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(Mark One) | ||
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
(Exact Name of Registrant as Specified in its Charter)
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Delaware | 20-1538254 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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103 Powell Court Brentwood, Tennessee |
37027 | |
(Address Of Principal Executive Offices) | (Zip Code) |
(Registrants Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 19, 2012, the number of outstanding shares of the registrants Common Stock was 49,348,523.
i
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues before provision for doubtful accounts | $ | 984.9 | $ | 866.2 | $ | 2,963.1 | $ | 2,628.2 | ||||||||
Provision for doubtful accounts | 164.7 | 127.0 | 464.6 | 383.4 | ||||||||||||
Revenues | 820.2 | 739.2 | 2,498.5 | 2,244.8 | ||||||||||||
Salaries and benefits | 390.3 | 337.8 | 1,130.2 | 1,011.2 | ||||||||||||
Supplies | 129.3 | 113.9 | 382.7 | 346.7 | ||||||||||||
Other operating expenses | 205.3 | 171.1 | 589.5 | 495.8 | ||||||||||||
Other income | (12.0 | ) | (11.0 | ) | (14.7 | ) | (15.2 | ) | ||||||||
Depreciation and amortization | 47.7 | 40.7 | 139.7 | 121.0 | ||||||||||||
Interest expense, net | 24.5 | 24.3 | 75.7 | 81.6 | ||||||||||||
Debt extinguishment costs | 4.4 | | 4.4 | | ||||||||||||
Impairment charge | | | 3.1 | | ||||||||||||
789.5 | 676.8 | 2,310.6 | 2,041.1 | |||||||||||||
Income from continuing operations before income taxes | 30.7 | 62.4 | 187.9 | 203.7 | ||||||||||||
Provision for income taxes | 11.4 | 22.8 | 69.8 | 76.5 | ||||||||||||
Income from continuing operations | 19.3 | 39.6 | 118.1 | 127.2 | ||||||||||||
(Loss) income from discontinued operations, net of income taxes | | (0.1 | ) | 0.2 | 0.2 | |||||||||||
Net income | 19.3 | 39.5 | 118.3 | 127.4 | ||||||||||||
Less: Net income attributable to noncontrolling interests | (0.1 | ) | (0.7 | ) | (2.7 | ) | (2.2 | ) | ||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 19.2 | $ | 38.8 | $ | 115.6 | $ | 125.2 | ||||||||
Basic earnings per share attributable to LifePoint Hospitals, Inc. stockholders: |
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Continuing operations | $ | 0.40 | $ | 0.79 | $ | 2.44 | $ | 2.49 | ||||||||
Discontinued operations | | | 0.01 | 0.01 | ||||||||||||
Net income | $ | 0.40 | $ | 0.79 | $ | 2.45 | $ | 2.50 | ||||||||
Diluted earnings per share attributable to LifePoint Hospitals, Inc. stockholders: |
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Continuing operations | $ | 0.39 | $ | 0.77 | $ | 2.38 | $ | 2.43 | ||||||||
Discontinued operations | | | | 0.01 | ||||||||||||
Net income | $ | 0.39 | $ | 0.77 | $ | 2.38 | $ | 2.44 | ||||||||
Weighted average shares and dilutive securities outstanding: |
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Basic | 47.5 | 49.3 | 47.3 | 50.2 | ||||||||||||
Diluted | 48.8 | 50.4 | 48.5 | 51.4 | ||||||||||||
Amounts attributable to LifePoint Hospitals, Inc. stockholders: |
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Income from continuing operations, net of income taxes | $ | 19.2 | $ | 38.9 | $ | 115.4 | $ | 125.0 | ||||||||
(Loss) income from discontinued operations, net of income taxes | | (0.1 | ) | 0.2 | 0.2 | |||||||||||
Net income | $ | 19.2 | $ | 38.8 | $ | 115.6 | $ | 125.2 |
See accompanying notes
1
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income | $ | 19.3 | $ | 39.5 | $ | 118.3 | $ | 127.4 | ||||||||
Other comprehensive income, net of income taxes: |
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Unrealized (losses) gains on changes in fair value of interest rate swap, net of income tax provision of $2.8 for the nine months ended September 30, 2011 | | (1.1 | ) | | 4.0 | |||||||||||
Other comprehensive income | | (1.1 | ) | | 4.0 | |||||||||||
Comprehensive income | 19.3 | 38.4 | 118.3 | 131.4 | ||||||||||||
Less: Net income attributable to noncontrolling interests | (0.1 | ) | (0.7 | ) | (2.7 | ) | (2.2 | ) | ||||||||
Comprehensive income attributable to LifePoint Hospitals, Inc. | $ | 19.2 | $ | 37.7 | $ | 115.6 | $ | 129.2 |
See accompanying notes
2
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September 30, 2012 |
December 31, 2011(a) |
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(Unaudited) | ||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 97.9 | $ | 126.2 | ||||
Accounts receivable, less allowances for doubtful accounts of $633.1 and $537.4 at September 30, 2012 and December 31, 2011, respectively | 512.9 | 430.6 | ||||||
Inventories | 96.0 | 87.2 | ||||||
Prepaid expenses | 29.0 | 26.4 | ||||||
Income taxes receivable | | 1.6 | ||||||
Deferred tax assets | 154.2 | 125.7 | ||||||
Other current assets | 44.6 | 42.3 | ||||||
934.6 | 840.0 | |||||||
Property and equipment: |
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Land | 102.4 | 93.5 | ||||||
Buildings and improvements | 1,802.8 | 1,631.6 | ||||||
Equipment | 1,200.1 | 1,084.0 | ||||||
Construction in progress (estimated costs to complete and equip after September 30, 2012 is $64.2) | 104.6 | 105.7 | ||||||
3,209.9 | 2,914.8 | |||||||
Accumulated depreciation | (1,210.1 | ) | (1,084.4 | ) | ||||
1,999.8 | 1,830.4 | |||||||
Deferred loan costs, net | 22.7 | 21.7 | ||||||
Intangible assets, net | 87.0 | 89.5 | ||||||
Other | 38.9 | 19.8 | ||||||
Goodwill | 1,602.2 | 1,568.7 | ||||||
Total assets | $ | 4,685.2 | $ | 4,370.1 | ||||
LIABILITIES AND EQUITY |
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Current liabilities: | ||||||||
Accounts payable | $ | 113.8 | $ | 99.6 | ||||
Accrued salaries | 122.4 | 103.1 | ||||||
Income taxes payable | 8.1 | | ||||||
Other current liabilities | 171.8 | 168.2 | ||||||
Current maturities of long-term debt | 13.6 | 1.9 | ||||||
429.7 | 372.8 | |||||||
Long-term debt | 1,650.6 | 1,595.4 | ||||||
Deferred income tax liabilities | 236.8 | 259.0 | ||||||
Long-term portion of reserves for self-insurance claims | 133.1 | 118.3 | ||||||
Other long-term liabilities | 69.8 | 20.8 | ||||||
Long-term income tax liability | 17.9 | 18.0 | ||||||
Total liabilities | 2,537.9 | 2,384.3 | ||||||
Redeemable noncontrolling interests | 29.0 | 26.2 | ||||||
Equity: |
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LifePoint Hospitals, Inc. stockholders' equity: |
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Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued | | | ||||||
Common stock, $0.01 par value; 90,000,000 shares authorized; 64,428,726 and 63,233,088 shares issued at September 30, 2012 and December 31, 2011, respectively | 0.6 | 0.6 | ||||||
Capital in excess of par value | 1,395.4 | 1,354.8 | ||||||
Retained earnings | 1,182.5 | 1,066.9 | ||||||
Common stock in treasury, at cost, 15,083,845 and 14,925,875 shares at September 30, 2012 and December 31, 2011, respectively | (483.3 | ) | (477.1 | ) | ||||
Total LifePoint Hospitals, Inc. stockholders' equity | 2,095.2 | 1,945.2 | ||||||
Noncontrolling interests | 23.1 | 14.4 | ||||||
Total equity | 2,118.3 | 1,959.6 | ||||||
Total liabilities and equity | $ | 4,685.2 | $ | 4,370.1 |
(a) | Derived from audited consolidated financial statements. |
See accompanying notes
3
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cash flows from operating activities: |
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Net income | $ | 19.3 | $ | 39.5 | $ | 118.3 | $ | 127.4 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Loss (income) from discontinued operations | | 0.1 | (0.2 | ) | (0.2 | ) | ||||||||||
Stock-based compensation | 7.0 | 6.4 | 20.3 | 17.7 | ||||||||||||
Depreciation and amortization | 47.7 | 40.7 | 139.7 | 121.0 | ||||||||||||
Amortization of physician minimum revenue guarantees | 4.9 | 5.0 | 14.7 | 14.3 | ||||||||||||
Amortization of convertible debt discounts | 6.5 | 6.1 | 19.2 | 18.0 | ||||||||||||
Amortization of deferred loan costs | 1.3 | 1.4 | 4.2 | 4.4 | ||||||||||||
Debt extinguishment costs | 4.4 | | 4.4 | | ||||||||||||
Impairment charge | | | 3.1 | | ||||||||||||
Deferred income tax benefit | (9.4 | ) | (15.3 | ) | (48.0 | ) | (34.7 | ) | ||||||||
Reserve for self-insurance claims, net of payments | 1.8 | 2.7 | (1.0 | ) | 9.7 | |||||||||||
Increase (decrease) in cash from operating assets and liabilities, net of effects from acquisitions and divestitures: |
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Accounts receivable | (6.7 | ) | (9.4 | ) | (42.4 | ) | (0.1 | ) | ||||||||
Inventories and other current assets | (9.5 | ) | (9.8 | ) | (2.2 | ) | (17.8 | ) | ||||||||
Accounts payable and accrued expenses | 40.3 | 8.6 | 22.2 | (2.6 | ) | |||||||||||
Income taxes payable/receivable | (22.9 | ) | 37.0 | 9.7 | 63.6 | |||||||||||
Other | (0.4 | ) | (3.0 | ) | 0.3 | (2.4 | ) | |||||||||
Net cash provided by operating activities continuing operations | 84.3 | 110.0 | 262.3 | 318.3 | ||||||||||||
Net cash (used in) provided by operating activities discontinued operations | | | (0.7 | ) | 0.2 | |||||||||||
Net cash provided by operating activities | 84.3 | 110.0 | 261.6 | 318.5 | ||||||||||||
Cash flows from investing activities: |
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Purchases of property and equipment | (47.3 | ) | (49.3 | ) | (157.4 | ) | (153.8 | ) | ||||||||
Acquisitions, net of cash acquired | (162.3 | ) | (36.6 | ) | (182.4 | ) | (63.1 | ) | ||||||||
Other | (0.1 | ) | (0.3 | ) | (0.4 | ) | (1.2 | ) | ||||||||
Net cash used in investing activities | (209.7 | ) | (86.2 | ) | (340.2 | ) | (218.1 | ) | ||||||||
Cash flows from financing activities: |
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Proceeds from borrowings | 490.0 | | 490.0 | | ||||||||||||
Payments of borrowings | (443.7 | ) | (0.1 | ) | (443.7 | ) | (0.1 | ) | ||||||||
Repurchases of common stock | (0.3 | ) | (99.4 | ) | (6.2 | ) | (141.2 | ) | ||||||||
Payment of debt financing costs | (9.6 | ) | (0.3 | ) | (9.6 | ) | (0.4 | ) | ||||||||
Proceeds from exercise of stock options | 15.9 | 0.1 | 21.4 | 34.6 | ||||||||||||
Proceeds from employee stock purchase plans | 0.8 | 0.6 | 1.3 | 1.2 | ||||||||||||
Distributions to noncontrolling interests | (1.4 | ) | (0.8 | ) | (2.8 | ) | (1.4 | ) | ||||||||
Sales of redeemable noncontrolling interests | | | 1.6 | | ||||||||||||
Capital lease payments and other | (0.7 | ) | (0.3 | ) | (1.7 | ) | (1.1 | ) | ||||||||
Net cash provided by (used in) financing activities | 51.0 | (100.2 | ) | 50.3 | (108.4 | ) | ||||||||||
Change in cash and cash equivalents | (74.4 | ) | (76.4 | ) | (28.3 | ) | (8.0 | ) | ||||||||
Cash and cash equivalents at beginning of period | 172.3 | 275.8 | 126.2 | 207.4 | ||||||||||||
Cash and cash equivalents at end of period | $ | 97.9 | $ | 199.4 | $ | 97.9 | $ | 199.4 | ||||||||
Supplemental disclosure of cash flow information: |
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Interest payments | $ | 7.0 | $ | 21.0 | $ | 43.8 | $ | 65.0 | ||||||||
Capitalized interest | $ | 0.6 | $ | 0.5 | $ | 1.9 | $ | 1.3 | ||||||||
Income tax payments, net | $ | 43.7 | $ | 1.2 | $ | 108.3 | $ | 47.8 |
See accompanying notes
4
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LifePoint Hospitals, Inc. Stockholders | ||||||||||||||||||||||||||||
Common Stock | Capital in Excess of Par Value |
Retained Earnings | Treasury Stock | Noncontrolling Interests | Total | |||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balance at December 31, 2011(a) | 48.3 | $ | 0.6 | $ | 1,354.8 | $ | 1,066.9 | $ | (477.1 | ) | $ | 14.4 | $ | 1,959.6 | ||||||||||||||
Net income | | | | 115.6 | | 2.7 | 118.3 | |||||||||||||||||||||
Exercise of stock options and tax benefits of stock-based awards | 0.7 | | 24.2 | | | | 24.2 | |||||||||||||||||||||
Stock activity in connection with employee stock purchase plan | 0.1 | | 1.3 | | | | 1.3 | |||||||||||||||||||||
Stock-based compensation | 0.5 | | 20.3 | | | | 20.3 | |||||||||||||||||||||
Repurchases of common stock, at cost | (0.2 | ) | | | | (6.2 | ) | | (6.2 | ) | ||||||||||||||||||
Noncash change in noncontrolling interests as a result of acquisition and other | | | (5.2 | ) | | | 8.8 | 3.6 | ||||||||||||||||||||
Cash distributions to noncontrolling interests | | | | | | (2.8 | ) | (2.8 | ) | |||||||||||||||||||
Balance at September 30, 2012 | 49.4 | $ | 0.6 | $ | 1,395.4 | $ | 1,182.5 | $ | (483.3 | ) | $ | 23.1 | $ | 2,118.3 |
(a) | Derived from audited consolidated financial statements. |
See accompanying notes
5
LifePoint Hospitals, Inc., a Delaware corporation, acting through its subsidiaries, operates general acute care hospitals primarily in non-urban communities in the United States (U.S.). Unless the context otherwise indicates, LifePoint Hospitals, Inc. and its subsidiaries are referred to herein as the Company. At September 30, 2012, on a consolidated basis, the Company operated 56 hospital campuses in 19 states. Unless noted otherwise, discussions in these notes pertain to the Companys continuing operations, which exclude the results of those facilities that have previously been disposed.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
The Company recognizes revenues in the period in which services are performed. Accounts receivable primarily consist of amounts due from third-party payors and patients. The Companys ability to collect outstanding receivables is critical to its results of operations and cash flows. Amounts the Company receives for treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations (HMOs), preferred provider organizations (PPOs) and other private insurers are generally less than the Companys established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, the revenues and accounts receivable reported in the Companys accompanying unaudited condensed consolidated financial statements are recorded at the net amount expected to be received.
