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#Thanks Bob.
Good morning everyone.
For the fourth quarter, our operating expenses which include our cost of services, general and administrative expense, and bad debt expense was $953.1 million.
This compares to $942.6 million in the same quarter last year.
As a percentage of net revenue, operating expenses for the fourth quarter were 91.1%, compared to 90.7% in the same quarter last year.
For the year our operating expenses were $3.84 billion.
This compares to $3.36 billion last year.
As a percentage of our net revenue, operating expenses for the year were 89.6%, compared to 89.9% last year.
The decrease in our operating expenses as a percentage of net revenue is attributable to a 30 basis point decrease in cost of services compared to last year.
Cost of services increased to $909.9 million for the fourth quarter.
This compares to $902.3 million in the same quarter last year.
As a percent of net revenue, cost of services increased 20 basis points to 87% in the fourth quarter.
This compares to 86.8% in the same quarter last year.
The increase is primarily due to the higher relative costs in our Specialty Hospitals.
For the year, cost of services increased to $3.66 billion.
This compares to $3.21 billion last year.
As a percent of net revenue, cost of services decreased 30 basis points to 85.5%.
This compares to 85.8% last year.
The decrease in cost of services as a percent of net revenue was the result of cost reductions achieved by Concentra, which were partially offset by an increase in Specialty Hospital cost of services as a percentage of revenue.
G&A expense was $25.7 million in the fourth quarter, which as a percent of net revenue is 2.5%, compared to $24.1 million, or 2.3% of net revenue for the same quarter last year.
For the year, G&A expense was $106.9 million.
This compares to $92.1 million last year, which as a percent of net revenue was 2.5% both for this year and last year.
Our G&A function includes our shared service activities, which have expanded as a result of the acquisitions we have completed over the past 18 months.
Bad debt as a percent of net revenue was 1.7% in the fourth quarter.
This compares to 1.6% in the same quarter last year.
Bad debt as a percentage of revenue was 1.6% both this year and last.
As Bob mentioned, total adjusted EBITDA was $97.7 million, and adjusted EBITDA margin was 9.3% for the fourth quarter.
This compares to adjusted EBITDA of $100.8 million, and adjusted EBITDA margin of 9.7% in the same quarter last year.
For the year, total adjusted EBITDA was $465.8 million, and adjusted EBITDA margins of 10.9%.
This compares to adjusted EBITDA of $399.2 million, and an adjusted EBITDA margin of 10.7% last year.
Depreciation and amortization expense was $37.4 million in the fourth quarter.
This compares to $34.3 million in the same quarter last year.
The increase resulted primarily from the acquisition of Physiotherapy.
For the year, depreciation and amortization expense was $145.3 million.
This compares to $105 million last year.
The increase resulted primarily from the acquisitions of both Concentra and Physiotherapy.
We generated $5.5 million in equity and earnings of unconsolidated subsidiaries during the fourth quarter.
This compares to $4 million in the same quarter last year.
During the year we generated $19.9 million of equity and earnings, compared to $16.8 million last year.
The increase was driven by improved performance in existing investments where we hold a minority position.
During the year we had pretax non-operating gains of $42.7 million, primarily related to the sale of our Contract Therapy business and the Kindred swap.
We had pretax losses on early retirement of debt of $11.6 million during the year.
Last year we had a pretax non-operating gain of $29.6 million related to the sale of NaviHealth investment.
Interest expense was $42.4 million in the fourth quarter.
This compares to $33.1 million in the same quarter last year.
For the year, interest expense was $170.1 million, compared to $112.8 million last year.
The increase in the interest expense for the full year is primarily the result of additional borrowings related to the financing of the Concentra acquisition in June of 2015, and the Physiotherapy acquisition in March of 2016.
As well as an increase in interest rates related to the amendments of Select's credit facilities in the fourth quarter 2015, and the first quarter of 2016.
The Company recorded income tax expense of $3.9 million in the fourth quarter.
The effective tax rate for the quarter was 15.9%.
For the year we recorded income tax expense of $55.5 million, and the effective tax rate was 30.7%.
Net income attributable to Select Medical Holdings was $20.2 million in the fourth quarter, and fully diluted earnings per share was $0.15.
For the full year net income attributable to Select Medical Holdings was $115.4 million, and fully diluted earnings per share were $0.87.
