Select Medical Holdings Corporation Announces Results For Its Third Quarter Ended September 30, 2017

I.  Condensed Consolidated Statements of Operations

For the Three Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

2016

2017

% Change

Net operating revenues

$     1,053,795

$     1,097,166

4.1%

Costs and expenses:

Cost of services

915,703

938,910

2.5

General and administrative

27,088

27,065

(0.1)

Bad debt expense

17,677

20,321

15.0

Depreciation and amortization

37,165

38,772

4.3

Income from operations

56,162

72,098

28.4

Loss on early retirement of debt

(10,853)

—

N/M 

Equity in earnings of unconsolidated subsidiaries

5,268

4,431

(15.9)

Non-operating loss

(1,028)

—

N/M 

Interest expense

(44,482)

(37,688)

(15.3)

Income before income taxes

5,067

38,841

666.5

Income tax expense

1,075

14,017

1,203.9

Net income

3,992

24,824

521.8

Less: Net income (loss) attributable to 
     non-controlling interests

(2,479)

6,362

(356.6)

Net income attributable to Select Medical 
     Holdings Corporation

$            6,471

$          18,462

185.3%

Weighted average shares outstanding⁽¹⁾:

     Basic

127,848

129,142

     Diluted

127,989

129,322

Income per common share⁽¹⁾:

     Basic

$              0.05

$             0.14

     Diluted

$              0.05

$             0.14

(1)       Under the two-class method for calculating income per common share, unvested restricted stock is a separate,
            participating class. Income per common share and weighted average common shares outstanding exclude 
            amounts attributed to the unvested restricted class of stockholders. Net income allocated to the unvested 
            restricted stockholders was $0.6 million and $0.2 million for the three months ended September 30, 2017 and 
            2016, respectively. Unvested restricted weighted average shares were 4,395 thousand and 4,270 thousand for the 
            three months ended September 30, 2017 and 2016, respectively.

N/M = Not Meaningful

II.  Condensed Consolidated Statements of Operations

For the Nine Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

2016

2017

% Change

Net operating revenues

$      3,239,756

$      3,329,202

2.8%

Costs and expenses:

Cost of services

2,754,950

2,787,497

1.2

General and administrative

81,226

83,415

2.7

Bad debt expense

51,591

59,120

14.6

Depreciation and amortization

107,887

119,644

10.9

Income from operations

244,102

279,526

14.5

Loss on early retirement of debt

(11,626)

(19,719)

N/M

Equity in earnings of unconsolidated subsidiaries

14,466

15,618

8.0

Non-operating gain (loss)

37,094

(49)

N/M

Interest expense

(127,662)

(116,196)

(9.0)

Income before income taxes

156,374

159,180

1.8

Income tax expense

51,585

59,593

15.5

Net income

104,789

99,587

(5.0)

Less: Net income attributable to 
     non-controlling interests

9,550

23,200

142.9

Net income attributable to Select Medical 
     Holdings Corporation

$           95,239

$           76,387

Weighted average shares outstanding⁽¹⁾:

     Basic

127,659

128,745

     Diluted

127,804

128,916

Income per common share⁽¹⁾:

     Basic

$              0.72

$              0.57

     Diluted

$              0.72

$              0.57

(1)       Under the two-class method for calculating income per common share, unvested restricted stock is a separate,
            participating class. Income per common share and weighted average common shares outstanding exclude 
            amounts attributed to the unvested restricted class of stockholders. Net income allocated to the unvested 
            restricted stockholders was $2.5 million and $2.9 million for the nine months ended September 30, 2017 and 
            2016, respectively. Unvested restricted weighted average shares were 4,291 thousand and 3,941 thousand for the 
            nine months ended September 30, 2017 and 2016, respectively.