On April 5, 2012, a settlement agreement (the Rural Floor Settlement) was signed between the U.S. Department of Health and Human Services (HHS), the Secretary of HHS, the Centers for Medicare and Medicaid Services (CMS) and a large number of healthcare service providers, including the Companys hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMSs calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 from federal fiscal year 1998 through and including federal fiscal year 2011 for healthcare service providers that participated in certain court cases and group appeals. As a result of the Rural Floor Settlement, the Company recognized $33.0 million of additional Medicare revenue during the nine months ended September 30, 2012.
6
The Companys revenues before provision for doubtful accounts by payor and approximate percentages of revenues were as follows for the three and nine months ended September 30, 2012 and 2011 (in millions):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % of Revenues |
Amount | % of Revenues |
Amount | % of Revenues |
Amount | % of Revenues |
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Medicare | $ | 279.2 | 34.0 | % | $ | 251.9 | 34.1 | % | $ | 881.3 | 35.3 | % | $ | 788.5 | 35.1 | % | ||||||||||||||||
Medicaid | 124.7 | 15.2 | 108.4 | 14.7 | 362.6 | 14.5 | 324.5 | 14.5 | ||||||||||||||||||||||||
HMOs, PPOs and other private insurers | 397.8 | 48.5 | 356.2 | 48.2 | 1,191.6 | 47.7 | 1,066.3 | 47.5 | ||||||||||||||||||||||||
Self-pay | 170.4 | 20.8 | 138.6 | 18.7 | 491.1 | 19.7 | 419.4 | 18.7 | ||||||||||||||||||||||||
Other | 12.8 | 1.6 | 11.1 | 1.5 | 36.5 | 1.4 | 29.5 | 1.3 | ||||||||||||||||||||||||
Revenues before provision for doubtful accounts | 984.9 | 120.1 | 866.2 | 117.2 | 2,963.1 | 118.6 | 2,628.2 | 117.1 | ||||||||||||||||||||||||
Provision for doubtful accounts | (164.7 | ) | (20.1 | ) | (127.0 | ) | (17.2 | ) | (464.6 | ) | (18.6 | ) | (383.4 | ) | (17.1 | ) | ||||||||||||||||
Revenues | $ | 820.2 | 100.0 | % | $ | 739.2 | 100.0 | % | $ | 2,498.5 | 100.0 | % | $ | 2,244.8 | 100.0 | % |
The primary uncertainty of the Companys accounts receivable lies with uninsured patient receivables and deductibles, co-payments or other amounts due from individual patients. The Company has an established process to determine the adequacy of the allowance for doubtful accounts that relies on a number of analytical tools and benchmarks to arrive at a reasonable allowance. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts. Some of the analytical tools that the Company utilizes include, but are not limited to, historical cash collection experience, revenue trends by payor classification and revenue days in accounts receivable. Accounts receivable are written off after collection efforts have been followed in accordance with the Companys policies.
The following is a summary of the Companys activity in the allowance for doubtful accounts for the nine months ended September 30, 2012 (in millions):
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Balance at January 1, 2012 | $ | 537.4 | ||
Additions recognized as a reduction to revenues | 464.6 | |||
Accounts written off, net of recoveries | (368.9 | ) | ||
Balance at September 30, 2012 | $ | 633.1 |
The allowances for doubtful accounts as a percent of gross accounts receivable, net of contractual discounts were 55.2% and 55.5% as of September 30, 2012 and December 31, 2011, respectively. Additionally, as of September 30, 2012 and December 31, 2011, the allowances for doubtful accounts plus certain contractual allowances related to self-pay patients as a percentage of self-pay receivables were 85.5% and 86.7%, respectively.
7
The majority of the Companys expenses are cost of revenue items. Costs that could be classified as general and administrative by the Company would include its hospital support center overhead costs, which were $44.2 million and $35.4 million for the three months ended September 30, 2012 and 2011, respectively, and $127.9 million and $99.1 million for the nine months ended September 30, 2012 and 2011, respectively. Included in the Companys hospital support center overhead costs are the transactional expenses related to the Companys recent acquisitions, including legal and consulting fees. See Note 5 for a further discussion of the Companys recent acquisition activity.
In accordance with Accounting Standards Codification (ASC) 825-10, Financial Instruments and ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), the fair value of the Companys financial instruments are further described as follows.
The carrying amounts reported in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.
The carrying amounts and fair values of the Companys senior secured term loan facility (the Term Facility) and senior secured revolving credit facility (the Revolving Facility) under its senior secured credit agreement with, among others, Citibank, N.A. (Citibank), as administrative agent, and the lenders party thereto (the Senior Credit Agreement), term B loans (the Term B Loans) under its prior credit agreement with Citicorp North America, Inc., as administrative agent and a syndicate of lenders (the Prior Credit Agreement), 6.625% unsecured senior notes due October 1, 2020 (the 6.625% Senior Notes), 3½% convertible senior subordinated notes due May 15, 2014 (the 3½% Notes) and 3¼% convertible senior subordinated debentures due August 15, 2025 (the 3¼% Debentures) as of September 30, 2012 and December 31, 2011 were as follows (in millions):
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Carrying Amount | Fair Value | |||||||||||||||
September 30, 2012 |
December 31, 2011 |
September 30, 2012 |
December 31, 2011 |
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Term Facility | $ | 450.0 | $ | | $ | 443.3 | $ | | ||||||||
Revolving Facility | $ | 40.0 | $ | | $ | 37.6 | $ | | ||||||||
Term B Loans | $ | | $ | 443.7 | $ | | $ | 432.6 | ||||||||
6.625% Senior Notes | $ | 400.0 | $ | 400.0 | $ | 430.0 | $ | 413.0 | ||||||||
3½% Notes, excluding unamortized discount | $ | 575.0 | $ | 575.0 | $ | 621.0 | $ | 592.3 | ||||||||
3¼% Debentures, excluding unamortized discount | $ | 225.0 | $ | 225.0 | $ | 225.6 | $ | 230.3 |
The fair values of the Term Facility, the Revolving Facility, the Term B Loans and the 6.625% Senior Notes were estimated based on the average bid and ask price as determined using published rates and categorized as Level 2 within the fair value hierarchy in accordance with ASC 820-10. The fair values of the 3½% Notes and the 3¼% Debentures were estimated based on the quoted market prices determined using the closing share price of the Companys common stock and categorized as Level 1 within the fair value hierarchy in accordance with ASC 820-10. Effective July 24, 2012, the Company repaid the $443.7 million outstanding Term B Loans with the issuance of the $450.0 million Term Facility, as more fully discussed in Note 7.
8
Effective September 1, 2012, the Company, through Duke LifePoint Healthcare, a joint venture in which the Company owns a controlling interest between the Company and a wholly-controlled affiliate of Duke University Health System, Inc., acquired Marquette General Health System (Marquette General), a 315 bed hospital system located in Marquette, Michigan for cash consideration of approximately $132.7 million, including net working capital. The Company committed to invest in Marquette General $350.0 million in capital expenditures and improvements as well as for the continuation of existing or initiation of new physician recruiting activities over the next ten years, subject to certain offsets. The aggregate remaining capital and physician recruitment commitment as of September 30, 2012 was $321.7 million. The results of operations of Marquette General are included in the Companys results of operations beginning on September 1, 2012.
The fair values assigned to certain assets and liabilities assumed by the Company have been prepared on a preliminary basis and are subject to change as new facts and circumstances emerge. Specifically, the Company is further assessing the valuation of acquired property and equipment, accounts receivable and certain equity investments as well as certain assumed and contingent obligations. The Company expects to finalize its analyses during the fourth quarter of 2012 or as the necessary information becomes available to complete the measurement process. Once finalized, the Company will adjust the purchase price allocations to reflect its final valuations. The preliminary fair values assigned to Marquette Generals assets acquired and liabilities assumed at the date of acquisition were as follows (in millions):
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Current assets | $ | 50.4 | ||
Property and equipment | 114.7 | |||
Other assets | 16.6 | |||
Goodwill | 22.2 | |||
Total assets acquired, excluding cash | 203.9 | |||
Current liabilities | 32.1 | |||
Other long-term liabilities | 39.1 | |||
Total liabilities assumed | 71.2 | |||
Net assets acquired | $ | 132.7 |
In connection with the acquisition of Marquette General, the Company agreed, pursuant to the asset purchase agreement that Marquette General Hospital, Inc. (the Marquette Seller) would receive net proceeds of $23.0 million at the closing of the transaction. To the extent that the Marquette Sellers satisfaction of its retained liabilities causes its net proceeds to be reduced to less than $15.0 million, the Company has agreed to pay additional purchase consideration to the Marquette Seller.
As a result of the $15.0 million net proceeds requirement, the Company does not believe that the Marquette Seller will have sufficient funds available to fully satisfy all of its retained liabilities. As such, based on facts that existed as of the acquisition date, the Companys management made reasonable estimates and recorded an aggregate of $25.3 million representing the preliminary fair values of its potential obligation to the Marquette Seller. This $25.3 million of contingent obligations (Marquette Contingent Obligations) consists primarily of pre-acquisition healthcare liabilities. The Company will continue to analyze and refine its estimate as changes in facts and circumstances warrant. The Companys management does not control and cannot predict with certainty the progress or final outcome of any discussions with third parties, such as government agencies. Therefore, the final amounts paid in settlement of the pre-acquisition healthcare and other retained liabilities, if any, could materially differ from amounts currently recorded.
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To the extent the Company is required to pay additional purchase consideration pursuant to the information described above, the amounts paid will reduce, on a dollar-for-dollar basis, the remaining $321.7 million of the initial $350.0 million capital improvements and physician recruitment commitment at Marquette General.
The Company also recorded a pension benefit obligation of $20.5 million relating to the assumed portion of Marquette Generals defined benefit pension plan. The Companys estimate of its Marquette Contingent Obligations, its pension benefit obligation and other amounts are included in the Companys preliminary fair values assigned at the date of acquisition of Marquette General, and these liabilities are reflected in the Companys accompanying condensed consolidated balance sheet at September 30, 2012 under the captions Other current liabilities and Other long-term liabilities.
During the three months ended September 30, 2012 and as a result of the Marquette General acquisition, the Company recognized approximately $0.1 million in net pension plan expense related to the assumed portion of Marquette Generals defined benefit pension plan. The Company expects to contribute approximately $0.2 million to the pension plan trust during the fourth quarter of 2012 to comply with applicable pension funding regulations and laws.
Effective July 1, 2012, the Company acquired Woods Memorial Hospital (Woods Memorial), a 72 bed hospital and an 88 bed long-term care facility located in Etowah, Tennessee for approximately $17.7 million, including net working capital. The results of operations of Woods Memorial are included in the Companys results of operations beginning on July 1, 2012.
Effective April 1, 2012, the Company, through Duke LifePoint Healthcare, acquired an 80% interest in Twin County Regional Hospital (Twin County), a 141 bed hospital located in Galax, Virginia for approximately $20.0 million, including 80% of the net working capital. The Company has committed to invest in Twin County an additional $20.0 million in capital expenditures and improvements over the next ten years as well as an additional $3.0 million for the continuation of existing or initiation of new physician recruiting activities over the next five years. The results of operations of Twin County are included in the Companys results of operations beginning April 1, 2012.
Additionally, during the nine months ended September 30, 2012, the Company completed certain ancillary service-line acquisitions, including physician practices, totaling $12.0 million.
The Company accounts for its acquisitions in accordance with ASC 805-10, Business Combinations using the acquisition method of accounting. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. In accordance with ASC 350-10, Intangibles Goodwill and Other goodwill and intangible assets with indefinite lives are reviewed by the Company at least annually for impairment. The Companys business comprises a single operating reporting unit for impairment test purposes. For the purposes of these analyses, the Companys estimates of fair value are based on a combination of the income approach, which estimates the fair value of the Company based on its future discounted cash flows, and the market approach, which estimates the fair value of the Company based on comparable market prices. The Company performed its most recent annual impairment test as of October 1, 2011 and did not incur an impairment charge.
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The following table provides information regarding the Companys intangible assets, which are included in the accompanying unaudited condensed consolidated balance sheets at September 30, 2012 and December 31, 2011 (in millions):
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September 30, 2012 |
December 31, 2011 |
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Amortized intangible assets: |
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Contract-based physician minimum revenue guarantees |
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Gross carrying amount | $ | 97.5 | $ | 92.5 | ||||
Accumulated amortization | (55.7 | ) | (48.7 | ) | ||||
Net total | 41.8 | 43.8 | ||||||
Non-competition agreements |
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Gross carrying amount | 34.8 | 32.8 | ||||||
Accumulated amortization | (18.7 | ) | (15.2 | ) | ||||
Net total | 16.1 | 17.6 | ||||||
Other amortized intangible assets |
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Gross carrying amount | 2.4 | 2.4 | ||||||
Accumulated amortization | (1.2 | ) | (0.3 | ) | ||||
Net total | 1.2 | 2.1 | ||||||
Total amortized intangible assets |
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Gross carrying amount | 134.7 | 127.7 | ||||||
Accumulated amortization | (75.6 | ) | (64.2 | ) | ||||
Net total | 59.1 | 63.5 | ||||||
Indefinite-lived intangible assets: |
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Certificates of need and certificates of need exemptions | 24.8 | 23.9 | ||||||
Licenses, provider numbers, accreditations and other | 3.1 | 2.1 | ||||||
Net total | 27.9 | 26.0 | ||||||
Total intangible assets: |
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Gross carrying amount | 162.6 | 153.7 | ||||||
Accumulated amortization | (75.6 | ) | (64.2 | ) | ||||
Net total | $ | 87.0 | $ | 89.5 |
The Company has committed to provide certain financial assistance pursuant to recruiting agreements, or physician minimum revenue guarantees, with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician to assist in establishing his or her practice.
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The Company accounts for its physician minimum revenue guarantees in accordance with the provisions of ASC 460-10, Guarantees (ASC 460-10). In accordance with ASC 460-10, the Company records a contract-based intangible asset and a related guarantee liability for new physician minimum revenue guarantees. The contract-based intangible asset is amortized over the period of the physician contract, which typically ranges from four to five years and is included as an expense under the caption Other operating expenses in the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2012 and December 31, 2011, the Companys liability for contract-based physician minimum revenue guarantees was $15.2 million and $13.6 million, respectively. These amounts are included as a current liability under the caption Other current liabilities in the Companys accompanying unaudited condensed consolidated balance sheets.
The Company has entered into non-competition agreements with certain physicians and other individuals which are amortized on a straight-line basis over the term of the agreements.
The construction or acquisition of new facilities, the expansion of existing facilities and the addition of new services and certain equipment at the Companys facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. The Company operates hospitals in certain states that have adopted certificate of need laws. The Company has determined that these intangible assets have an indefinite useful life.
To operate hospitals, the Company must obtain certain licenses, provider numbers and accreditations from federal, state and other accrediting agencies. The Company has determined that these intangible assets have an indefinite useful life.
Effective July 24, 2012, the Company replaced the Prior Credit Agreement with the Senior Credit Agreement maturing on July 24, 2017. The Senior Credit Agreement provides for the $450.0 million Term Facility and the $350.0 million Revolving Facility. The proceeds from the Term Facility were used to repay the $443.7 million outstanding Term B Loans under the Prior Credit Agreement and to pay fees and expenses related to the Senior Credit Agreement. The Term Facility requires scheduled quarterly repayments in an amount equal to 2.5% per annum for each of the first, second and third years and 5.0% per annum for the fourth year and first three quarters of the fifth year, with the balance due at maturity. Additionally, the Term Facility is subject to mandatory prepayments based on excess cash flow, as well as upon the occurrence of certain other events, as specifically described in the Senior Credit Agreement. The Senior Credit Agreement is guaranteed on a senior basis by the Companys subsidiaries with certain limited exceptions.
