:
Term loan	—		—		—		3,016		6,520		609,639		619,175
Other	657		2,843		144		161		160		3,559			7,524
Total Concentra debt	657		2,843		144		3,177		6,680		613,198		626,699
Total debt	$	21,360	$	19,780	$	23,471	$	14,745	$	728,194	$	2,028,583	$	2,836,133

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The Company’s long-term debt and notes payable as of December 31, 2016 are as follows (in thousands):

	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	1,006		$	(8,461	)	$	702,545	$	710,000
Credit facilities:
Revolving facility	220,000		—			—			220,000		204,600
Term loans	1,147,751		(11,967		)	(13,581		)	1,122,203		1,165,860
Other	22,688		—			—			22,688		22,688
Total Select debt	2,100,439		(10,961		)	(22,042		)	2,067,436		2,103,148
Concentra:
Credit facilities:
Term loan	642,239		(2,773		)	(13,091		)	626,375		644,648
Other	5,178		—			—			5,178		5,178
Total Concentra debt	647,417		(2,773		)	(13,091		)	631,553		649,826
Total debt	$	2,747,856	$	(13,734	)	$	(35,133	)	$	2,698,989	$	2,752,974

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) repay 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, which resulted in $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.

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 (iii) 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.

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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 September 30, 2017, Select’s leverage ratio was 5.82 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.

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, as defined in the Concentra credit facilities.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s 6.375% senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

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

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6.  Segment Information

The Company’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 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 September 30,						Nine Months Ended September 30,
	2016			2017			2016			2017
	(in thousands)
Net operating revenues:
Specialty hospitals	$	544,491		$	585,288		$	1,729,261		$	1,785,035
Outpatient rehabilitation(1)	250,710			250,527			745,720			764,450
Concentra	258,507			261,295			764,252			779,030
Other	87			56			523			687
Total Company	$	1,053,795		$	1,097,166		$	3,239,756		$	3,329,202
Adjusted EBITDA:
Specialty hospitals	$	48,264		$	69,454		$	217,759		$	256,291
Outpatient rehabilitation(1)	31,995			29,298			99,006			102,575
Concentra	40,888			40,003			118,080			125,656
Other	(23,070		)	(22,928		)	(66,696		)	(71,125		)
Total Company	$	98,077		$	115,827		$	368,149		$	413,397
Total assets:(2)
Specialty hospitals	$	2,469,060		$	2,748,761		$	2,469,060		$	2,748,761