N/M = Not Meaningful

III.  Condensed Consolidated Balance Sheets

(In thousands, unaudited)

December 31,
2016

September 30,
2017

Assets

Cash

$                99,029

$             107,300

Accounts receivable, net

573,752

716,426

Other current assets

90,122

80,324

Total Current Assets

762,903

904,050

Property and equipment, net

892,217

946,063

Goodwill

2,751,000

2,767,896

Identifiable intangible assets, net

340,562

331,036

Other assets

173,944

174,762

Total Assets

$            4,920,626

$           5,123,807

Liabilities and Equity

Payables and accruals

$               557,979

$             561,976

Current portion of long-term debt and notes payable

13,656

37,560

Total Current Liabilities

571,635

599,536

Long-term debt, net of current portion

2,685,333

2,752,742

Non-current deferred tax liability

199,078

191,441

Other non-current liabilities

136,520

138,118

Total Liabilities

3,592,566

3,681,837

Redeemable non-controlling interests

422,159

621,515

Total equity

905,901

820,455

Total Liabilities and Equity

$            4,920,626

$          5,123,807

IV.  Condensed Consolidated Statements of Cash Flows

For the Three Months Ended September 30, 2016 and 2017

(In thousands, unaudited)

2016

2017

Operating activities

Net income

$         3,992

$       24,824

Adjustments to reconcile net income to net cash provided by operating activities:

     Distributions from unconsolidated subsidiaries

4,106

3,609

     Depreciation and amortization

37,165

38,772

     Provision for bad debts

17,677

20,321

     Equity in earnings of unconsolidated subsidiaries

(5,268)

(4,431)

     Loss on extinguishment of debt

10,853

—

     Loss on sale or disposal of assets and businesses

1,496

24

     Gain on sale of equity investment

(241)

—

     Stock compensation expense

4,750

4,957

     Amortization of debt discount, premium and issuance costs

4,768

2,572

     Deferred income taxes

198

(4,652)

     Changes in operating assets and liabilities, net of effects of business
     combinations:

Accounts receivable

3,320

(22,511)

Other current assets

1,083

2,880

Other assets

638

(3,214)

Accounts payable and accrued expenses

30,464

26,739

Due to third party payors

11,065

—

Income taxes

(23,543)

(258)

Net cash provided by operating activities

102,523

89,632

Investing activities

Purchases of property and equipment

(38,002)

(68,498)

Investment in businesses

(1,550)

(1,500)

Business combinations, net of cash acquired

7,288

(863)

Proceeds from sale of assets, businesses, and equity investment

1,263

3

Net cash used in investing activities

(31,001)

(70,858)

Financing activities

Borrowings on revolving facilities

100,000

175,000

Payments on revolving facilities

(165,000)

(155,000)

Proceeds from term loans

195,217

—

Payments on term loans

(205,193)

(2,875)

Borrowings of other debt

1,719

18,127

Principal payments on other debt

(5,551)

(4,675)

Repurchase of common stock

(1,433)

(3,003)

Proceeds from exercise of stock options

831

671

Repayments of overdrafts

(6,326)

(15,211)

Proceeds from issuance of non-controlling interests

8,743

5,433

Purchase of non-controlling interests

(236)

—

Distributions to non-controlling interests

(4,490)

(3,740)

Net cash provided by (used in) financing activities

(81,719)

14,727

Net increase (decrease) in cash and cash equivalents

(10,197)

33,501

Cash and cash equivalents at beginning of period

78,420

73,799

Cash and cash equivalents at end of period

$        68,223

$    107,300

Supplemental Information

     Cash paid for interest

$        23,613

$       24,691

     Cash paid for taxes

$        24,419

$       18,927

V.  Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2016 and 2017

(In thousands, unaudited)

2016

2017

Operating activities

Net income

$     104,789

$        99,587

Adjustments to reconcile net income to net cash provided by operating activities:

     Distributions from unconsolidated subsidiaries

16,145

14,542

     Depreciation and amortization

107,887

119,644

     Provision for bad debts

51,591

59,120

     Equity in earnings of unconsolidated subsidiaries

(14,466)

(15,618)

     Loss on extinguishment of debt

11,626

6,527

     Gain on sale or disposal of assets and businesses

(41,910)