The Senior Credit Agreement provides for the issuance of letters of credit up to $75.0 million. Issued letters of credit reduce the amounts available under the Revolving Facility. As of September 30, 2012, the Company had $29.8 million in letters of credit outstanding that were related to the self-insured retention level of its general and professional liability insurance and workers compensation programs as security for payment of claims.
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During September 2012, the Company borrowed $40.0 million under the Revolving Facility for general purposes. Under the terms of the Senior Credit Agreement, amounts available for borrowing under the Revolving Facility were $280.2 million as of September 30, 2012.
Interest on the outstanding borrowings under the Senior Credit Agreement is payable at the Companys option at either an adjusted London Interbank Offer Rate (LIBOR) or an adjusted base rate plus an applicable margin. The applicable margin under the Senior Credit Agreement ranges from 1.50% to 2.50% for LIBOR loans and from 0.50% to 1.50% for adjusted base rate loans based on the Companys total leverage ratio, calculated in accordance with the Senior Credit Agreement.
As of September 30, 2012, the applicable annual interest rates under the Term Facility and the Revolving Facility were 1.97% and 1.98%, respectively, which were based on the 30-day adjusted LIBOR plus the applicable margins. The 30-day adjusted LIBOR was 0.22% and 0.23% for the Term Facility and the Revolving Facility, respectively, as of September 30, 2012. The weighted-average applicable annual interest rate for the three months ended September 30, 2012 under the Senior Credit Agreement was 2.02%.
The Senior Credit Agreement requires the Company to satisfy a maximum total leverage ratio not to exceed 5.00:1.00 through June 30, 2014 with a step-down to 4.75:1.00 through June 30, 2015, 4.50:1.00 through June 30, 2016 and 4.25:1.00 through the remaining term and as determined on a trailing four quarter basis. The Company was in compliance with this covenant as of September 30, 2012.
In addition, the Senior Credit Agreement contains certain customary affirmative and negative covenants, which among other things, limit the Companys ability to incur additional debt, create liens, merge, consolidate, enter into acquisitions, sell assets, effect sale leaseback transactions, pay dividends, pay subordinated debt and effect transactions with its affiliates. It does not contain provisions that would accelerate the maturity dates upon a downgrade in the Companys credit rating. However, a downgrade in the Companys credit rating could adversely affect its ability to obtain other capital sources in the future and could increase the Companys cost of borrowings.
In connection with the Companys replacement of the Prior Credit Agreement with the Senior Credit Agreement during the three months ended September 30, 2012, the Company recorded $4.4 million of debt extinguishment costs. The debt extinguishment costs include $2.4 million of previously capitalized loan costs and $2.0 million of loan costs related to the issuance of the Senior Credit Agreement.
Through May 30, 2011, the Company had an interest rate swap agreement in effect with Citibank as counterparty. Effective May 30, 2011, the Companys interest rate swap agreement matured. Prior to its maturity, the interest rate swap agreement required the Company to make quarterly fixed rate payments to Citibank calculated on a notional amount at an annual fixed rate of 5.585% while Citibank was obligated to make quarterly floating payments to the Company based on the three-month LIBOR on the same referenced notional amount. The notional amount in effect during 2011 through May 30, 2011 was $300.0 million.
The Company entered into the interest rate swap agreement to mitigate the floating interest rate risk on a portion of its outstanding borrowings under the Prior Credit Agreement. In accordance with ASC 815-10 Derivatives and Hedging, the Company designated its interest rate swap as a cash flow hedge. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified
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into earnings in the same period or periods during which the hedged transactions affect earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Through May 30, 2011, the Company assessed the effectiveness of its interest rate swap and determined the hedge to be effective. During the three months ended September 30, 2011, the Company reclassed $1.1 million in previously recognized ineffective losses to OCI in connection with the maturity of the Companys interest rate swap agreement. During the nine months ended September 30, 2011, changes in the fair value of the Companys interest rate swap resulted in pretax comprehensive gains of $6.8 million, or $4.0 million net of taxes.
Since the Companys interest rate swap was not traded on a market exchange, the fair value was determined using a valuation model that involved a discounted cash flow analysis on the expected cash flows. This cash flow analysis reflected the contractual terms of the interest rate swap agreement, including the period to maturity, and used observable market-based inputs, including the three-month LIBOR forward interest rate curve. The fair value of the Companys interest rate swap agreement was determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts were based on the expectation of future interest rates based on the observable market three-month LIBOR forward interest rate curve and the notional amount being hedged. In addition, the Company incorporated credit valuation adjustments to appropriately reflect both its own and Citibanks non-performance or credit risk in the fair value measurements. The interest rate swap agreement exposed the Company to credit risk in the event of non-performance by Citibank. The majority of the inputs used to value its interest rate swap agreement, including the three-month LIBOR forward interest rate curve and market perceptions of the Companys credit risk used in the credit valuation adjustments, were observable inputs available to a market participant. As a result, the Company made the determination that the interest rate swap valuation was categorized as Level 2 within the fair value hierarchy, in accordance with ASC 820-10.
In accordance with repurchase plans adopted in 2010 and 2011, the Companys Board of Directors authorized the repurchase of outstanding shares of its common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other customary factors. The 2010 repurchase plan provided for the repurchase of up to $150.0 million in shares of the Companys common stock, and the Company has repurchased all shares authorized for repurchase under this plan. The 2011 plan provides for the repurchase of up to $250.0 million in shares of the Companys common stock. The Company is not obligated to repurchase any specific number of shares under its 2011 repurchase plan. The Company has designated the shares repurchased in accordance with the 2010 and 2011 repurchase plans as treasury stock.
In connection with the 2010 repurchase plan, the Company repurchased approximately 2.0 and 3.0 million shares for an aggregate purchase price, including commissions, of approximately $67.3 million and $103.6 million at an average purchase price of $33.46 and $35.24 per share for the three and nine months ended September 30, 2011, respectively. There were no repurchases made in accordance with the 2010 repurchase plan during the three or nine months ended September 30, 2012.
In connection with the 2011 repurchase plan, the Company repurchased approximately 0.9 million shares for an aggregate purchase price, including commissions, of $31.7 million at an average purchase price of $35.39 per share for both the three and nine months ended September 30, 2011. Additionally, during the nine months ended September 30, 2012, the Company repurchased a nominal number of shares for an aggregate purchase price, including commissions, of $0.1 million at an average purchase price of $35.01 per share in connection with the 2011 repurchase plan. There were no repurchases made in accordance with the 2011 repurchase plan during the three months ended September 30, 2012. Through September 30, 2012, the
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Company had repurchased approximately 1.8 million shares for an aggregate purchase price, including commissions, of approximately $65.2 million in accordance with the 2011 repurchase plan. As of September 30, 2012, the Company had remaining authority to repurchase up to an additional $184.8 million in shares in accordance with the 2011 repurchase plan. In connection with the 2011 repurchase plan, the Company recently entered into a trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of the Companys common stock during the Companys blackout period (the 10b5-1 Trading Plan). The 10b5-1 Trading Plan became effective on September 15, 2012 and will expire on October 30, 2012.
Additionally, the Company redeems shares from employees for minimum statutory tax withholding purposes upon vesting of certain stock awards granted pursuant to the Companys Amended and Restated 1998 Long-Term Incentive Plan (LTIP) and Amended and Restated Management Stock Purchase Plan (MSPP). The Company redeemed a nominal number of certain vested LTIP and MSPP shares during the three months ended September 30, 2012 and 2011. During the nine months ended September 30, 2012 and 2011, the Company redeemed approximately 0.2 million and 0.1 million shares of certain vested LTIP and MSPP shares for an aggregate purchase price of approximately $6.1 million and $5.9 million, respectively. The Company has designated these shares as treasury stock.
The Company issues stock-based awards, including stock options and other stock-based awards (nonvested stock, restricted stock, restricted stock units, performance shares and deferred stock units) to certain officers, employees and non-employee directors in accordance with the Companys various stockholder-approved stock-based compensation plans. The Company accounts for its stock-based awards in accordance with the provisions of ASC 718-10, Compensation Stock Compensation (ASC 718-10), and accordingly recognizes compensation expense over each of the stock-based awards requisite service period based on the estimated grant date fair value.
The Company granted options to purchase 789,800 and 724,190 shares of the Companys common stock to certain officers and employees in accordance with the LTIP during the nine months ended September 30, 2012 and 2011, respectively. Options to purchase shares granted to the Companys officers and employees in accordance with the LTIP were granted with an exercise price equal to the fair market value of the Companys common stock on the day prior to the grant date. The options granted during the nine months ended September 30, 2012 and 2011 become ratably exercisable beginning one year from the date of grant to three years after the date of grant and expire ten years from the date of grant.
The Company estimated the fair value of stock options granted using the Hull-White II (HW-II) lattice option valuation model and a single option award approach. The Company uses the HW-II because it considers characteristics of fair value option pricing, such as an options contractual term and the probability of exercise before the end of the contractual term. In addition, the complications surrounding the expected term of an option are material, as indicated in ASC 718-10. Given the Companys relatively large pool of unexercised options, the Company believes a lattice model that specifically addresses this fact and models a full term of exercises is the most appropriate and reliable means of valuing its stock options. The Company is amortizing the fair value on a straight-line basis over the requisite service period of the awards, which is the vesting period of three years. The stock options vest 33.3% on each grant anniversary date over three years of continued employment.
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The following table shows the weighted average assumptions the Company used to develop the fair value estimates under its HW-II option valuation model and the resulting estimates of weighted-average fair value per share of stock options granted during the nine months ended September 30, 2012 and 2011:
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Nine Months Ended September 30, |
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2012 | 2011 | |||||||
Expected volatility | 36.0% | 36.0% | ||||||
Risk free interest rate (range) | 0.03% 1.97% | 0.02% 3.58% | ||||||
Expected dividends | | | ||||||
Average expected term (years) | 5.3 | 5.3 | ||||||
Fair value per share of stock options granted | $12.18 | $11.77 |
The total intrinsic value of stock options exercised during the nine months ended September 30, 2012 and 2011 was $8.2 million and $12.7 million, respectively. The Company received $15.9 million and $0.1 million in cash from stock option exercises for the three months ended September 30, 2012 and 2011, respectively, and $21.4 million and $34.6 million during the nine months ended September 30, 2012 and 2011, respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled $2.8 million and $1.6 million for the nine months ended September 30, 2012 and 2011, respectively. There was a nominal amount of tax benefit realized for the tax deductions from stock options exercised during the three months ended September 30, 2012 and 2011.
As of September 30, 2012, there was $13.5 million of total estimated unrecognized compensation cost related to stock option compensation arrangements. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.3 years.
The Company granted 521,011 and 489,294 shares of nonvested stock awards to certain officers, employees and non-employee directors in accordance with the LTIP, MSPP and Outside Directors Stock and Incentive Compensation Plan during the nine months ended September 30, 2012 and 2011, respectively. The fair value of these other stock-based awards is determined based on the closing price of the Companys common stock on the day prior to the grant date. The nonvested stock awards granted during the nine months ended September 30, 2012 and 2011 have either cliff-vesting periods from the grant date of three years, cliff-vesting periods from the grant date of six months and one day or ratable vesting periods beginning one year from the date of grant to three years after the date of grant.
Of the nonvested stock awards granted during the nine months ended September 30, 2012 and 2011, 320,000 and 297,000, respectively, were performance-based. In addition to requiring continuing service of an employee, the vesting of these nonvested stock awards is contingent upon the satisfaction of certain financial goals, specifically related to the achievement of targeted annual revenues or earnings goals within a three-year period. If these goals are achieved, the nonvested stock awards will cliff-vest three years after the grant date. The performance criteria for the 297,000 performance-based nonvested stock awards granted during 2011 have been certified as met by the Compensation Committee of the Companys Board of Directors, however, these awards are still subject to continuing service requirements and the three year cliff-vesting provisions. For purposes of estimating compensation expense for the performance-based nonvested stock awards granted during the nine months ended September 30, 2012, the Company has assumed that the performance goals will be achieved. If the performance goals are not met for the performance-based awards granted during the nine months ended September 30, 2012, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed.
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Notwithstanding the specific grant vesting requirements, nonvested stock awards and performance-based awards granted under the LTIP become fully vested upon the death or disability of the participant. Additionally, in the event of termination without cause of a participant, the nonvested stock awards and performance-based awards otherwise subject to cliff-vesting become vested in a percentage equal to the number of full months of continuous employment following the date of grant through the date of termination divided by the total number of months in the vesting period, and in the case of performance-based awards, only in the event that the performance goals are attained.
The Company received $0.8 million and $0.6 million for the issuance of nonvested stock in accordance with the MSPP during the three months ended September 30, 2012 and 2011, respectively, and $1.3 million and $1.2 million during the nine months ended September 30, 2012 and 2011, respectively.
As of September 30, 2012, there was $21.3 million of total estimated unrecognized compensation cost related to other stock-based awards granted in accordance with the LTIP and MSPP. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.8 years.
The following table summarizes the Companys total stock-based compensation expense as well as the total recognized tax benefits related thereto for the three and nine months ended September 30, 2012 and 2011 (in millions):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Other stock-based awards | $ | 4.4 | $ | 4.1 | $ | 12.4 | $ | 10.8 | ||||||||
Stock options | 2.6 | 2.3 | 7.9 | 6.9 | ||||||||||||
Total stock-based compensation expense | $ | 7.0 | $ | 6.4 | $ | 20.3 | $ | 17.7 | ||||||||
Tax benefit on stock-based compensation expense | $ | 2.8 | $ | 2.4 | $ | 8.1 | $ | 7.1 |
The Company did not capitalize any stock-based compensation cost during the three or nine months ended September 30, 2012 or 2011. As of September 30, 2012, there was $34.8 million of total estimated unrecognized compensation cost related to all of the Companys stock-based compensation arrangements. Total estimated unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted-average period of 1.6 years.
Hospitals are subject to the regulation and oversight of various state and federal governmental agencies. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or whistleblower, suits against hospitals that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. The healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focal areas of the Office of the Inspector General (OIG) and other governmental fraud and abuse programs. Certain of our individual facilities have received, and from time to time, other facilities may receive, government inquiries from federal and state
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agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material adverse effect on our financial position, results of operations and liquidity.
In addition, the hospitals are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance.
In May 2009, the Companys hospital in Andalusia, Alabama (Andalusia Regional Hospital) produced documents responsive to a request received from the U.S. Attorneys Office for the Western District of New York regarding an investigation they are conducting with respect to the billing of kyphoplasty (spine related) procedures. Based on a review of the number of the kyphoplasty procedures performed at all of the Companys other hospitals, as part of its effort to cooperate with the U.S. Attorneys Office, by letter dated January 20, 2010 the Companys management identified to the U.S. Attorneys Office four additional facilities at which the number of inpatient kyphoplasty procedures approximated those performed at Andalusia Regional Hospital. The Companys management has completed its review of the relevant medical records and is continuing to cooperate with the governments investigation.
In December 2011, Jackson Purchase Medical Center, in Mayfield, Kentucky, received a request from an agent of the OIG, HHS, for information regarding the relationship between the hospital and a physician on its medical staff and that physicians use of a hospital-employed advanced nurse practitioner, as well as lease arrangements between the hospital and physician. The U.S. Attorneys Office for the Western District of Kentucky is also involved in this inquiry. The hospital is currently subject to a Corporate Integrity Agreement with the OIG, effective June 26, 2011. We have, and will continue to, cooperate with the government in this matter.
