Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended September 30, 2019



☐	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

SELECT MEDICAL HOLDINGS CORPORATION

(Exact name of Registrant as specified in its Charter)



Delaware		20-1764048
(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

(Registrant’s telephone number, including area code)

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



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

Indicate by check mark whether the Registrant (1) has 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging Growth Company	☐

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. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2019, Select Medical Holdings Corporation had outstanding 134,326,112 shares of common stock.

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 Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and its subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra.

Table of Contents

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	8

	Notes to condensed consolidated financial statements	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50

ITEM 4.	CONTROLS AND PROCEDURES	50

PART II	OTHER INFORMATION	51

ITEM 1.	LEGAL PROCEEDINGS	51

ITEM 1A.	RISK FACTORS	53

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53

ITEM 4.	MINE SAFETY DISCLOSURES	53

ITEM 5.	OTHER INFORMATION	53

ITEM 6.	EXHIBITS	54

SIGNATURES

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)



	December 31, 2018		September 30, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	175,178	$	135,963
Accounts receivable	706,676		798,805
Prepaid income taxes	20,539		18,804
Other current assets	90,131		96,721
Total Current Assets	992,524		1,050,293
Operating lease right-of-use assets	—		986,519
Property and equipment, net	979,810		997,467
Goodwill	3,320,726		3,382,656
Identifiable intangible assets, net	437,693		415,763
Other assets	233,512		322,058
Total Assets	$	5,964,265	$	7,154,756
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	25,083	$	—
Current operating lease liabilities	—		204,936
Current portion of long-term debt and notes payable	43,865		15,656
Accounts payable	146,693		136,801
Accrued payroll	172,386		170,294
Accrued vacation	110,660		119,286
Accrued interest	12,137		10,112
Accrued other	190,691		209,887
Income taxes payable	3,671		2,815
Total Current Liabilities	705,186		869,787
Non-current operating lease liabilities	—		836,205
Long-term debt, net of current portion	3,249,516		3,336,506
Non-current deferred tax liability	153,895		147,567
Other non-current liabilities	158,940		105,251
Total Liabilities	4,267,537		5,295,316
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	780,488		953,697
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,171,529 shares issued and outstanding at 2018 and 2019, respectively	135		134
Capital in excess of par	482,556		485,415
Retained earnings	320,351		269,169
Total Stockholders’ Equity	803,042		754,718
Non-controlling interests	113,198		151,025
Total Equity	916,240		905,743
Total Liabilities and Equity	$	5,964,265	$	7,154,756

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)



	For the Three Months Ended September 30,
	2018			2019
Net operating revenues	$	1,267,401		$	1,393,343
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,087,062			1,183,111
General and administrative	29,975			34,385
Depreciation and amortization	50,527			52,941
Total costs and expenses	1,167,564			1,270,437
Income from operations	99,837			122,906
Other income and expense:
Loss on early retirement of debt	—			(18,643		)
Equity in earnings of unconsolidated subsidiaries	5,432			6,950
Gain on sale of businesses (Note 5)	2,139			—
Interest expense	(50,669		)	(54,336		)
Income before income taxes	56,739			56,877
Income tax expense	14,060			12,847
Net income	42,679			44,030
Less: Net income attributable to non-controlling interests	9,762			13,298
Net income attributable to Select Medical Holdings Corporation	$	32,917		$	30,732
Earnings per common share (Note 12):
Basic	$	0.24		$	0.23
Diluted	$	0.24		$	0.23

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)



	For the Nine Months Ended September 30,
	2018			2019
Net operating revenues	$	3,816,575		$	4,079,338
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	3,247,606			3,465,353
General and administrative	90,951			94,401
Depreciation and amortization	149,022			160,072
Total costs and expenses	3,487,579			3,719,826
Income from operations	328,996			359,512
Other income and expense:
Loss on early retirement of debt	(10,255		)	(18,643		)
Equity in earnings of unconsolidated subsidiaries	14,914			18,710
Gain on sale of businesses (Note 5)	9,016			6,532
Interest expense	(147,991		)	(156,611		)
Income before income taxes	194,680			209,500
Income tax expense	47,460			52,140
Net income	147,220			157,360
Less: Net income attributable to non-controlling interests	34,053			40,978
Net income attributable to Select Medical Holdings Corporation	$	113,167		$	116,382
Earnings per common share (Note 12):
Basic	$	0.84		$	0.86
Diluted	$	0.84		$	0.86

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)