(9,499)

     Gain on sale of equity investment

(241)

—

     Impairment of equity investment

5,339

—

     Stock compensation expense

12,924

14,227

     Amortization of debt discount, premium and issuance costs

11,845

8,546

     Deferred income taxes

(13,088)

(6,126)

     Changes in operating assets and liabilities, net of effects of business
     combinations:

Accounts receivable

(40,776)

(201,514)

Other current assets

12,094

(2,677)

Other assets

5,146

1,407

Accounts payable and accrued expenses

35,244

22,665

Due to third party payors

11,065

—

Income taxes

5,547

19,141

Net cash provided by operating activities

280,761

129,972

Investing activities

Purchases of property and equipment

(118,260)

(173,800)

Investment in businesses

(3,140)

(11,374)

Business combinations, net of cash acquired

(414,231)

(19,371)

Proceeds from sale of assets, businesses, and equity investment

72,629

34,555

Net cash used in investing activities

(463,002)

(169,990)

Financing activities

Borrowings on revolving facilities

420,000

805,000

Payments on revolving facilities

(545,000)

(705,000)

Proceeds from term loans

795,344

1,139,487

Payments on term loans

(434,842)

(1,176,567)

Debt issuance costs

—

(4,392)

Borrowings of other debt

23,801

27,571

Principal payments on other debt

(15,477)

(15,112)

Repurchase of common stock

(1,939)

(3,603)

Proceeds from exercise of stock options

1,488

1,634

Repayments of overdrafts

(8,464)

(20,439)

Proceeds from issuance of non-controlling interests

11,846

8,986

Purchase of non-controlling interests

(1,530)

(120)

Distributions to non-controlling interests

(9,198)

(9,156)

Net cash provided by financing activities

236,029

48,289

Net increase in cash and cash equivalents

53,788

8,271

Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$       68,223

$     107,300

Supplemental Information

     Cash paid for interest

$       92,928

$     101,341

     Cash paid for taxes

$       59,937

$       46,553

VI.  Key Statistics

For the Three Months Ended September 30, 2016 and 2017

(unaudited)

2016

2017

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

104

101

Rehabilitation hospitals (a)

19

22

Total specialty hospitals

123

123

Net operating revenues (,000)

$      544,491

$      585,288

7.5%

Number of patient days (b)

296,202

316,170

6.7%

Number of admissions (b)

12,586

13,728

9.1%

Net revenue per patient day (b)(c)

$          1,642

$          1,676

2.1%

Adjusted EBITDA (,000)

$        48,264

$        69,454

43.9%

Adjusted EBITDA margin

8.9%

11.9%

Outpatient Rehabilitation

Number of clinics – end of period (d)

1,603

1,604

Net operating revenues (,000)

$     250,710

$     250,527

(0.1)%

Number of visits (e)

2,052,678

1,986,213

(3.2)%

Revenue per visit (e)(f)

$            102

$            104

2.0%

Adjusted EBITDA (,000)

$       31,995

$       29,298

(8.4)%

Adjusted EBITDA margin

12.8%

11.7%

Concentra

Number of centers – end of period (g)

301

312

Net operating revenues (,000)

$     258,507

$     261,295

1.1%

Number of visits (g)

1,906,242

1,979,481

3.8%

Revenue per visit (g)(h)

$            119

$            116

(2.5)%

Adjusted EBITDA (,000)

$       40,888

$       40,003

(2.2)%

Adjusted EBITDA margin

15.8%

15.3%

(a)     Includes managed hospitals.

(b)     Excludes managed hospitals.

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

(d)     Includes managed clinics.

(e)     Excludes managed clinics.

(f)      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 clinic direct 
          patient service revenue does not include managed clinics or contract therapy revenue.

(g)     Excludes onsite clinics and community-based outpatient clinics.