In addition to legal proceedings initiated by government agencies and third parties, all hospitals have an obligation to report and refund promptly any overpayments received once identified. Overpayments in this context include any amount received from a government program by a provider to which it is not entitled, regardless of the cause. Such overpayments become obligations in violation of the False Claims Act if not reported and refunded within 60 days of identification. Hospitals can meet the obligation to report and refund in three ways: (1) refunding overpayments directly to the program, (2) self-disclosing the overpayment to the OIG via its voluntary self disclosure protocol (with respect to False Claims Act and other violations not related to the Stark law), and (3) self-disclosing to CMS via the self-referral disclosure protocol (with respect to overpayments caused by potential violations of the Stark law only) for which CMS has the authority to reduce the amounts otherwise owed.
In connection with the acquisition of Marquette General, the Company agreed that, to the extent that the Marquette Sellers satisfaction of its retained liabilities, which includes the Marquette Sellers healthcare liabilities related to the self disclosure obligations as well as other obligations, causes its net proceeds to be reduced to less than $15.0 million, the Company would pay additional purchase consideration to the Marquette Seller. The Companys management made reasonable estimates and recorded an aggregate of $25.3 million representing the preliminary fair values of its potential obligation to the Marquette Seller related to the Marquette Contingent Obligations. The Companys management does not control and cannot predict with certainty the amount the Marquette Seller will owe any agency or creditor. Therefore, the final amounts paid in settlement, if any, could materially differ from amounts currently recorded. To the extent the Company is required to pay additional purchase consideration pursuant to the information described above, the amounts
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paid will reduce on a dollar-for-dollar basis, the remaining $321.7 million of the initial $350.0 million in capital improvements and physician recruitment commitment at Marquette General. The Companys Marquette Contingent Obligations are further described in Note 5.
During August 2012, Minden Medical Center (Minden) finalized an independent review of the medical necessity of certain services rendered to patients in its intensive outpatient psychiatric (IOP) program, which was managed by a third party, Allegiance Health Management, Inc. (Allegiance). This review was commenced by Minden in 2011 and, in August 2011, the hospital voluntarily disclosed its concerns regarding these services to the OIG pursuant to the OIGs self disclosure protocol. On January 3, 2012, Minden received notice that it had been accepted into the OIGs self disclosure protocol. Shortly after receiving this notice, Bolivar Medical Center (Bolivar) received a subpoena from the OIG seeking information about its IOP program and its relationship with Allegiance. Minden and Bolivar continue to cooperate with the government in addressing these matters.
The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physicians relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician, normally over a period of one year, to assist in establishing the physicians practice. The Company has committed to advance a maximum amount of approximately $38.5 million at September 30, 2012. The actual amount of such commitments to be subsequently advanced to physicians is estimated at $15.2 million and often depends upon the financial results of a physicians private practice during the guarantee period. Generally, amounts advanced under the recruiting agreements may be forgiven pro rata over a period of 36 to 48 months contingent upon the physician continuing to practice in the respective community. Pursuant to the Companys standard physician recruiting agreement, any breach or non-fulfillment by a physician under the physician recruiting agreement gives the Company the right to recover any payments made to the physician under the agreement.
The Company is reconfiguring some of its hospitals to more effectively accommodate patient services and to provide for a greater variety of services, as well as implementing various information system initiatives in its efforts to comply with the Health Information Technology for Economic and Clinical Health Act. The Company has incurred approximately $104.6 million in costs related to uncompleted projects as of September 30, 2012, which is included under the caption Construction in progress in the Companys accompanying unaudited condensed consolidated balance sheet. At September 30, 2012, these uncompleted projects had an estimated cost to complete and equip of approximately $64.2 million. Additionally, the Company is subject to annual capital expenditure commitments in connection with several of its facilities, including the remaining $321.7 million of an initial $350.0 million over the next ten years, subject to certain offsets, and $20.0 million over the next ten years for the Companys recently acquired Marquette General and Twin County, respectively.
The Company recently entered into agreements with a third party to provide certain nonclinical business functions to the Company, including supply chain management and revenue cycle functions under a shared centralized resource model for periods ranging from eight to ten years. In connection with the Companys entry into these agreements, the Company extended its current technology support agreement with this same third party. These agreements are in addition to the Companys existing agreement with this third party to provide payroll processing services.
19
The Companys management believes this model of sharing centralized resources to support common business functions across multi-facility enterprises provides it efficiencies and is the most cost effective approach to managing these nonclinical business functions. The Company recently completed the implementation of the payroll processing services and expects to implement the supply chain management and revenue cycle functions over the next 21 to 27 months. Primarily in connection with the implementation process, the Company incurred severance and retention costs for its affected workforce of approximately $1.8 million and $2.0 million for the three and nine months ended September 30, 2012, respectively. The Company estimates it will recognize approximately $6.1 million of additional severance and retention costs over the remaining implementation periods.
The Company has entered into an agreement with an unrelated third party to lease a new hospital support center with a targeted occupancy date in the fourth quarter of 2013. Under the terms of the lease agreement, the Company will lease from the third party the newly constructed hospital support center for a period of just over 15 years following construction completion. The Companys management has determined that it has substantially all of the risks of ownership of the new hospital support center during the construction period and in accordance with ASC 840-40, Leases Sale-Leaseback Transactions (ASC 840-40) has recorded an asset under the caption Construction in progress and related financing obligation under the caption Reserves for self-insurance claims and other liabilities in the accompanying unaudited condensed consolidated balance sheet of $7.7 million as of September 30, 2012. This asset and related liability represents the cumulative costs incurred to date and funded by the unrelated third party to construct the new hospital support center. Once construction is complete, the Company will consider the applicable requirements of ASC 840-40 for sale-leaseback treatment, including the transfer back of all risks of ownership to the unrelated third party and whether the Company has any continuing involvement in the leased property. Currently, the Company anticipates that its lease agreement will qualify as a financing lease in accordance with ASC 840-40 and accordingly, the Company will depreciate the completed hospital support center and amortize the related financing obligation over the expected lease agreement term.
In connection with the acquisition of Marquette General, the Company recorded $25.3 million of Marquette Contingent Obligations. The Companys management made reasonable estimates of the Marquette Contingent Obligations based on facts that existed as of the acquisition date. The Company will continue to analyze and refine its estimate as changes in facts and circumstances warrant. The Companys management does not control and cannot predict with certainty the progress or final outcome of any discussions with third parties, such as government agencies. Therefore, the final amounts paid in settlement of the pre-acquisition healthcare and other retained liabilities, if any, could materially differ from amounts currently recorded. To the extent the Company is required to pay additional purchase consideration pursuant to the information described above, the amounts paid will reduce, on a dollar-for-dollar basis, the remaining $321.7 million of the initial $350.0 million capital improvements and physician recruitment commitment at Marquette General. The Companys Marquette Contingent Obligations are further described in Note 5.
20
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 (dollars and shares in millions, except per share amounts):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator for basic and diluted earnings per share attributable to LifePoint Hospitals, Inc.: |
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Income from continuing operations | $ | 19.3 | $ | 39.6 | $ | 118.1 | $ | 127.2 | ||||||||
Less: Net income attributable to noncontrolling interests | (0.1 | ) | (0.7 | ) | (2.7 | ) | (2.2 | ) | ||||||||
Income from continuing operations attributable to LifePoint Hospitals, Inc. stockholders | 19.2 | 38.9 | 115.4 | 125.0 | ||||||||||||
(Loss) income from discontinued operations, net of income taxes | | (0.1 | ) | 0.2 | 0.2 | |||||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 19.2 | $ | 38.8 | $ | 115.6 | $ | 125.2 | ||||||||
Denominator: |
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Weighted average shares outstanding basic | 47.5 | 49.3 | 47.3 | 50.2 | ||||||||||||
Effect of dilutive securities: stock options and other stock-based awards | 1.3 | 1.1 | 1.2 | 1.2 | ||||||||||||
Weighted average shares outstanding diluted | 48.8 | 50.4 | 48.5 | 51.4 | ||||||||||||
Basic earnings per share attributable to LifePoint Hospitals, Inc. stockholders: |
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Continuing operations | $ | 0.40 | $ | 0.79 | $ | 2.44 | $ | 2.49 | ||||||||
Discontinued operations | | | 0.01 | 0.01 | ||||||||||||
Net income | $ | 0.40 | $ | 0.79 | $ | 2.45 | $ | 2.50 | ||||||||
Diluted earnings per share attributable to LifePoint Hospitals, Inc. stockholders: |
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Continuing operations | $ | 0.39 | $ | 0.77 | $ | 2.38 | $ | 2.43 | ||||||||
Discontinued operations | | | | 0.01 | ||||||||||||
Net income | $ | 0.39 | $ | 0.77 | $ | 2.38 | $ | 2.44 |
The 3½% Notes and the 3¼% Debentures are included in the calculation of diluted earnings per share whether or not the contingent requirements have been met for conversion if the conversion price of $51.79 and $61.22, respectively, is less than the average market price of the Companys common stock for the period. Upon conversion, the par value is settled in cash, and only the conversion premium is settled in shares of the Companys common stock. The impact of the 3½% Notes and the 3¼% Debentures has been excluded because the effects would have been anti-dilutive for the three and nine months ended September 30, 2012 and 2011. Additionally, certain outstanding stock-based awards have been excluded from the calculation of diluted earnings per share to the extent they were anti-dilutive for the three and nine months ended September 30, 2012 and 2011.
21
The 6.625% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of the Companys existing subsidiaries that guarantee the Senior Credit Agreement. The following presents the condensed consolidating financial information for the parent issuer, guarantor subsidiaries, non-guarantor subsidiaries, certain eliminations and the Company for the three and nine months ended September 30, 2012 and 2011 and as of September 30, 2012 and December 31, 2011:
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues before provision for doubtful accounts | $ | | $ | 844.1 | $ | 140.8 | $ | | $ | 984.9 | ||||||||||
Provision for doubtful accounts | | 142.5 | 22.2 | | 164.7 | |||||||||||||||
Revenues | | 701.6 | 118.6 | | 820.2 | |||||||||||||||
Salaries and benefits | 7.0 | 326.4 | 56.9 | | 390.3 | |||||||||||||||
Supplies | | 107.3 | 22.0 | | 129.3 | |||||||||||||||
Other operating expenses | | 180.8 | 24.5 | | 205.3 | |||||||||||||||
Other income | | (11.7 | ) | (0.3 | ) | | (12.0 | ) | ||||||||||||
Equity in earnings of affiliates | (31.7 | ) | | | 31.7 | | ||||||||||||||
Depreciation and amortization | | 40.8 | 6.9 | | 47.7 | |||||||||||||||
Interest expense, net | 5.3 | 17.3 | 1.9 | | 24.5 | |||||||||||||||
Debt extinguishment costs | 4.4 | | | | 4.4 | |||||||||||||||
Management (income) fees | | (2.0 | ) | 2.0 | | | ||||||||||||||
(15.0 | ) | 658.9 | 113.9 | 31.7 | 789.5 | |||||||||||||||
Income from continuing operations before taxes | 15.0 | 42.7 | 4.7 | (31.7 | ) | 30.7 | ||||||||||||||
(Benefit) provision for income taxes | (4.2 | ) | 15.6 | | | 11.4 | ||||||||||||||
Net income | 19.2 | 27.1 | 4.7 | (31.7 | ) | 19.3 | ||||||||||||||
Less: Net (income) loss attributable to noncontrolling interests | | (1.1 | ) | 1.0 | | (0.1 | ) | |||||||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 19.2 | $ | 26.0 | $ | 5.7 | $ | (31.7 | ) | $ | 19.2 |
22
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues before provision for doubtful accounts | $ | | $ | 791.5 | $ | 74.7 | $ | | $ | 866.2 | ||||||||||
Provision for doubtful accounts | | 117.0 | 10.0 | | 127.0 | |||||||||||||||
Revenues | | 674.5 | 64.7 | | 739.2 | |||||||||||||||
Salaries and benefits | 6.4 | 307.9 | 23.5 | | 337.8 | |||||||||||||||
Supplies | | 102.0 | 11.9 | | 113.9 | |||||||||||||||
Other operating expenses | | 159.7 | 11.4 | | 171.1 | |||||||||||||||
Other income | | (11.0 | ) | | | (11.0 | ) | |||||||||||||
Equity in earnings of affiliates | (50.4 | ) | | | 50.4 | | ||||||||||||||
Depreciation and amortization | | 36.8 | 3.9 | | 40.7 | |||||||||||||||
Interest expense, net | 5.8 | 17.9 | 0.6 | | 24.3 | |||||||||||||||
Management (income) fees | | (2.3 | ) | 2.3 | | | ||||||||||||||
(38.2 | ) | 611.0 | 53.6 | 50.4 | 676.8 | |||||||||||||||
Income from continuing operations before taxes | 38.2 | 63.5 | 11.1 | (50.4 | ) | 62.4 | ||||||||||||||
(Benefit) provision for income taxes | (0.6 | ) | 23.4 | | | 22.8 | ||||||||||||||
Income from continuing operations | 38.8 | 40.1 | 11.1 | (50.4 | ) | 39.6 | ||||||||||||||
Loss from discontinued operations, net of taxes | | (0.1 | ) | | | (0.1 | ) | |||||||||||||
