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#Thanks Bob.
Good morning everyone.
For the first quarter our operating expenses which include our cost of services, general and administrative expense, and bad debt expense were $966.9 million.
This compares to $698.7 million in the same quarter last year.
The increase in operating expenses is primarily due to the addition of Concentra and Physiotherapy.
As a percentage of our net revenue operating expenses for the first quarter increased to 88.8%.
This compares to 87.8% in the same quarter last year.
The increase as a percent of net revenue is a 120 basis points increase in the cost of services, which was partially offset by a 10 basis point reduction in G&A and a 10 basis point reduction in bad debt.
Cost of services increased to $922.3 million for the first quarter, compared to $664.4 million in the same quarter last year.
As a percent of net revenue cost of services increased 120 basis points to 84.7% in the first quarter.
This compares to 83.5% in the same quarter last year.
Cost of services in our Concentra segment was $213.2 million in the first quarter, or 85% of revenue.
The higher relative cost of services in our Concentra segment, as well as an increase in the relative cost of services in our specialty hospital was the primary reason for the increase in our cost of services as a percent of net revenue during the first quarter.
As Bob mentioned, we had an increase in labor costs in our LTACs associated with the increased patient acuity, and the higher wage rate for clinicians due to patient criteria.
In addition to the aforementioned labor costs, we have elected to maintain certain staffing levels at many of our specialty hospitals in criteria, even though we have experienced a decline in volume.
This is due to the current nursing shortage we have been experiencing.
Given our belief that we will be successful in replacing reduced volumes, this strategy will allow us to not incur the additional costs of recruiting and training new nurses, as well as avoiding the hiring of agency nurses.
G&A expense was $28.3 million in the first quarter, which as a percent of net revenue is 2.6%, this compares to $21.7 million, or 2.7% of net revenue for the same quarter last year.
G&A expense in the first quarter included $3.2 million of Physiotherapy acquisition expenses, excluding the Physiotherapy acquisitions costs G&A would have been 2.3% in the first quarter.
Bad debt as a percentage of net revenue was 1.5% in the first quarter.
This compares to 1.6% in the same quarter last year.
Total adjusted EBITDA was $128.6 million, and adjusted EBITDA margin was 11.8% for the first quarter.
This compares to an adjusted EBITDA of $98.9 million, and an adjusted EBITDA margin of 12.4% in the same quarter last year.
Depreciation and amortization expense was $34.5 million in the first quarter.
This compares to $17.3 million in the same quarter last year.
The increase resulted primarily from an incremental $15.4 million of depreciation and amortization expense in our Concentra segment.
We generated $4.7 million in equity and earnings of unconsolidated subsidiaries during the first quarter.
This compares to $2.6 million in the same quarter last year.
These increases are mainly the result of the contributions from our specialty hospital joint venture partnerships.
During the quarter, as Bob mentioned, we had several one-time gains and losses.
We sold our contract therapy business for approximately $65 million, and recognized a gain on the sale of $30.4 million.
Additionally, we recognized an impairment loss of $5.3 million on an equity investment in which we are a minority owner.
This loss was triggered by the planned sale of the Company by its controlling owners.
Both of these items were reflected in our income statement as non-operating items.
In connection with our financing activity in the quarter, we repaid our series D term loans that were scheduled to mature in December of 2016, and recognized a loss on early retirement of debt of $800,000 during the quarter.
Interest expense was $38.8 million in the first quarter.
This compares to $21.4 million in the same quarter last year.
The increase in interest expense in the first quarter is a result of additional borrowings related to the financing of the Concentra acquisition in 2015.
The Company recorded income tax expense of $17 million in the first quarter, the effective tax rate for the quarter was 22.2%, compared to an effective tax rate of 38.3% in the first quarter of last year.
The lower effective tax rate during the first quarter of this year is primarily related to the sale of our contract therapy business.
Our tax basis in the business exceeds our selling price, and as a result we had no tax expense resulting from the sale.
Net income attributable to Select Medical Holdings was $54.8 million in the first quarter, and fully diluted earnings-per-share were $0.42.
This compares to fully diluted earnings-per-share of $0.27 in the same quarter last year.
Excluding the gain on sale of the contract therapy business, loss on impairment of the equity investment, Physiotherapy acquisition costs, and a loss on early retirement of debt, and the related tax effects, earnings-per-share on a fully diluted basis would have been $0.23 in the first quarter of this year.
At the end of the quarter, we had $2.78 billion of debt outstanding, and $85.4 million of cash on the balance sheet, which includes $61.5 million of cash at Select, and $23.9 million of cash at Concentra.
Our debt balances at the end of the quarter included $1.1524 billion in Select term loans, $315 million in Select revolving loans, $710 million in the Select 6.375% senior notes, $646.6 million in Concentra term loans.
In addition we had $62.8 million in total unamortized discounted premium and debt issuance cost that reduced the balance sheet debt liability.
With the balance of $20.5 million consisting of other miscellaneous debt.
Operating activities provided $111.2 million of cash flow in the first quarter.
Our days outstanding, or DSO, was 52 days at March 31st, 2016.
This compares to 53 days at December 31st, 2015, and 56 days at March 31st of 2015.
Investing activities used $397.7 million of cash during the first quarter.