	For the Nine Months Ended September 30, 2019

			Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value			Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	135,266		$	135		$	482,556		$	320,351		$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Holdings Corporation									40,834			40,834						40,834
Net income attributable to non-controlling interests												—			4,810			4,810
Issuance of restricted stock	21		0			0						—						—
Forfeitures of unvested restricted stock	(24	)	0			0						—						—
Vesting of restricted stock						5,488						5,488						5,488
Issuance of non-controlling interests												—			6,837			6,837
Distributions to and purchases of non-controlling interests						259						259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests									(47,470		)	(47,470		)				(47,470		)
Other									(122		)	(122		)	413			291
Balance at March 31, 2019	135,263		$	135		$	488,303		$	313,593		$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Holdings Corporation									44,816			44,816						44,816
Net income attributable to non-controlling interests												—			3,663			3,663
Issuance of restricted stock	187		0			0						—						—
Vesting of restricted stock						5,591						5,591						5,591
Repurchase of common shares	(936	)	0			(8,164		)	(5,456		)	(13,620		)				(13,620		)
Exercise of stock options	50		0			459						459						459
Issuance of non-controlling interests						6,366						6,366			24,761			31,127
Distributions to and purchases of non-controlling interests						14						14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests									270			270						270
Other									82			82			428			510
Balance at June 30, 2019	134,564		$	135		$	492,569		$	353,305		$	846,009		$	149,941		$	995,950
Net income attributable to Select Medical Holdings Corporation									30,732			30,732						30,732
Net income attributable to non-controlling interests												—			7,202			7,202
Issuance of restricted stock	1,069		1			(1		)				—						—
Forfeitures of unvested restricted stock	(12	)	0			0						—						—
Vesting of restricted stock						6,050						6,050						6,050
Repurchase of common shares	(1,494	)	(2		)	(13,616		)	(10,071		)	(23,689		)				(23,689		)
Exercise of stock options	45		0			413						413						413
Distributions to and purchases of non-controlling interests												—			(6,538		)	(6,538		)
Redemption adjustment on non-controlling interests									(104,553		)	(104,553		)				(104,553		)
Other									(244		)	(244		)	420			176
Balance at September 30, 2019	134,172		$	134		$	485,415		$	269,169		$	754,718		$	151,025		$	905,743

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)



	For the Nine Months Ended September 30, 2018

			Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Holdings Corporation								33,739			33,739						33,739
Net income attributable to non-controlling interests											—			4,500			4,500
Issuance of restricted stock	4		0		0						—						—
Forfeitures of unvested restricted stock	(88	)	0		0						—						—
Vesting of restricted stock					4,717						4,717						4,717
Repurchase of common shares	(7	)	0		(69		)	(53		)	(122		)				(122		)
Exercise of stock options	80		0		738						738						738
Issuance and exchange of non-controlling interests								74,341			74,341						74,341
Distributions to and purchases of non-controlling interests								(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests								(1,051		)	(1,051		)				(1,051		)
Other								103			103			35			138
Balance at March 31, 2018	134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277
Net income attributable to Select Medical Holdings Corporation								46,511			46,511						46,511
Net income attributable to non-controlling interests											—			3,139			3,139
Issuance of restricted stock	170		0		0						—						—
Vesting of restricted stock					4,845						4,845						4,845
Repurchase of common shares	(42	)	0		(421		)	(346		)	(767		)				(767		)
Exercise of stock options	95		0		882						882						882
Issuance and exchange of non-controlling interests					1,553						1,553			1,921			3,474
Distributions to and purchases of non-controlling interests					(932		)	(384		)	(1,316		)	(1,958		)	(3,274		)
Redemption adjustment on non-controlling interests								(8,500		)	(8,500		)				(8,500		)
Other								(337		)	(337		)	677			340
Balance at June 30, 2018	134,327		$	134	$	474,812		$	420,525		$	895,471		$	116,456		$	1,011,927
Net income attributable to Select Medical Holdings Corporation								32,917			32,917						32,917
Net income attributable to non-controlling interests											—			518			518
Issuance of restricted stock	1,048		1		(1		)				—						—
Vesting of restricted stock					5,497						5,497						5,497
Repurchase of common shares	(236	)	0		(2,499		)	(2,252		)	(4,751		)				(4,751		)
Exercise of stock options	1		0		13						13						13
Distributions to and purchases of non-controlling interests											—			(4,419		)	(4,419		)
Redemption adjustment on non-controlling interests								(154,514		)	(154,514		)				(154,514		)
Other								(41		)	(41		)	421			380
Balance at September 30, 2018	135,140		$	135	$	477,822		$	296,635		$	774,592		$	112,976		$	887,568

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

Table of Contents

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)