Net income | 38.8 | 40.0 | 11.1 | (50.4 | ) | 39.5 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | | | (0.7 | ) | | (0.7 | ) | |||||||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 38.8 | $ | 40.0 | $ | 10.4 | $ | (50.4 | ) | $ | 38.8 |
23
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues before provision for doubtful accounts | $ | | $ | 2,581.7 | $ | 381.4 | $ | | $ | 2,963.1 | ||||||||||
Provision for doubtful accounts | | 402.1 | 62.5 | | 464.6 | |||||||||||||||
Revenues | | 2,179.6 | 318.9 | | 2,498.5 | |||||||||||||||
Salaries and benefits | 20.3 | 973.3 | 136.6 | | 1,130.2 | |||||||||||||||
Supplies | | 325.5 | 57.2 | | 382.7 | |||||||||||||||
Other operating expenses | | 523.9 | 65.6 | | 589.5 | |||||||||||||||
Other income | | (13.4 | ) | (1.3 | ) | | (14.7 | ) | ||||||||||||
Equity in earnings of affiliates | (152.7 | ) | | | 152.7 | | ||||||||||||||
Depreciation and amortization | | 119.1 | 20.6 | | 139.7 | |||||||||||||||
Interest expense, net | 18.3 | 52.6 | 4.8 | | 75.7 | |||||||||||||||
Debt extinguishment costs | 4.4 | | | | 4.4 | |||||||||||||||
Impairment charge | | 3.1 | | | 3.1 | |||||||||||||||
Management (income) fees | | (6.1 | ) | 6.1 | | | ||||||||||||||
(109.7 | ) | 1,978.0 | 289.6 | 152.7 | 2,310.6 | |||||||||||||||
Income from continuing operations before taxes | 109.7 | 201.6 | 29.3 | (152.7 | ) | 187.9 | ||||||||||||||
(Benefit) provision for income taxes | (5.9 | ) | 75.7 | | | 69.8 | ||||||||||||||
Income from continuing operations | 115.6 | 125.9 | 29.3 | (152.7 | ) | 118.1 | ||||||||||||||
Income from discontinued operations, net of taxes | | 0.2 | | | 0.2 | |||||||||||||||
Net income | 115.6 | 126.1 | 29.3 | (152.7 | ) | 118.3 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | | (0.9 | ) | (1.8 | ) | | (2.7 | ) | ||||||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 115.6 | $ | 125.2 | $ | 27.5 | $ | (152.7 | ) | $ | 115.6 |
24
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues before provision for doubtful accounts | $ | | $ | 2,395.9 | $ | 232.3 | $ | | $ | 2,628.2 | ||||||||||
Provision for doubtful accounts | | 352.4 | 31.0 | | 383.4 | |||||||||||||||
Revenues | | 2,043.5 | 201.3 | | 2,244.8 | |||||||||||||||
Salaries and benefits | 17.7 | 921.5 | 72.0 | | 1,011.2 | |||||||||||||||
Supplies | | 308.9 | 37.8 | | 346.7 | |||||||||||||||
Other operating expenses | | 460.7 | 35.1 | | 495.8 | |||||||||||||||
Other income | | (13.9 | ) | (1.3 | ) | | (15.2 | ) | ||||||||||||
Equity in earnings of affiliates | (167.1 | ) | | | 167.1 | | ||||||||||||||
Depreciation and amortization | | 109.9 | 11.1 | | 121.0 | |||||||||||||||
Interest expense, net | 27.6 | 52.6 | 1.4 | | 81.6 | |||||||||||||||
Management (income) fees | | (7.1 | ) | 7.1 | | | ||||||||||||||
(121.8 | ) | 1,832.6 | 163.2 | 167.1 | 2,041.1 | |||||||||||||||
Income from continuing operations before taxes | 121.8 | 210.9 | 38.1 | (167.1 | ) | 203.7 | ||||||||||||||
(Benefit) provision for income taxes | (3.4 | ) | 79.9 | | | 76.5 | ||||||||||||||
Income from continuing operations | 125.2 | 131.0 | 38.1 | (167.1 | ) | 127.2 | ||||||||||||||
Income from discontinued operations, net of taxes | | 0.2 | | | 0.2 | |||||||||||||||
Net income | 125.2 | 131.2 | 38.1 | (167.1 | ) | 127.4 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | | (0.4 | ) | (1.8 | ) | | (2.2 | ) | ||||||||||||
Net income attributable to LifePoint Hospitals, Inc. | $ | 125.2 | $ | 130.8 | $ | 36.3 | $ | (167.1 | ) | $ | 125.2 |
25
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net income | $ | 38.8 | $ | 40.0 | $ | 11.1 | $ | (50.4 | ) | $ | 39.5 | |||||||||
Other comprehensive income, net of income taxes: |
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Unrealized losses on changes in fair value of interest rate swap | (1.1 | ) | | | | (1.1 | ) | |||||||||||||
Other comprehensive income | (1.1 | ) | | | | (1.1 | ) | |||||||||||||
Comprehensive income | 37.7 | 40.0 | 11.1 | (50.4 | ) | 38.4 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | | | (0.7 | ) | | (0.7 | ) | |||||||||||||
Comprehensive income attributable to LifePoint Hospitals, Inc. | $ | 37.7 | $ | 40.0 | $ | 10.4 | $ | (50.4 | ) | $ | 37.7 |
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net income | $ | 125.2 | $ | 131.2 | $ | 38.1 | $ | (167.1 | ) | $ | 127.4 | |||||||||
Other comprehensive income, net of income taxes: |
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Unrealized gains on changes in fair value of interest rate swap | 4.0 | | | | 4.0 | |||||||||||||||
Other comprehensive income | 4.0 | | | | 4.0 | |||||||||||||||
Comprehensive income | 129.2 | 131.2 | 38.1 | (167.1 | ) | 131.4 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | | (0.4 | ) | (1.8 | ) | | (2.2 | ) | ||||||||||||
Comprehensive income attributable to LifePoint Hospitals, Inc. | $ | 129.2 | $ | 130.8 | $ | 36.3 | $ | (167.1 | ) | $ | 129.2 |
26
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | 55.2 | $ | 42.7 | $ | | $ | 97.9 | ||||||||||
Accounts receivable, net | | 404.7 | 108.2 | | 512.9 | |||||||||||||||
Inventories | | 76.2 | 19.8 | | 96.0 | |||||||||||||||
Prepaid expenses | 0.2 | 24.3 | 4.5 | | 29.0 | |||||||||||||||
Deferred tax assets | 154.2 | | | | 154.2 | |||||||||||||||
Other current assets | | 36.4 | 8.2 | | 44.6 | |||||||||||||||
154.4 | 596.8 | 183.4 | | 934.6 | ||||||||||||||||
Property and equipment: |
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Land | | 74.5 | 27.9 | | 102.4 | |||||||||||||||
Buildings and improvements | | 1,512.3 | 290.5 | | 1,802.8 | |||||||||||||||
Equipment | | 1,093.6 | 106.5 | | 1,200.1 | |||||||||||||||
Construction in progress | | 96.6 | 8.0 | | 104.6 | |||||||||||||||
| 2,777.0 | 432.9 | | 3,209.9 | ||||||||||||||||
Accumulated depreciation | | (1,137.2 | ) | (72.9 | ) | | (1,210.1 | ) | ||||||||||||
| 1,639.8 | 360.0 | | 1,999.8 | ||||||||||||||||
Deferred loan costs, net | 22.7 | | | | 22.7 | |||||||||||||||
Intangible assets, net | | 48.9 | 38.1 | | 87.0 | |||||||||||||||
Investments in subsidiaries | 1,615.4 | | | (1,615.4 | ) | | ||||||||||||||
Other | 1.2 | 19.0 | 18.7 | | 38.9 | |||||||||||||||
Goodwill | | 1,440.7 | 161.5 | | 1,602.2 | |||||||||||||||
Total assets | $ | 1,793.7 | $ | 3,745.2 | $ | 761.7 | $ | (1,615.4 | ) | $ | 4,685.2 | |||||||||
LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | 85.4 | $ | 28.4 | $ | | $ | 113.8 | ||||||||||
Accrued salaries | | 97.8 | 24.6 | | 122.4 | |||||||||||||||
Income taxes payable | 8.1 | | | | 8.1 | |||||||||||||||
Other current liabilities | 22.3 | 119.9 | 29.6 | | 171.8 | |||||||||||||||
Current maturities of long-term debt | 11.3 | 1.6 | 0.7 | | 13.6 | |||||||||||||||
41.7 | 304.7 | 83.3 | | 429.7 | ||||||||||||||||
Long-term debt | 1,642.4 | 5.8 | 2.4 | | 1,650.6 | |||||||||||||||
Intercompany | (2,240.3 | ) | 2,018.1 | 222.2 | | | ||||||||||||||
Deferred income tax liabilities | 236.8 | | | | 236.8 | |||||||||||||||
Long-term portion of reserves for self-insurance claims | | 108.2 | 24.9 | | 133.1 | |||||||||||||||
Other long-term liabilities | | 30.0 | 39.8 | | 69.8 | |||||||||||||||
Long-term income tax liability | 17.9 | | | | 17.9 | |||||||||||||||
Total liabilities | (301.5 | ) | 2,466.8 | 372.6 | | 2,537.9 | ||||||||||||||
Redeemable noncontrolling interests | | | 29.0 | | 29.0 | |||||||||||||||
Total LifePoint Hospitals, Inc. stockholders' equity | 2,095.2 | 1,276.9 | 338.5 | (1,615.4 | ) | 2,095.2 | ||||||||||||||
Noncontrolling interests | | 1.5 | 21.6 | 23.1 | ||||||||||||||||
Total equity | 2,095.2 | 1,278.4 | 360.1 | (1,615.4 | ) | 2,118.3 | ||||||||||||||
Total liabilities and equity | $ | 1,793.7 | $ | 3,745.2 | $ | 761.7 | $ | (1,615.4 | ) | $ | 4,685.2 |
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | 106.2 | $ | 20.0 | $ | | $ | 126.2 | ||||||||||
Accounts receivable, net | | 373.6 | 57.0 | | 430.6 | |||||||||||||||
Inventories | | 75.4 | 11.8 | | 87.2 | |||||||||||||||
Prepaid expenses | 0.1 | 24.7 | 1.6 | | 26.4 | |||||||||||||||
Income taxes receivable | 1.6 | | | | 1.6 | |||||||||||||||
Deferred tax assets | 125.7 | | | | 125.7 | |||||||||||||||
Other current assets | | 42.3 | | | 42.3 | |||||||||||||||
127.4 | 622.2 | 90.4 | | 840.0 | ||||||||||||||||
Property and equipment: |
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Land | | 74.1 | 19.4 | | 93.5 | |||||||||||||||
Buildings and improvements | | 1,427.5 | 204.1 | | 1,631.6 | |||||||||||||||
Equipment | | 991.3 | 92.7 | | 1,084.0 | |||||||||||||||
Construction in progress | | 102.6 | 3.1 | | 105.7 | |||||||||||||||
| 2,595.5 | 319.3 | | 2,914.8 | ||||||||||||||||
Accumulated depreciation | | (1,001.2 | ) | (83.2 | ) | | (1,084.4 | ) | ||||||||||||
| 1,594.3 | 236.1 | | 1,830.4 | ||||||||||||||||
Deferred loan costs, net | 21.7 | | | | 21.7 | |||||||||||||||
Intangible assets, net | | 46.7 | 42.8 | | 89.5 | |||||||||||||||
Investments in subsidiaries | 1,467.9 | | | (1,467.9 | ) | | ||||||||||||||
Other | 1.0 | 16.7 | 2.1 | | 19.8 | |||||||||||||||
Goodwill | | 1,413.1 | 155.6 | | 1,568.7 | |||||||||||||||
Total assets | $ | 1,618.0 | $ | 3,693.0 | $ | 527.0 | $ | (1,467.9 | ) | $ | 4,370.1 | |||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable | $ | | $ | 88.5 | $ | 11.1 | $ | | $ | 99.6 | ||||||||||
Accrued salaries | | 94.3 | 8.8 | | 103.1 | |||||||||||||||
Other current liabilities | 14.0 | 141.1 | 13.1 | | 168.2 | |||||||||||||||
Current maturities of long-term debt | | 1.5 | 0.4 | | 1.9 | |||||||||||||||
14.0 | 325.4 | 33.4 | | 372.8 | ||||||||||||||||
Long-term debt | 1,588.2 | 6.0 | 1.2 | | 1,595.4 | |||||||||||||||
Intercompany | (2,206.4 | ) | 2,151.4 | 55.0 | | | ||||||||||||||
Deferred income tax liabilities | 259.0 | | | | 259.0 | |||||||||||||||
Long-term portion of reserves for self-insurance claims | | 94.8 | 23.5 | | 118.3 | |||||||||||||||
Other long-term liabilities | 18.4 | 2.4 | 20.8 | |||||||||||||||||
Long-term income tax liability | 18.0 | | | | 18.0 | |||||||||||||||
Total liabilities | (327.2 | ) | 2,596.0 | 115.5 | | 2,384.3 | ||||||||||||||
Redeemable noncontrolling interests | | | 26.2 | | 26.2 | |||||||||||||||
Total LifePoint Hospitals, Inc. stockholders' equity | 1,945.2 | 1,095.5 | 372.4 | (1,467.9 | ) | 1,945.2 | ||||||||||||||
Noncontrolling interests | | 1.5 | 12.9 | | 14.4 | |||||||||||||||
Total equity | 1,945.2 | 1,097.0 | 385.3 | (1,467.9 | ) | 1,959.6 | ||||||||||||||
Total liabilities and equity | $ | 1,618.0 | $ | 3,693.0 | $ | 527.0 | $ | (1,467.9 | ) | $ | 4,370.1 |
28
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income | $ | 19.2 | $ | 27.1 | $ | 4.7 | $ | (31.7 | ) | $ | 19.3 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||||||
Equity in earnings of affiliates | (31.7 | ) | | | 31.7 | | ||||||||||||||
Stock-based compensation | 7.0 | | | | 7.0 | |||||||||||||||
Depreciation and amortization | | 40.8 | 6.9 | | 47.7 | |||||||||||||||
Amortization of physician minimum revenue guarantees | | 4.5 | 0.4 | | 4.9 | |||||||||||||||
Amortization of convertible debt discounts | 6.5 | | | | 6.5 | |||||||||||||||
Amortization of deferred loan costs | 1.3 | | | | 1.3 | |||||||||||||||
Debt extinguishment costs | 4.4 | | | | 4.4 | |||||||||||||||
Deferred income tax benefit | (9.4 | ) | | | | (9.4 | ) | |||||||||||||
Reserve for self-insurance claims, net of payments | | (0.3 | ) | 2.1 | | 1.8 | ||||||||||||||
Increase (decrease) in cash from operating assets and liabilities, net of effects of acquisitions and divestitures: |
||||||||||||||||||||
Accounts receivable | | (1.3 | ) | (5.4 | ) | | (6.7 | ) | ||||||||||||
Inventories and other current assets | (0.1 | ) | (6.4 | ) | (3.0 | ) | | (9.5 | ) | |||||||||||
Accounts payable and accrued expenses | 9.4 | 19.8 | 11.1 | | 40.3 | |||||||||||||||
Income taxes payable/receivable | (22.9 | ) | | | | (22.9 | ) | |||||||||||||
Other | | 0.4 | (0.8 | ) | | (0.4 | ) | |||||||||||||
Net cash (used in) provided by operating activities | (16.3 | ) | 84.6 | 16.0 | | 84.3 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment | | (44.0 | ) | (3.3 | ) | | (47.3 | ) | ||||||||||||
Acquisitions, net of cash acquired | | (26.9 | ) | (135.4 | ) | | (162.3 | ) | ||||||||||||
Other | | (0.1 | ) | | | (0.1 | ) | |||||||||||||
Net cash used in investing activities | | (71.0 | ) | (138.7 | ) | | (209.7 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from borrowings | 490.0 | | | | 490.0 | |||||||||||||||
Payments of borrowings | (443.7 | ) | | | | (443.7 | ) | |||||||||||||
Repurchases of common stock | (0.3 | ) | | | | (0.3 | ) | |||||||||||||
Payment of debt financing costs | (9.6 | ) | | | | (9.6 | ) | |||||||||||||
Proceeds from exercise of stock options | 15.9 | | | | 15.9 | |||||||||||||||
Proceeds from employee stock purchase plans | 0.8 | | | | 0.8 | |||||||||||||||
Proceeds from (distributions to) noncontrolling interests | | 0.3 | (1.7 | ) | | (1.4 | ) | |||||||||||||
Change in intercompany balances with affiliates, net | (36.8 | ) | (107.8 | ) | 144.6 | | | |||||||||||||
Capital lease payments and other | | (0.7 | ) | | | (0.7 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 16.3 | (108.2 | ) | 142.9 | | 51.0 | ||||||||||||||
Change in cash and cash equivalents | | (94.6 | ) | 20.2 | | (74.4 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | | 149.8 | 22.5 | | 172.3 | |||||||||||||||
Cash and cash equivalents at end of period | $ | | $ | 55.2 | $ | 42.7 | $ | | $ | 97.9 |
29
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
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Net income | $ | 38.8 | $ | 40.0 | $ | 11.1 | $ | (50.4 | ) | $ | 39.5 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||||||
Loss from discontinued operations | | 0.1 | | | 0.1 | |||||||||||||||
Equity in earnings of affiliates | (50.4 | ) | | | 50.4 | | ||||||||||||||
Stock-based compensation | 6.4 | | | | 6.4 | |||||||||||||||
Depreciation and amortization | | 36.8 | 3.9 | | 40.7 | |||||||||||||||
Amortization of physician minimum revenue guarantees | | 4.5 | 0.5 | | 5.0 | |||||||||||||||
Amortization of convertible debt discounts | 6.1 | | | | 6.1 | |||||||||||||||
Amortization of deferred loan costs | 1.4 | | | | 1.4 | |||||||||||||||
Deferred income tax benefit | (15.3 | ) | | | | (15.3 | ) | |||||||||||||
Reserve for self-insurance claims, net of payments | | 2.7 | | | 2.7 | |||||||||||||||
Increase (decrease) in cash from operating assets and liabilities, net of effects of acquisitions and divestitures: |
||||||||||||||||||||
Accounts receivable | | (10.0 | ) | 0.6 | | (9.4 | ) | |||||||||||||
Inventories and other current assets | | (9.6 | ) | (0.2 | ) | | (9.8 | ) | ||||||||||||
Accounts payable and accrued expenses | (3.4 | ) | 11.9 | 0.1 | | 8.6 | ||||||||||||||
Income taxes payable/receivable | 37.0 | | | | 37.0 | |||||||||||||||
Other | 0.1 | (3.3 | ) | 0.2 | | (3.0 | ) | |||||||||||||
Net cash provided by operating activities | 20.7 | 73.1 | 16.2 | | 110.0 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment | | (44.3 | ) | (5.0 | ) | | (49.3 | ) | ||||||||||||
Acquisitions, net of cash acquired | | (23.3 | ) | (13.3 | ) | | (36.6 | ) | ||||||||||||
Other | | (0.3 | ) | | (0.3 | ) | ||||||||||||||
Net cash used in investing activities | | (67.9 | ) | (18.3 | ) | | (86.2 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments of borrowings | | (0.1 | ) | | | (0.1 | ) | |||||||||||||
Repurchases of common stock | (99.4 | ) | | | | (99.4 | ) | |||||||||||||
Payment of debt financing costs | (0.3 | ) | | | | (0.3 | ) | |||||||||||||
Proceeds from exercise of stock options | 0.1 | | | | 0.1 | |||||||||||||||