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

VII.  Key Statistics

For the Nine Months Ended September 30, 2016 and 2017

(unaudited)

2016

2017

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

104

101

Rehabilitation hospitals (a)

19

22

Total specialty hospitals

123

123

Net operating revenues (,000)

$   1,729,261

$   1,785,035

3.2%

Number of patient days (b)

951,292

950,419

(0.1)%

Number of admissions (b)

39,541

41,314

4.5%

Net revenue per patient day (b)(c)

$          1,651

$          1,707

3.4%

Adjusted EBITDA (,000)

$      217,759

$      256,291

17.7%

Adjusted EBITDA margin

12.6%

14.4%

Outpatient Rehabilitation

Number of clinics – end of period (d)

1,603

1,604

Net operating revenues (,000)

$      745,720

$     764,450

2.5%

Number of visits (e)

5,751,562

6,168,763

7.3%

Revenue per visit (e)(f)

$             102

$            103

1.0%

Adjusted EBITDA (,000)

$        99,006

$     102,575

3.6%

Adjusted EBITDA margin

13.3%

13.4%

Concentra

Number of centers – end of period (g)

301

312

Net operating revenues (,000)

$      764,252

$     779,030

1.9%

Number of visits (g)

5,642,305

5,848,551

3.7%

Revenue per visit (g)(h)

$             118

$            117

(0.8)%

Adjusted EBITDA (,000)

$      118,080

$     125,656

6.4%

Adjusted EBITDA margin

15.5%

16.1%

(a)     Includes managed hospitals.

(b)     Excludes managed hospitals.

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

(d)     Includes managed clinics.

(e)     Excludes managed clinics.

(f)      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 clinic direct 
          patient service revenue does not include managed clinics or contract therapy revenue.

(g)     Excludes onsite clinics and community-based outpatient clinics.

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

VIII. Net Income to Adjusted EBITDA Reconciliation

For the Three and Nine Months Ended September 30, 2016 and 2017

(In thousands, unaudited)

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
to evaluate financial performance and determine resource allocation for each of Select Medical's 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.

The following table reconciles net income to Adjusted EBITDA for Select Medical. Adjusted EBITDA is
used by Select Medical to report its segment performance. 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.

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

2017

Net income

$            3,992

$          24,824

$       104,789

$          99,587

Income tax expense

1,075

14,017

51,585

59,593

Interest expense

44,482

37,688

127,662

116,196

Non‑operating loss (gain)

1,028

—

(37,094)

49

Equity in earnings of unconsolidated subsidiaries

(5,268)

(4,431)

(14,466)

(15,618)

Loss on early retirement of debt

10,853

—

11,626

19,719

Income from operations

56,162

72,098

244,102

279,526

Stock compensation expense:

Included in general and administrative

3,932

4,079

10,771

11,603

Included in cost of services

818

878

2,153

2,624

Depreciation and amortization

37,165

38,772

107,887

119,644

Physiotherapy acquisition costs

—

—

3,236

—

Adjusted EBITDA

$          98,077

$        115,827

$        368,149

$        413,397

Specialty hospitals

$          48,264

$          69,454

$        217,759

$        256,291

Outpatient rehabilitation

31,995

29,298

99,006

102,575

Concentra

40,888

40,003

118,080

125,656

Other (a)

(23,070)

(22,928)

(66,696)

(71,125)

Adjusted EBITDA

$          98,077

$        115,827

$        368,149

$        413,397

(a)     Other primarily includes general and administrative costs.

IX. Reconciliation of Income per Common Share to Adjusted Income per Common Share

For the Three and Nine Months Ended September 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

Adjusted net income available to common stockholders and adjusted income per common share – diluted
shares are not measures of financial performance under GAAP.  Items excluded from adjusted net income available
to common stockholders and adjusted income per common share – diluted shares are significant components in
understanding and assessing financial performance. Select Medical believes that the presentation of adjusted net
income available to common stockholders and adjusted income per common share – diluted shares are important to
investors because they are reflective of the financial performance of our ongoing operations and provide better
comparability of our results of operations between periods. Adjusted net income available to common stockholders
and adjusted income per common share – diluted shares should not be considered in isolation or as alternatives to, or
substitutes for, net income, 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 net income available to common stockholders and adjusted income per common share – diluted
shares are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations,
adjusted net income available to common stockholders and adjusted income per common share – diluted shares as
presented may not be comparable to other similarly titled measures of other companies.