	For the Nine Months Ended September 30,
	2018			2019
Operating activities
Net income	$	147,220		$	157,360
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	10,734			13,609
Depreciation and amortization	149,022			160,072
Provision for bad debts	(373		)	2,344
Equity in earnings of unconsolidated subsidiaries	(14,914		)	(18,710		)
Loss on extinguishment of debt	484			10,160
Gain on sale of assets and businesses	(9,129		)	(6,349		)
Stock compensation expense	17,175			19,431
Amortization of debt discount, premium and issuance costs	9,845			9,469
Deferred income taxes	(2,092		)	(7,247		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	23,495			(93,425		)
Other current assets	(10,274		)	(6,016		)
Other assets	4,828			1,259
Accounts payable	(3,507		)	1,369
Accrued expenses	49,391			22,396
Income taxes	9,072			918
Net cash provided by operating activities	380,977			266,640
Investing activities
Business combinations, net of cash acquired	(519,258		)	(86,269		)
Purchases of property and equipment	(121,039		)	(123,956		)
Investment in businesses	(12,936		)	(60,668		)
Proceeds from sale of assets and businesses	6,691			183
Net cash used in investing activities	(646,542		)	(270,710		)
Financing activities
Borrowings on revolving facilities	420,000			700,000
Payments on revolving facilities	(585,000		)	(720,000		)
Proceeds from term loans	779,904			593,683
Payments on term loans	(8,625		)	(375,084		)
Proceeds from 6.250% senior notes	—			539,176
Payment on 6.375% senior notes	—			(710,000		)
Revolving facility debt issuance costs	(1,333		)	(310		)
Borrowings of other debt	30,134			19,282
Principal payments on other debt	(17,971		)	(22,628		)
Repurchase of common stock	(5,640		)	(37,309		)
Proceeds from exercise of stock options	1,633			872
Decrease in overdrafts	(6,172		)	(25,083		)
Proceeds from issuance of non-controlling interests	2,926			18,288
Distributions to and purchases of non-controlling interests	(306,427		)	(16,032		)
Net cash provided by (used in) financing activities	303,429			(35,145		)
Net increase (decrease) in cash and cash equivalents	37,864			(39,215		)
Cash and cash equivalents at beginning of period	122,549			175,178
Cash and cash equivalents at end of period	$	160,413		$	135,963
Supplemental Information
Cash paid for interest	$	134,378		$	149,090
Cash paid for taxes	40,460			58,472
Non-cash equity exchange for acquisition of U.S. HealthWorks	238,000			—

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

Table of Contents

SELECT MEDICAL HOLDINGS 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, 2019, and for the three and nine month periods ended September 30, 2018 and 2019, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019.


2.	Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Credit Risk Concentrations

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

Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% and 15% of the Company’s accounts receivable is from Medicare at December 31, 2018, and September 30, 2019, respectively.

Leases

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

Balance Sheet

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

Table of Contents

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

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

Statement of Operations

For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the subleases. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.

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

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

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

Recent Accounting Pronouncements

Financial Instruments

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

The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s financial instruments, the impact of ASU 2016-13 will not be material to the Company’s consolidated financial statements.

The Company’s implementation efforts are focused on finalizing the accounting processes and related controls associated with accounting for its financial instruments under the new standard.

Table of Contents

Recently Adopted Accounting Pronouncements

Leases

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

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

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


3.	Redeemable Non-Controlling Interests

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

The changes in redeemable non-controlling interests are as follows (in thousands):



	Nine Months Ended September 30,
	2018			2019
Balance as of January 1	$	640,818		$	780,488
Net income attributable to redeemable non-controlling interests	5,743			7,700
Issuance and exchange of redeemable non-controlling interests	163,659			—
Distributions to and purchases of redeemable non-controlling interests	(203,972		)	(2,771		)
Redemption adjustment on redeemable non-controlling interests	1,051			47,470
Other	175			354
Balance as of March 31	$	607,474		$	833,241
Net income attributable to redeemable non-controlling interests	10,909			11,507
Distributions to and purchases of redeemable non-controlling interests	(11,112		)	(395		)
Redemption adjustment on redeemable non-controlling interests	8,500			(270		)
Other	461			339
Balance as of June 30	$	616,232		$	844,422
Net income attributable to redeemable non-controlling interests	9,244			6,096
Distributions to and purchases of redeemable non-controlling interests	(763		)	(1,721		)
Redemption adjustment on redeemable non-controlling interests	154,514			104,553
Other	347			347
Balance as of September 30	$	779,574		$	953,697

Table of Contents


4.	Acquisitions

U.S. HealthWorks Acquisition

On February 1, 2018, Concentra Inc. acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, from Dignity Health Holding Corporation (“DHHC”).

U.S. HealthWorks was acquired for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.

For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.

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



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

For the three months ended September 30, 2018, U.S. HealthWorks contributed net operating revenues of $133.3 million which is reflected in the Company’s consolidated statement of operations. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks contributed net operating revenues of $362.7 million which is reflected in the Company’s consolidated statement of operations for the nine months ended September 30, 2018. Due to the integrated nature of the Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.

Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date. For the three and nine months ended September 30, 2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.



	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
	(in thousands)
Net operating revenues	$	1,267,401	$	3,864,155
Net income attributable to Select Medical Holdings Corporation	34,441		116,135