Refunds of employee stock purchase plans | 0.6 | | | | 0.6 | |||||||||||||||
Proceeds from (distributions to) noncontrolling interests | | 0.8 | (1.6 | ) | | (0.8 | ) | |||||||||||||
Change in intercompany balances with affiliates, net | 78.3 | (82.8 | ) | 4.5 | | | ||||||||||||||
Capital lease payments and other | | (0.3 | ) | | | (0.3 | ) | |||||||||||||
Net cash (used in) provided by financing activities | (20.7 | ) | (82.4 | ) | 2.9 | | (100.2 | ) | ||||||||||||
Change in cash and cash equivalents | | (77.2 | ) | 0.8 | | (76.4 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | | 264.6 | 11.2 | | 275.8 | |||||||||||||||
Cash and cash equivalents at end of period | $ | | $ | 187.4 | $ | 12.0 | $ | | $ | 199.4 |
30
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
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Net income | $ | 115.6 | $ | 126.1 | $ | 29.3 | $ | (152.7 | ) | $ | 118.3 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Income from discontinued operations | | (0.2 | ) | | | (0.2 | ) | |||||||||||||
Equity in earnings of affiliates | (152.7 | ) | | | 152.7 | | ||||||||||||||
Stock-based compensation | 20.3 | | | | 20.3 | |||||||||||||||
Depreciation and amortization | | 119.1 | 20.6 | | 139.7 | |||||||||||||||
Amortization of physician minimum revenue guarantees | | 13.5 | 1.2 | | 14.7 | |||||||||||||||
Amortization of convertible debt discounts | 19.2 | | | | 19.2 | |||||||||||||||
Amortization of deferred loan costs | 4.2 | | | | 4.2 | |||||||||||||||
Debt extinguishment costs | 4.4 | | | | 4.4 | |||||||||||||||
Impairment charge | | 3.1 | | | 3.1 | |||||||||||||||
Deferred income tax benefit | (48.0 | ) | | | | (48.0 | ) | |||||||||||||
Reserve for self-insurance claims, net of payments | | (2.4 | ) | 1.4 | | (1.0 | ) | |||||||||||||
Increase (decrease) in cash from operating assets and liabilities, net of effects of acquisitions and divestitures: |
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Accounts receivable | | (27.0 | ) | (15.4 | ) | | (42.4 | ) | ||||||||||||
Inventories and other current assets | (0.1 | ) | 1.8 | (3.9 | ) | | (2.2 | ) | ||||||||||||
Accounts payable and accrued expenses | 8.3 | 4.6 | 9.3 | | 22.2 | |||||||||||||||
Income taxes payable/receivable | 9.7 | | | | 9.7 | |||||||||||||||
Other | | 1.0 | (0.7 | ) | | 0.3 | ||||||||||||||
Net cash (used in) provided by operating activities continuing operations | (19.1 | ) | 239.6 | 41.8 | | 262.3 | ||||||||||||||
Net cash used in operating activities discontinued operations | | (0.7 | ) | | | (0.7 | ) | |||||||||||||
Net cash (used in) provided by operating activities | (19.1 | ) | 238.9 | 41.8 | | 261.6 | ||||||||||||||
Cash flows from investing activities: |
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Purchases of property and equipment | | (146.5 | ) | (10.9 | ) | | (157.4 | ) | ||||||||||||
Acquisitions, net of cash acquired | | (26.9 | ) | (155.5 | ) | | (182.4 | ) | ||||||||||||
Other | (0.2 | ) | (0.2 | ) | | | (0.4 | ) | ||||||||||||
Net cash used in investing activities | (0.2 | ) | (173.6 | ) | (166.4 | ) | | (340.2 | ) | |||||||||||
Cash flows from financing activities: |
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Proceeds from borrowings | 490.0 | | | | 490.0 | |||||||||||||||
Payments of borrowings | (443.7 | ) | | | | (443.7 | ) | |||||||||||||
Repurchases of common stock | (6.2 | ) | | | | (6.2 | ) | |||||||||||||
Payment of debt financing costs | (9.6 | ) | | | | (9.6 | ) | |||||||||||||
Proceeds from exercise of stock options | 21.4 | | | | 21.4 | |||||||||||||||
Proceeds from employee stock purchase plans | 1.3 | | | | 1.3 | |||||||||||||||
Proceeds from (distributions to) noncontrolling interests | | 0.9 | (3.7 | ) | | (2.8 | ) | |||||||||||||
Sales of redeemable noncontrolling interests | | | 1.6 | | 1.6 | |||||||||||||||
Change in intercompany balances with affiliates, net | (33.9 | ) | (115.9 | ) | 149.8 | | | |||||||||||||
Capital lease payments and other | | (1.3 | ) | (0.4 | ) | | (1.7 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 19.3 | (116.3 | ) | 147.3 | | 50.3 | ||||||||||||||
Change in cash and cash equivalents | | (51.0 | ) | 22.7 | | (28.3 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | | 106.2 | 20.0 | | 126.2 | |||||||||||||||
Cash and cash equivalents at end of period | $ | | $ | 55.2 | $ | 42.7 | $ | | $ | 97.9 |
31
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Parent Issuer |
Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
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Net income | $ | 125.2 | $ | 131.2 | $ | 38.1 | $ | (167.1 | ) | $ | 127.4 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Income from discontinued operations | | (0.2 | ) | | | (0.2 | ) | |||||||||||||
Equity in earnings of affiliates | (167.1 | ) | | | 167.1 | | ||||||||||||||
Stock-based compensation | 17.7 | | | | 17.7 | |||||||||||||||
Depreciation and amortization | | 109.9 | 11.1 | | 121.0 | |||||||||||||||
Amortization of physician minimum revenue guarantees | | 12.9 | 1.4 | | 14.3 | |||||||||||||||
Amortization of convertible debt discounts | 18.0 | | | | 18.0 | |||||||||||||||
Amortization of deferred loan costs | 4.4 | | | | 4.4 | |||||||||||||||
Deferred income tax benefit | (34.7 | ) | | | | (34.7 | ) | |||||||||||||
Reserve for self-insurance claims, net of payments | | 11.3 | (1.6 | ) | | 9.7 | ||||||||||||||
Increase (decrease) in cash from operating assets and liabilities, net of effects of acquisitions and divestitures: |
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Accounts receivable | | 4.8 | (4.9 | ) | | (0.1 | ) | |||||||||||||
Inventories and other current assets | (0.1 | ) | (16.1 | ) | (1.6 | ) | | (17.8 | ) | |||||||||||
Accounts payable and accrued expenses | (5.6 | ) | 2.6 | 0.4 | | (2.6 | ) | |||||||||||||
Income taxes payable/receivable | 63.6 | | | | 63.6 | |||||||||||||||
Other | 0.2 | (3.0 | ) | 0.4 | | (2.4 | ) | |||||||||||||
Net cash provided by operating activities continuing operations | 21.6 | 253.4 | 43.3 | | 318.3 | |||||||||||||||
Net cash provided by operating activities discontinued operations | | 0.2 | | | 0.2 | |||||||||||||||
Net cash provided by operating activities | 21.6 | 253.6 | 43.3 | | 318.5 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of property and equipment | | (142.9 | ) | (10.9 | ) | | (153.8 | ) | ||||||||||||
Acquisitions, net of cash acquired | | (25.0 | ) | (38.1 | ) | | (63.1 | ) | ||||||||||||
Other | (1.0 | ) | (0.2 | ) | | | (1.2 | ) | ||||||||||||
Net cash used in investing activities | (1.0 | ) | (168.1 | ) | (49.0 | ) | | (218.1 | ) | |||||||||||
Cash flows from financing activities: |
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Payments of borrowings | | (0.1 | ) | | | (0.1 | ) | |||||||||||||
Repurchases of common stock | (141.2 | ) | | | | (141.2 | ) | |||||||||||||
Payment of debt financing costs | (0.4 | ) | | | | (0.4 | ) | |||||||||||||
Proceeds from exercise of stock options | 34.6 | | | | 34.6 | |||||||||||||||
Proceeds from employee stock purchase plans | 1.2 | | | | 1.2 | |||||||||||||||
Proceeds from (distributions to) noncontrolling interests | | 1.7 | (3.1 | ) | | (1.4 | ) | |||||||||||||
Change in intercompany balances with affiliates, net | 85.2 | (95.7 | ) | 10.5 | | | ||||||||||||||
Capital lease payments and other | | (1.1 | ) | | | (1.1 | ) | |||||||||||||
Net cash (used in) provided by financing activities | (20.6 | ) | (95.2 | ) | 7.4 | | (108.4 | ) | ||||||||||||
Change in cash and cash equivalents | | (9.7 | ) | 1.7 | | (8.0 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | | 197.1 | 10.3 | | 207.4 | |||||||||||||||
Cash and cash equivalents at end of period | $ | | $ | 187.4 | $ | 12.0 | $ | | $ | 199.4 |
32
We recommend that you read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Annual Report on Form 10-K). Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations. Additionally, unless the context indicates otherwise, LifePoint Hospitals, Inc. and its subsidiaries are referred to in this section as we, our, or us.
We make forward-looking statements in this report, other reports and in statements we file with the United States Securities and Exchange Commission (the SEC) and/or release to the public. In addition, our senior management makes forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include: projections of our revenues, net income, earnings per share, capital expenditures, cash flows, debt repayments, interest rates, operating statistics and data or other financial items; descriptions of plans or objectives of our management for future operations, services or growth plans including acquisitions, divestitures, business strategies and initiatives; interpretations of Medicare and Medicaid laws and regulations and their effect on our business; and descriptions of assumptions underlying or relating to any of the foregoing.
In this report, for example, we make forward-looking statements, including statements discussing our expectations about: future financial performance and condition; future liquidity and capital resources; future cash flows; existing and future debt; our business strategy and operating philosophy; effects of competition in a hospitals market; costs of providing care to our patients; changes in interest rates; our compliance with new and existing laws and regulations as well as costs and benefits associated with compliance; the impact of national healthcare reform; other income from electronic health records (EHR); anticipated capital expenditures, including investments to add new technologies, modernize facilities and expand services available at our facilities; implementation of supply chain management and revenue cycle functions; impact of accounting methodologies; professional fees; industry and general economic trends; reimbursement changes, including changes resulting from state budgetary restrictions; patient volumes and related revenues; claims and legal actions relating to professional liabilities, governmental investigations; and physician recruiting and retention.
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as can, could, may, should, believe, will, would, expect, project, estimate, seek, anticipate, intend, target, continue or similar expressions. You should not unduly rely on forward-looking statements, which give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors, as well as other factors such as market, operational, liquidity, interest rate and other risks, are described in Part I, Item 1A. Risk Factors and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk of the 2011 Annual Report on Form 10-K. Any factor described in this report and in the 2011 Annual Report on Form 10-K could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report or in the 2011 Annual Report on Form 10-K that could also cause results to differ from our expectations.
33
We operate general acute care hospitals primarily in non-urban communities in the United States. At September 30, 2012, on a consolidated basis, we operated 56 hospital campuses in 19 states, having a total of 6,581 licensed beds. We generate revenues primarily through hospital services offered at our facilities. We generated revenues from continuing operations of $820.2 million and $739.2 million during the three months ended September 30, 2012 and 2011, respectively, and $2,498.5 million and $2,244.8 million during the nine months ended September 30, 2012 and 2011, respectively. We derived revenues from the Medicare and Medicaid programs, collectively of 49.2% and 48.8% during the three months ended September 30, 2012 and 2011, respectively, and 49.8% and 49.6% during the nine months ended September 30, 2012 and 2011, respectively. Payments made to our hospitals pursuant to the Medicare and Medicaid programs for services rendered rarely exceed our costs for such services. As a result, we rely largely on payments made by private or commercial payors, together with certain limited services provided to Medicare recipients, to generate an operating profit. The hospital industry continues to endure a period where the costs of providing care are rising faster than reimbursement rates from government or private commercial payors. This places a premium on efficient operation, the ability to reduce or control costs and the need to leverage the benefits of our organization across all of our hospitals.
The environment in which our hospitals operate is extremely competitive. In addition to competitive concerns, many of our communities are experiencing slow growth, and in some cases, population losses. We believe this trend has occurred primarily as a result of poor economic conditions because the economies in the non-urban communities in which our hospitals primarily operate are often dependent on a small number of larger employers, especially manufacturing or other facilities. This causes the economies of our communities to be more sensitive to economic downturns in the manufacturing sector than other parts of the United States, generally.
Our hospitals face competition from other acute care hospitals, including larger tertiary hospitals located in larger markets and/or affiliated with universities; specialty hospitals that focus on one or a small number of very lucrative service lines but that are not required to operate emergency departments; stand-alone centers at which surgeries or diagnostic tests can be performed; and physicians on the medical staffs of our hospitals. In many cases, our competitors focus on the service lines that offer the highest margins. By doing so, our competitors can potentially draw the best-paying business out of our hospitals. This, in turn, can reduce the overall operating profit of our hospitals as we are often obligated to offer service lines that operate at a loss or that have much lower profit margins. We continue to see the shift of increasingly complex procedures from the inpatient to the outpatient setting and have also seen growth in the general shift of lower acuity procedures to physician offices and other non-hospital outpatient settings. These trends have, to some extent, offset our efforts to improve equivalent admission rates at many of our hospitals.
Our hospitals also face extreme competition in their efforts to recruit and retain physicians on their medical staffs. It is widely recognized that the United States has a shortage of physicians in certain practice areas, including specialists such as cardiologists, oncologists, urologists and orthopedists, in various areas of the country. This fact, and our ability to overcome these shortages, is directly relevant to our growth strategies because cardiologists, oncologists, urologists and orthopedists are often the physicians in highest demand in communities where our hospitals are located. Larger tertiary medical centers are acquiring physician practices and employing physicians in some of our communities. While physicians in these practices may continue to be members of the medical staffs of our hospitals, they may be less likely to refer patients to our hospitals over time.
We believe other key factors in our competition for patients is the quality of our patient care and the perception of that quality in the communities where our hospitals are located, which may be influenced by, among other things, the technology, service lines and capital improvements made at our facilities and by the skills and experience of our non-physician employees involved in patient care.