The following tables reconcile net income available to common stockholders and income per common
share to adjusted net income available to common stockholders and adjusted income per common share – diluted
shares for Select Medical.  Adjusted net income available to common stockholders is defined as net income
available to common shareholders before non-operating gain (loss) and gain (loss) on early retirement of debt.

Three Months Ended September 30,

2016

Per share (a)

2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$        6,471

$      18,462

Earnings allocated to unvested  restricted stockholders

(209)

(608)

Net income available to common stockholders

6,262

$            0.05

17,854

$            0.14

Adjustments:

Non-operating losses:

Other non-operating losses

1,049

—

Loss on early retirement of debt (b)

5,437

—

Estimated income tax benefit (c)

(5,405)

—

Earnings allocated to unvested restricted stockholders

(35)

—

Adjusted net income available to common stockholders

$        7,308

$           0.06

$       17,854

$           0.14

Adjustment for dilution

(0.00)

(0.00)

Adjusted income per common share – diluted shares

$           0.06

$           0.14

Weighted average common shares outstanding:

    Basic

127,848

129,142

    Diluted

127,989

129,322

(a)      Per share amounts for each period presented are basic weighted average common shares outstanding for all amounts except 
           adjusted income per common share - diluted shares, which is based on diluted shares outstanding.

(b)      For the three months ended September 30, 2016, the loss on early retirement of Concentra's debt is net of non-controlling 
           interest.

(c)      Represents the estimated tax benefit on the adjustments to net income.

Nine Months Ended September 30,

2016

Per share (a)

2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$      95,239

$       76,387

Earnings allocated to unvested  restricted stockholders

(2,852)

(2,464)

Net income available to common stockholders

92,387

$            0.72

73,923

$            0.57

Adjustments:

Non-operating losses (gains):

Gain on sale of contract therapy

(33,933)

—

Other non-operating losses (gains)

(3,148)

49

Loss on early retirement of debt (b)

6,211

19,719

Estimated income tax expense (benefit) (c)

330

(7,796)

Earnings allocated to unvested restricted stockholders

915

(385)

Adjusted net income available to common stockholders

$      62,762

$            0.49

$      85,510

$            0.66

Adjustment for dilution

(0.00)

(0.00)

Adjusted income per common share – diluted shares

$            0.49

$            0.66

Weighted average common shares outstanding:

    Basic

127,659

128,745

    Diluted

127,804

128,916

(a)       Per share amounts for each period presented are basic weighted average common shares outstanding for all amounts except 
            adjusted income per common share - diluted shares, which is based on diluted shares outstanding.

(b)       For the nine months ended September 30, 2016, the loss on early retirement of Concentra's debt is net of non-controlling 
            interest.

(c)       Represents the estimated tax expense (benefit) on the adjustments to net income.

X. Net Income to Adjusted EBITDA Reconciliation

Business Outlook for the Year Ending December 31, 2017

(In millions, unaudited)

The following is a reconciliation of full year 2017 Adjusted EBITDA expectations as computed at the low
and high points of the range to the closest comparable GAAP financial measure.  Refer to table VIII for the
definition of Adjusted EBITDA and a discussion of Select Medical's use of Adjusted EBITDA in evaluating financial
performance and determining resource allocation. Each item of expense presented in the table is an
estimation of full year 2017 expectations.

Range

Non-GAAP Measure Reconciliation

Low

High

Net income

$                    124

$                    136

Income tax expense

76

84

Interest expense

155

155

Equity in earnings of unconsolidated subsidiaries

(22)

(22)

Loss on early retirement of debt

20

20

Income from operations

353

373

Stock compensation expense

19

19

Depreciation and amortization

158

158

Adjusted EBITDA

$                    530

$                    550