The use of cash was related to $412.9 million in acquisition-related payments, primarily related to the acquisition of Physiotherapy, and $46.8 million in purchases of property and equipment.
This was offset in part by the $62.6 million in net proceeds from the sale of the business during the quarter.
Financing activities provided $357.5 million of cash in the first quarter, the provision of cash was primarily the result of Select's financing the Physiotherapy acquisition and refinancing of certain term loans.
Net activity on Select and Concentra credit facilities were $388.2 million of net proceeds, offset in part by the repayment of bank overdrafts of $28.6 million and $4.4 million in repurchases of distributions through non-controlling interests.
Additionally, in our earnings press release we provided revised financial guidance for the calendar year 2016.
This includes net revenue in the range of $4.15 billion to $4.35 billion, adjusted EBITDA in the range of $500 million to $540 million, and fully diluted earnings-per-share to be in the range of $0.87 to $1.06.
The update to our guidance includes changes in the full year expectations resulting from the acquisition of Physiotherapy, the sale of our contract therapy business, and the financing activity completed in the first quarter.
This concludes our prepared remarks, and at this time we would like to turn it back over to the operator to open up the call for questions.
Yes, <UNK>.
That's a great question, and I think the response to that is when you take look at the portfolio, the portfolio really isn't that much different.
You're right.
There are fewer additional beds, but at the end of the day there really isn't that much of a difference.
You're absolutely right, <UNK>.
I mean when you take a look at the decision to not really flex, and the other issue is that when you think about the variable expense on salaries, wages and benefits, it really isn't linear.
It's a step function.
So the way that we staff is, we will staff RNs for four to five patients per nurse, based on the acuity of the patient, and as Bob had mentioned, we're basically down ADC on a per hospital per day basis about 1.1 patients, so in essence what we expect to see is when that volume comes back you will see no incremental cost on the labor side.
So all of that incremental revenue from the increased volume should basically with the exception of pharma and supply costs drop right to the EBITDA line.
<UNK>, I think as a follow-up to Bob's comments, I think the other thing to remember and we have talked about this, is that the approach, the multi-prong approach that we're taking we think is having some success here, and as you recall that multi-prong approach is having the clinical liaisons that are on the ground at each of our LTACs, the amount of time that they spend with the case managers, the discharge planners.
We have our Chief Medical Officer and his staff out talking to the discharging physicians from the short-term acute care hospitals, and we have our finance people spending a bunch of time with the finance people at the short term acuity hospitals.
So I think over time, it really is an educational process an over time we think we will become more and more successful.
Yes, <UNK>.
It's a great question.
It's interesting if you take a look at those facilities that have been in criteria from October through February, and you take a look at the reduction in ADC pre versus post criteria, that's about 2.6%, and yet Bob had said that we're at 3.9% in total.
That's really a function of what's going on with the last group of March hospitals.
We anticipate that will improve just like it's done historically.
So yes to your question is that as the hospitals come onboard, and as they mature, we see improvement.
Sure, <UNK>.
No.
I think it's the right way to think about it.
The real question for us is as Bob had mentioned, there is a nursing shortage right now, and we're going to monitor that, and not be quick to flex down, because again, we anticipate we will get that volume back.
And as you recall in the third quarter, we talked about the educational process, the educational costs that we incurred, and from our perspective as you well know as all of the investors know, is that when you flex down the nurses can't get their hours, they're going to go someplace else, which means when the volume comes back that would really require us to go out and recruit, retrain, and the incremental cost of doing that just doesn't make a lot of sense.
Yes.
We would say Concentra is on plan right now.
First quarter was a little bit better than we anticipated.
There is seasonality in the occupational medicine business, but it's really the down quarters are typically the fourth and the first quarter.
The second and third quarters are typically the best, and with regards to synergies, I mean we still have some more synergies to achieve there, but all-in-all we think we're very happy and pleased with what's going on with Concentra right now.
Sure.
That's correct, <UNK>.
If you take a look at both on revenue EBITDA and EPS line that's what it reflects.
On the EBITDA, it's a net differential of about $30 million.
What we have done is we have assumed that for full year Physio would be at $37 million, and we needed to back out the EBITDA so it was a contract therapy of $7 million.
And then.
On the EPS line, it's a net $0.15 and the way that we arrived at that was taking a look at the $0.19 gain on the contract therapy sale, plus approximately $0.03 for the Physio transaction, less about $0.06 associated with the refi, less about a penny for the contract therapy sale.
So netting out all of that is about $0.15 and that's what you see in the guidance.
Yes.
With regards to your question on Concentra, no, we don't really see the same type of issues in Concentra that we see on our specialty hospital side.
Yes.
There was a $10 million reduction in Specialty Hospitals on a same quarter year-over-year basis.
$3.8 million of that had to do with, on the inpatient rehab facilities.
That was $3.8 million of start-up costs.
There was about $1.3 million associated with the closed hospitals, and then the balance had to do with the labor that we talked about.
No.
$3.8 million in total this year versus I think it was $5 million, a little bit more than $5 million last year.
What I am doing is giving you an idea that the $10 million component, yes.
So it would have been a little bit of a tailwind.
Labor, when you walk it through it's the labor costs.
I want to make sure that people are aware that on the inpatient rehab side there's $3.8 million worth of start-up costs.