34
In order to achieve growth in patient volumes, revenues and profitability given the competitive and structural environment, we continue to focus our business strategy on the following:
| Measurement and improvement of quality of patient care and perceptions of such quality in communities where our hospitals are located; |
| Targeted recruiting of primary care physicians and physicians in key specialties; |
| Retention of physicians and efforts to improve physician satisfaction; |
| Retention and, where needed, recruitment of non-physician employees involved in patient care and efforts to improve employee satisfaction; |
| Targeted investments in new technologies, new service lines and capital improvements at our facilities; |
| Improvements in management of expenses and revenue cycle; |
| Negotiation of improved reimbursement rates with non-governmental payors; and |
| Strategic growth through acquisition and integration of hospitals and other healthcare facilities where valuations are attractive and we can identify opportunities for improved financial performance through our management or ownership. |
As part of our ongoing efforts to further manage costs and improve the results of our revenue cycle, we recently entered into agreements with a third party to provide certain nonclinical business functions, including supply chain management and revenue cycle functions. In connection with our entry into these agreements, we extended our current technology support agreement with this same third party. These agreements are in addition to our existing agreement with this third party to provide payroll processing services. We believe this model of sharing centralized resources to support common business functions across multi-facility enterprises provides us efficiencies and is the most cost effective approach to managing these nonclinical business functions. We expect to implement the supply chain management and revenue cycle functions over the next 21 to 27 months.
Our business and our hospitals are highly regulated, and the penalties for noncompliance are severe. We are required to comply with extensive, extremely complicated and overlapping government laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, from what service lines must be offered in order to be licensed as an acute care hospital, to whether our hospitals may employ physicians, and to how (and whether) our hospitals may receive payments pursuant to the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to receive reimbursements through the Medicare and Medicaid programs.
Not only are our hospitals heavily regulated, but the rules, regulations and laws to which they are subject often change, with little or no notice, and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require our hospitals to make changes in their facilities, equipment, personnel or services, and may also require that standard operating policies and procedures be re-written and re-implemented. The cost of complying with such laws and regulations is a significant component of our overall expenses. Further, this expense has grown in recent periods because of new regulatory requirements and the severity of the penalties associated with non-compliance. Management anticipates that compliance expenses will continue to grow in the foreseeable future. The healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focal areas of the Office of the Inspector General (OIG) and other governmental fraud and abuse programs.
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The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the Affordable Care Act) dramatically alter the United States healthcare system and are intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare disproportionate share hospital (DSH) and Medicaid payments to providers, expanding the Medicare programs use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, and instituting certain private health insurance reforms. Although a majority of the measures contained in the Affordable Care Act do not take effect until 2013 and 2014, certain of the reductions in Medicare spending, such as negative adjustments to the Medicare hospital inpatient and outpatient prospective payment system market basket updates and the incorporation of productivity adjustments to the Medicare programs annual inflation updates, became effective in 2010, 2011 and 2012.
On June 28, 2012, the United States Supreme Court upheld the individual mandate provision of the Affordable Care Act that generally requires all individuals to obtain healthcare insurance or pay a penalty. However, the Supreme Court also held that the provision of the Affordable Care Act that authorized the Secretary of the Department of Health and Human Services (HHS) to penalize states that choose not to participate in the expansion of the Medicaid program by removing all of their existing Medicaid funding was unconstitutional. In response to the ruling, a number of states have already indicated that they will not expand their Medicaid programs, which would result in the Affordable Care Act not providing coverage to some low-income persons in those states. In addition, several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act on our revenue and results of operations due to its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, potential future legal challenges, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act.
Medicare payment methodologies have been, and are expected to continue to be, revised significantly based on cost containment and policy considerations. Centers for Medicare and Medicaid Services (CMS) has already begun to implement some of the Medicare reimbursement reductions required by the Affordable Care Act. These revisions will likely be more frequent and significant as more of the Affordable Care Acts changes and cost-saving measures become effective.
On August 31, 2012, CMS published its hospital inpatient prospective payment system (IPPS) final rule for federal fiscal year (FFY) 2013, which began on October 1, 2012. Among other things, the final rule provides for a payment rate increase of 2.8% for hospitals that successfully report the quality measures for the Hospital Inpatient Quality Reporting (IQR) Program in FFY 2013 and 0.8% for those that do not. The update is based on a hospital market basket increase of 2.6%, which is reduced by a multi-factor productivity adjustment of 0.7% and an additional 0.1% as required by the Affordable Care Act and is increased by a documentation and coding adjustment of 1.0%, which completes all of the adjustments required by Transitional Medical Assistance, Abstinence Education, and Qualifying Individuals Programs Extension Act of 2007.
The IPPS final rule for FFY 2013 also finalized the methodology for calculating payment reductions to hospitals with excess readmissions, as required by the Affordable Care Act beginning on October 1, 2012. For FFY 2013, hospitals subject to this rule will receive a payment reduction of the higher of a ratio of the hospitals aggregate dollars for excess readmissions to their aggregate dollars for all discharges, or .99 (that is, or a 1 percent reduction) CMS estimates that the hospital readmissions reduction program will result in a 0.3% ($270 million) decrease in overall payments to hospitals.
In addition, many states in which we operate are facing budgetary challenges and have adopted, or may be considering, legislation that is intended to control or reduce Medicaid expenditures, enroll Medicaid recipients in managed care programs, and/or impose additional taxes on hospitals to help finance or expand their Medicaid programs. Budget cuts, federal or state legislation, or other changes in the administration or
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interpretation of government health programs by government agencies or contracted managed care organizations could have a material adverse effect on our financial position and results of operations.
Physician services are reimbursed under the Medicare physician fee schedule (PFS) system, under which CMS has assigned a national relative value unit (RVU) to most medical procedures and services that reflects the various resources required by a physician to provide the services relative to all other services. Each RVU is calculated based on a combination of work required in terms of time and intensity of effort for the service, practice expense (overhead) attributable to the service and malpractice insurance expense attributable to the service. These three elements are each modified by a geographic adjustment factor to account for local practice costs then aggregated. The aggregated amount is multiplied by a conversion factor that accounts for inflation and targeted growth in Medicare expenditures (as calculated by the sustainable growth rate (SGR)) to arrive at the payment amount for each service.
The PFS rates are adjusted each year, and reductions in both current and future payments are anticipated. The SGR formula has resulted in payment decreases to physicians every year since 2002. However, all but one of those payment decreases have been averted by Congressional action. For calendar year 2012, CMS issued a final rule that would have applied the SGR and resulted in an aggregate reduction of 27.4% to all physician payments under the PFS. The Medicare and Medicaid Extenders Act of 2010 delayed application of the SGR until January 1, 2012, and the Temporary Payroll Tax Cut Continuation Act of 2011 then delayed application of the SGR for two additional months, through February 29, 2012. On February 22, 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which, among other things, further postponed the application of the SGR through December 31, 2012.
On July 6, 2012, CMS issued the PFS proposed rule for calendar year 2013. Under the proposed rule, payment rates to physicians would be reduced by 27% based on the application of the SGR. We cannot predict whether Congress will pass legislation to avert the proposed rate cut in calendar year 2013 or will otherwise adopt a permanent fix for the issues that are created by the application of the SGR. If the payment reduction contained in the proposed rule is not averted, the reimbursement received by our employed physicians, the physicians to whom our hospitals have provided recruitment assistance, and the physician members of our medical staffs would be adversely affected.
The Health Information Technology for Economic and Clinical Health Act (the HITECH Act) was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011; however, on August 23, 2012, HHS released final requirements for Stage 2, which will take effect starting in 2014. We strive to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments. Our compliance has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. We currently estimate that at a minimum total costs incurred to comply will be recovered through the total EHR incentive payments over the projected lifecycle of this initiative.
An important component of the effective implementation of our EHR initiatives involves our uninterrupted access to reliable information systems. We recently entered into an agreement with a third party technology provider to design and operate a hosted data center for our critical third party information systems. In addition to providing a hosted data center, the third party technology provider will offer help desk end-user support for certain clinical information systems, provide help desk and support functions for certain clinical information system applications, perform backups and recoveries of certain critical data, and monitor critical systems to facilitate the identifications of and rapid responses to certain system issues. We believe this agreement will provide us with a single technology platform for the delivery of critical third party information systems and will improve the effectiveness and efficiency of key information support functions in a cost-effective and high quality manner.
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We are subject to the privacy and security requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) that are designed to protect the confidentiality, availability and integrity of health information. The privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally, impose extensive administrative requirements on us, require our compliance with rules governing the use and disclosure of this health information, and require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf. The security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA.
The HITECH Act, among other things, strengthened the HIPAA privacy and security requirements, significantly increased the penalties for violations of the HIPAA privacy and security regulations, imposed varying civil monetary penalties and created a private cause of action for state attorneys general for certain HIPAA violations, extended HIPAAs security provisions to business associates, and created new security breach notification requirements. The HITECH Act also created a federal breach notification law that mirrors protections that many states have passed in recent years.
In 2011, HHS initiated a pilot audit program that will run until December 2012 in the first phase of HHS implementation of the HITECH Acts requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. We cannot predict whether our hospitals will be able to comply with the final rules or the financial impact to our hospitals in implementing the requirements under the final rules if and when they take effect, or whether our hospitals will be selected for an audit and the results of such an audit.
In addition to the privacy and security requirements, we also are subject to the administrative simplification provisions of HIPAA, which require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. In January 2009, CMS published its 10th revision of International Statistical Classification of Diseases and Related Health Problems (ICD-10) and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided in our hospitals and clinics will require much greater specificity. Implementation of ICD-10 will require a significant investment in technology and training. We may experience delays in reimbursement while our facilities and the payors from which we seek reimbursement make the transition to ICD-10. On August 24, 2012, CMS released a final rule that revised the effective date of the ICD-10 transition to October 1, 2014. If any of our hospitals fail to implement the new coding system by the deadline, the affected hospital will not be paid for services. We are not able to predict the overall financial impact of the Company's transition to ICD-10.
Our hospitals generate revenues by providing healthcare services to our patients. Depending upon the patients medical insurance coverage, we are paid for these services by governmental Medicare and Medicaid programs, commercial insurance, including managed care organizations, and directly by the patient. The amounts we are paid for providing healthcare services to our patients vary depending upon the payor. Governmental payors generally pay significantly less than the hospitals customary charges for the services provided. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments.
Revenues from governmental payors, such as Medicare and Medicaid, are controlled by complex rules and regulations that stipulate the amount a hospital is paid for providing healthcare services. We must comply with these rules and regulations to continue to be eligible to participate in the Medicare and Medicaid programs. These rules and regulations are subject to frequent changes as a result of legislative and
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administrative action and annual payment adjustments on both the federal and the state levels. These changes will likely become more frequent and significant as the provisions of the Affordable Care Act are implemented.
Revenues from health maintenance organizations (HMOs), preferred provider organizations (PPOs) and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors in an effort to maintain or increase the pricing of our healthcare services; however, we have no control over patients switching their healthcare coverage to a payor with which we have negotiated less favorable reimbursement rates.
Self-pay revenues are primarily generated through the treatment of uninsured patients. Our hospitals have experienced an increase in self-pay revenues during recent years as well as during the first nine months of 2012 as a result of a combination of broad economic factors, including rising unemployment in many of our markets, reductions in state Medicaid budgets and increasing numbers of individuals and employers who choose not to purchase insurance. Additionally, certain of our hospitals participate in federal, state and local programs that provide for supplemental support and funding for the care of indigent patients. During the three months ended September 30, 2012, as a result of a decrease in our reimbursement under one such program in New Mexico, we experienced an increase of approximately $2.8 million in our charity care write-offs. As a result of this decrease in our reimbursement under this program, we have experienced and will continue to experience an increase in our charity care write-offs prospectively. Because we cannot predict what actions the federal government or the states may take under existing legislation and future legislation to address budget gaps or deficits, we are unable to assess the effect that any such legislation might have on our business, but the impact on our future financial position, results of operations or cash flows could be material.
To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Our provision for doubtful accounts serves to reduce our reported revenues.
The following definitions apply throughout the remaining portion of Managements Discussion and Analysis of Financial Condition and Results of Operations:
Admissions. Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and used by management and investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations information includes the results of (i) our hospital support center, (ii) our same-hospital operations, (iii) the results of Marquette General Health System (Marquette General), which we acquired effective September 1, 2012, Twin County Regional Hospital (Twin County), in which we acquired an 80% interest effective April 1, 2012, Maria Parham Medical Center (Maria Parham), in which we acquired an 80% interest effective November 1, 2011, and Person Memorial Hospital (Person Memorial), which we acquired effective October 1, 2011, each through Duke LifePoint Healthcare, in which we own a controlling interest with a wholly-controlled affiliate of Duke University Health System, Inc. and (iv) Woods Memorial Hospital (Woods Memorial), which we acquired effective July 1, 2012. Continuing operations information excludes the results of our hospitals that have previously been disposed.
Effective tax rate. Provision for income taxes as a percentage of income from continuing operations before income taxes less net income attributable to noncontrolling interests.
Emergency room visits. Represents the total number of hospital-based emergency room visits.
Equivalent admissions. Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue). The equivalent admissions computation
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equates outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
Medicare case mix index. Refers to the acuity or severity of illness of an average Medicare patient at our hospitals.
N/A. Not applicable.
Net revenue days outstanding. We compute net revenue days outstanding by dividing our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues by the number of calendar days in the quarter.
Outpatient surgeries. Outpatient surgeries are those surgeries that do not require admission to our hospitals.
Revenues. Revenues represent amounts recognized from all payors for the delivery of healthcare services, net of contractual discounts and the provision for doubtful accounts.
Same-hospital. Same-hospital information includes the results of our hospital support center and the same 51 hospitals operated during the three and nine months ended September 30, 2012 and 2011. Same-hospital information excludes the results of Marquette General, Woods Memorial, Twin County, Maria Parham, Person Memorial and our hospitals that have previously been disposed.