At the end of the year we had $2.7 billion of debt outstanding, and $99 million of cash on the balance sheet, which included $22.6 million of cash at Select, and $76.4 million of cash at Concentra.
Our debt balance at the end of the year included $1.15 billion in Select term loans, $220 million in Select revolving loans, $710 million in Select 6.375% senior notes, $642.2 million in Concentra term loans, and $48.9 million in unamortized discounts, premiums and debt issuance costs that reduced the overall balance sheet debt liability.
We also had $27.9 million consisting of other borrowings and notes payable.
Operating activities provided $65.8 million of cash flow in the fourth quarter, and $346.6 million for the year.
Our day sales outstanding, or DSO was 51 days as of December 31st, 2016.
This compares to 52 days at September 30th, 2016, and 53 days at December 31st, 2015.
Investing activities used $91.3 million of cash during the fourth quarter.
The use of cash resulted from $58 million of acquisition-related payments, $43.4 million in purchases of PP&E, $1.6 million of investments in businesses which were offset in part by $11.6 million in net proceeds from sales of assets and equity investments during the quarter.
Investing activities used $554.3 million of cash during the year.
The use of cash resulted from $472.2 million of acquisition-related payments, $161.6 million in purchases, PP&E, $4.7 million of investment in businesses which were offset in part by $84.2 million in net proceeds from sales of assets and equity investments during the year.
Financing activities provided $56.3 million of cash in the fourth quarter.
The provision of cash resulted from $45 million in net borrowings on the Select revolving credit facility, and $19.2 million in proceeds from bank overdrafts, offset in part by $5.2 million in debt payments, and $1.9 million from non-controlling interest purchases and distributions.
Financing activities provided $292.3 million of cash for the year.
The provision of cash resulted primarily from $795.3 million in net proceeds from term loans related to the financing of the Physio acquisition, and refinancing of term loans at both Select and Concentra, offset in part by $438 million in term loan repayments, and $80 million in net repayments of revolving credit facilities.
In addition, $11.9 million was provided from the issuance of non-controlling interests, and $10.7 million in proceeds from bank overdrafts.
As Bob mentioned, Select is in the process of refinancing its senior credit facilities, and we expect to complete the transaction early next month.
The proposed financing remains subject to certain closing conditions, and the effects of the refinancing are not included in our current financial guidance for calendar year 2017, which I will reaffirm for you now.
This includes net revenue expected to the range of $4.4 billion to $4.6 billion, adjusted EBITDA expected to be in the range of $540 million to $580 million, and fully diluted earnings per share expected to be in the range of $0.73 to $0.91.
This concludes our prepared remarks, and at this point in time, I would like to turn it back over to the operator to open up the call for questions.
Sure, <UNK>, let us give you a bridge to get you to both the improvement in the margin, as well as the increase in total overall EBITDA.
So if you take a look at where we ended up for 2016, we ended up at close to $466 million.
And if you take a look at our business segments, you can take a look at on the Specialty Hospital side, first take a look at inpatient rehab.
Inpatient rehab, we had about $22 million worth of start-up losses associated with the three projects that Bob talked about, which were CRI, TriHealth, and Cleveland Clinic.
We anticipate that those will generate somewhere in the neighborhood of $15 million to $18 million worth of EBITDA.
That in and of itself, is a $40 million swing.
Plus the overall business we anticipate on the inpatient rehab side to be about another $5 million, so all told for the inpatient rehab facilities would be about $45 million.
On the outpatient rehab side, we acquired Physio in March of 2016.
So if you annualize that, plus add back the synergies, the $20 million of synergies that we expect to get from that, plus the growth from our legacy business, that is about another $25 million.
And then on Concentra, Concentra had a fabulous year in 2016, so we anticipate the growth on a same-store basis will be pretty modest, probably in that $5 million range.
So adding all of those up, you're going to come up with about $75 million, which will get you to in that $540 million to $545 million range.
And then the balance of the year, or the balance of 2017 will really be a function of the volume increases that we see on the LTAC business.
And that is really where that's coming from.
No, I think certainly we had a lot going on in 2016.
I think the improvement in the margins in 2017 will be more attuned to our business moving forward.
And I think the other thing to point out is the CRI development that we did is a very unique development.
It's a very large project, as Bob had mentioned in the opening of the call.
And we don't anticipate seeing those types of projects very often.
So from that perspective, that had a very detrimental impact on the margins in 2016.
There was not, but it was about $4 million for the quarter.