The following table summarizes the results of operations for the three and nine months ended September 30, 2012 and 2011 (dollars in millions):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | |||||||||||||||||||||||||
Revenues before provision for doubtful accounts | $ | 984.9 | 120.1 | % | $ | 866.2 | 117.2 | % | $ | 2,963.1 | 118.6 | % | $ | 2,628.2 | 117.1 | % | ||||||||||||||||
Provision for doubtful accounts | 164.7 | 20.1 | 127.0 | 17.2 | 464.6 | 18.6 | 383.4 | 17.1 | ||||||||||||||||||||||||
Revenues | 820.2 | 100.0 | 739.2 | 100.0 | 2,498.5 | 100.0 | 2,244.8 | 100.0 | ||||||||||||||||||||||||
Salaries and benefits | 390.3 | 47.6 | 337.8 | 45.7 | 1,130.2 | 45.2 | 1,011.2 | 45.0 | ||||||||||||||||||||||||
Supplies | 129.3 | 15.8 | 113.9 | 15.4 | 382.7 | 15.3 | 346.7 | 15.4 | ||||||||||||||||||||||||
Other operating expenses | 205.3 | 25.0 | 171.1 | 23.2 | 589.5 | 23.7 | 495.8 | 22.2 | ||||||||||||||||||||||||
Other income | (12.0 | ) | (1.5 | ) | (11.0 | ) | (1.5 | ) | (14.7 | ) | (0.6 | ) | (15.2 | ) | (0.7 | ) | ||||||||||||||||
Depreciation and amortization | 47.7 | 5.9 | 40.7 | 5.5 | 139.7 | 5.6 | 121.0 | 5.4 | ||||||||||||||||||||||||
Interest expense, net | 24.5 | 3.0 | 24.3 | 3.3 | 75.7 | 3.0 | 81.6 | 3.6 | ||||||||||||||||||||||||
Debt extinguishment costs |
4.4 | 0.5 | | | 4.4 | 0.2 | | | ||||||||||||||||||||||||
Impairment charge | | | | | 3.1 | 0.1 | | | ||||||||||||||||||||||||
789.5 | 96.3 | 676.8 | 91.6 | 2,310.6 | 92.5 | 2,041.1 | 90.9 | |||||||||||||||||||||||||
Income from continuing operations before income taxes | 30.7 | 3.7 | 62.4 | 8.4 | 187.9 | 7.5 | 203.7 | 9.1 | ||||||||||||||||||||||||
Provision for income taxes |
11.4 | 1.4 | 22.8 | 3.0 | 69.8 | 2.8 | 76.5 | 3.4 | ||||||||||||||||||||||||
Income from continuing operations | 19.3 | 2.3 | 39.6 | 5.4 | 118.1 | 4.7 | 127.2 | 5.7 | ||||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests |
(0.1 | ) | (0.1 | ) | (0.7 | ) | (0.1 | ) | (2.7 | ) | (0.1 | ) | (2.2 | ) | (0.1 | ) | ||||||||||||||||
Income from continuing operations attributable to LifePoint Hospitals, Inc. | $ | 19.2 | 2.2 | % | $ | 38.9 | 5.3 | % | $ | 115.4 | 4.6 | % | $ | 125.0 | 5.6 | % |
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The following table presents the components of revenues for the three months ended September 30, 2012 and 2011 (dollars in millions):
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Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase | % Increase | |||||||||||||
Continuing operations: |
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Revenues before provision for doubtful accounts | $ | 984.9 | $ | 866.2 | $ | 118.7 | 13.7 | % | ||||||||
Provision for doubtful accounts | 164.7 | 127.0 | 37.7 | 29.7 | ||||||||||||
Revenues | $ | 820.2 | $ | 739.2 | $ | 81.0 | 11.0 | |||||||||
Same-hospital: |
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Revenues before provision for doubtful accounts | $ | 903.1 | $ | 866.2 | $ | 36.9 | 4.3 | % | ||||||||
Provision for doubtful accounts | 154.5 | 127.0 | 27.5 | 21.7 | ||||||||||||
Revenues | $ | 748.6 | $ | 739.2 | $ | 9.4 | 1.3 |
The following table shows the sources of our revenues before provision for doubtful accounts by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the three months ended September 30, 2012 and 2011 (in millions):
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Continuing Operations | Same-Hospital | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | |||||||||||||||||||||||||
Medicare | $ | 279.2 | 34.0 | % | $ | 251.9 | 34.1 | % | $ | 254.5 | 34.0 | % | $ | 251.9 | 34.1 | % | ||||||||||||||||
Medicaid | 124.7 | 15.2 | 108.4 | 14.7 | 116.1 | 15.5 | 108.4 | 14.7 | ||||||||||||||||||||||||
HMOs, PPOs and other private insurers | 397.8 | 48.5 | 356.2 | 48.2 | 363.1 | 48.5 | 356.2 | 48.2 | ||||||||||||||||||||||||
Self-pay | 170.4 | 20.8 | 138.6 | 18.7 | 158.4 | 21.2 | 138.6 | 18.7 | ||||||||||||||||||||||||
Other | 12.8 | 1.6 | 11.1 | 1.5 | 11.0 | 1.4 | 11.1 | 1.5 | ||||||||||||||||||||||||
Revenues before provision for doubtful accounts | 984.9 | 120.1 | 866.2 | 117.2 | 903.1 | 120.6 | 866.2 | 117.2 | ||||||||||||||||||||||||
Provision for doubtful accounts | (164.7 | ) | (20.1 | ) | (127.0 | ) | (17.2 | ) | (154.5 | ) | (20.6 | ) | (127.0 | ) | (17.2 | ) | ||||||||||||||||
Revenues | $ | 820.2 | 100.0 | % | $ | 739.2 | 100.0 | % | $ | 748.6 | 100.0 | % | $ | 739.2 | 100.0 | % |
Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the three months ended September 30, 2012 and 2011:
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Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase | % Increase | |||||||||||||
Revenues per equivalent admission continuing operations | $ | 7,249 | $ | 7,045 | $ | 204 | 2.9 | |||||||||
Revenues per equivalent admission same-hospital | $ | 7,250 | $ | 7,045 | $ | 205 | 2.9 |
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The following table shows the key drivers of our revenues before provision for doubtful accounts for the three months ended September 30, 2012 and 2011:
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Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Continuing operations: |
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Admissions | 48,766 | 47,378 | 1,388 | 2.9 | ||||||||||||
Equivalent admissions | 113,147 | 104,912 | 8,235 | 7.8 | ||||||||||||
Medicare case mix index | 1.29 | 1.28 | 0.01 | 0.8 | ||||||||||||
Average length of stay (days) | 4.5 | 4.2 | 0.3 | 7.1 | ||||||||||||
Inpatient surgeries | 13,283 | 13,255 | 28 | 0.2 | ||||||||||||
Outpatient surgeries | 41,379 | 39,017 | 2,362 | 6.1 | ||||||||||||
Emergency room visits | 293,657 | 258,888 | 34,769 | 13.4 | ||||||||||||
Outpatient factor | 2.32 | 2.22 | 0.1 | 4.6 | ||||||||||||
Same-hospital: |
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Admissions | 45,215 | 47,378 | (2,163 | ) | (4.6 | ) | ||||||||||
Equivalent admissions | 103,248 | 104,912 | (1,664 | ) | (1.6 | ) | ||||||||||
Medicare case mix index | 1.30 | 1.28 | 0.02 | 1.6 | ||||||||||||
Average length of stay (days) | 4.2 | 4.2 | | | ||||||||||||
Inpatient surgeries | 12,180 | 13,255 | (1,075 | ) | (8.1 | ) | ||||||||||
Outpatient surgeries | 38,225 | 39,017 | (792 | ) | (2.0 | ) | ||||||||||
Emergency room visits | 266,136 | 258,888 | 7,248 | 2.8 | ||||||||||||
Outpatient factor | 2.29 | 2.22 | 0.07 | 3.1 |
For the three months ended September 30, 2012, our same-hospital revenues before provision for doubtful accounts increased by $36.9 million or 4.3%, to $903.1 million as compared to $866.2 million for the same period last year. Same-hospital admissions decreased 4.6% over the same period in the prior year while same-hospital equivalent admissions decreased at a more modest 1.6%. The decrease in same-hospital admissions was primarily a result of a significant decrease in our one day stay admissions as well as a decrease in our deliveries. During the three months ended September 30, 2012, we experienced growth in our observation visits indicating an overall shift to an outpatient setting. The same-hospital equivalent admissions continue to be favorably impacted by higher emergency room visits and overall growth in our oncology and cardiology services. This increase in our same-hospital revenues before provision for doubtful accounts is largely a result of the following:
| Increases in our same-hospital Medicare revenue of approximately $2.6 million or 1.0%; |
| Increases in our same-hospital Medicaid revenue of approximately $7.7 million or 7.1%; |
| Increases in our same-hospital HMOs, PPOs and other private insurers revenue of approximately $6.9 million or 1.9%; and |
| Increases in our same-hospital self-pay revenue of approximately $19.8 million or 14.3%. |
The increases in our same-hospital Medicare revenue were largely driven by increases in our Medicare case mix index and overall higher reimbursement rates, partially offset by the negative impact of a higher level of denials as a result of recovery audit contractors (RACs) audits as compared to the same period last year. For the three months ended September 30, 2012, our RAC audits resulted in approximately $3.2 million of higher revenue reductions compared to the same period in the prior year.
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Our same-hospital Medicaid revenue increased primarily as a result of the favorable impact of our participation in various Medicaid DSH programs and other state supplemental payment programs (collectively Supplemental Payment Programs), particularly in Alabama, Louisiana, North Carolina and West Virginia. The amount and timing of revenue recorded for Supplemental Payment Programs are often dependent upon a variety of factors including state budgetary limitations, program approval procedures and other factors.
Our same-hospital HMOs, PPOs and other private insurer revenue increased primarily as a result of higher contracted rates partially offset by unfavorable equivalent admission volumes compared to the same period of the prior year. Finally, same-hospital self-pay revenue increased primarily as a result of higher emergency room visits from our self-pay population, overall high levels of unemployment in the majority of our communities and pricing increases. Increases in our self-pay revenues attributed to an increase in our provision for doubtful accounts, as further discussed in our analysis of our provision for doubtful accounts.
The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the three months ended September 30, 2012 and 2011 (dollars in millions):
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Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Related key indicators: |
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Charity care write-offs | $ | 29.6 | 3.6 | % | $ | 25.6 | 3.5 | % | $ | 4.0 | 15.7 | % | ||||||||||||
Self-pay revenues, net of charity care write-offs and uninsured discounts | $ | 170.4 | 20.8 | % | $ | 138.6 | 18.8 | % | $ | 31.8 | 22.9 | % | ||||||||||||
Net revenue days outstanding (at end of period) | 57.5 | N/A | 49.5 | N/A | 8.0 | 16.2 | % | |||||||||||||||||
Same-hospital: |
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Related key indicators: |
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Charity care write-offs | $ | 27.6 | 3.7 | % | $ | 25.6 | 3.5 | % | $ | 2.0 | 7.9 | % | ||||||||||||
Self-pay revenues, net of charity care write-offs and uninsured discounts | $ | 158.4 | 21.2 | % | $ | 138.6 | 18.8 | % | $ | 19.8 | 14.3 | % | ||||||||||||
Net revenue days outstanding (at end of period) | 52.6 | N/A | 49.5 | N/A | 3.1 | 6.3 | % |
For the three months ended September 30, 2012, our provision for doubtful accounts increased by $37.7 million, or 29.7%, to $164.7 million on a continuing operations basis and by $27.5 million, or 21.7%, to $154.5 million on a same-hospital basis as compared to the same period last year. This increase was primarily the result of increases in self-pay revenues during the three months ended September 30, 2012. Same-hospital self-pay revenues increased by $19.8 million over the same period last year and represented 21.2% of revenues. Self-pay revenues continued to increase for both our inpatient and outpatient services, which were primarily driven by higher self-pay volumes. Additionally, as a result of a decrease in our reimbursement under a New Mexico state program that provides for supplemental support and funding for the care of indigent patients we have experienced an increase of approximately $2.8 million in our charity care write-offs during the three months ended September 30, 2012 compared to the same period in the prior year.
Our increased provision for doubtful accounts was partially offset by an increase in up-front cash collections for the three months ended September 30, 2012, as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Estimates, in the 2011 Annual Report on Form 10-K.
43
Our net revenue days outstanding on a continuing operations basis increased to 57.5 and included just 30 days of net revenue for our recent Marquette General acquisition. After normalizing for a full quarter of revenue for Marquette General, we estimated that on a continuing operations basis our net revenue days outstanding would have been 54.4. Our continuing operations net revenue days outstanding increased primarily as a result of higher than average net revenue days outstanding at our recently acquired hospitals, increases in our insured accounts receivable due to an increase in Medicare prepayment audit activity and new managed Medicaid payors in a few of our markets.
The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the three months ended September 30, 2012 and 2011:
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Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Salaries and benefits (dollars in millions) | $ | 390.3 | 47.6 | % | $ | 337.8 | 45.7 | % | $ | 52.5 | 15.6 | % | ||||||||||||
Man-hours per equivalent admission | 103.4 | N/A | 98.6 | N/A | 4.8 | 4.9 | % | |||||||||||||||||
Salaries and benefits per equivalent admission | $ | 3,475 | N/A | $ | 3,206 | N/A | $ | 269 | 8.4 | % | ||||||||||||||
Same-hospital: |
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Salaries and benefits (dollars in millions) | $ | 350.0 | 46.8 | % | $ | 337.8 | 45.7 | % | $ | 12.2 | 3.6 | % | ||||||||||||
Man-hours per equivalent admission |
101.8 | N/A | 98.6 | N/A | 3.2 | 3.3 | % | |||||||||||||||||
Salaries and benefits per equivalent admission | $ | 3,418 | N/A | $ | 3,206 | N/A | $ | 212 | 6.6 | % |
For the three months ended September 30, 2012, our salaries and benefits expense increased to $350.0 million, or 3.6%, on a same-hospital basis as compared to $337.8 million for the same period last year. Additionally, our man-hours per equivalent admission increased to 101.8, or 3.3% for the three months ended September 30, 2012 on a same-hospital basis as compared to 98.6 for the same period last year. These increases in our same-hospital salaries and benefits expense and man-hours per equivalent admission are primarily a result of the impact of an increasing number of employed physicians and their related support staff. On a same-hospital basis, the number of our employed physicians, including hospitalists and their related support staff, increased by 238 to 1,273 from 1,035 for the same period last year. The increase in our employed physicians and their related support staff resulted in an increase of $6.2 million in our salaries and benefits expense on a same-hospital basis for the three months ended September 30, 2012 as compared to the same period last year. Additionally, in connection with our acquisition of Marquette General, we assumed the employment of approximately 140 physicians. As we continue to employ an increasing number of medical professionals, including physicians, we anticipate that salaries and benefits as a percentage of revenues will increase in future periods.
Additionally, our same-hospital salaries and benefits expense increased as a result of higher employee benefits costs, the impact of compensation increases for our employees and severance costs related to our shared centralized resource initiatives. Primarily in connection with our shared centralized resource initiatives implementation process, we incurred severance and retention costs for our affected workforce of approximately $1.8 million for the three months ended September 30, 2012. We estimate we will recognize approximately $6.1 million of additional severance and retention costs over the remaining implementation periods.
Furthermore, for the three months ended September 30, 2012, we estimate that we incurred approximately $2.6 million of additional salaries and benefits expense related to our implementation of our EHR initiatives as compared to $2.3 million for the same period last year.
44
The following table summarizes our supplies and supplies per equivalent admission for the three months ended September 30, 2012 and 2011:
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Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Supplies (dollars in millions) | $ | 129.3 | 15.8 | % | $ | 113.9 | 15.4 | % | $ | 15.4 | 13.4 | % | ||||||||||||
Supplies per equivalent admission | $ | 1,141 | N/A | $ | 1,085 | N/A | $ | 56 | 5.1 | % | ||||||||||||||
Same-hospital: |
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Supplies (dollars in millions) | $ | 115.5 | 15.4 | % | $ | 113.9 | 15.4 | % | $ | 1.6 | 1.4 | % | ||||||||||||
Supplies per equivalent admission | $ | 1,118 | N/A | $ | 1,085 | N/A | $ | 33 | 3.1 | % |
For the three months ended September 30, 2012, our supplies expense increased to $115.5 million, or 1.4% on a same-hospital basis as compared to $113.9 million for the same period last year. This increase in our same-hospital supplies expense for the three months ended September 30, 2012 was primarily a result of an increase in our supplies expense per equivalent admission to $1,118, or 3.1%, as compared to $1,085 for the same period last year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies, predominantly cancer related pharmaceuticals and other pharmacy supplies.
The following table summarizes our other operating expenses for the three months ended September 30, 2012 and 2011 (dollars in millions):
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Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||
Continuing operations: |
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Professional fees | $ | 28.5 | 3.5 | % | $ | 23.7 | 3.2 | % | $ | 4.8 | 19.7 | % | ||||||||||||
Utilities | 17.1 | 2.1 | 15.9 | 2.1 | 1.2 | 8.3 | ||||||||||||||||||
Repairs and maintenance | 21.8 | 2.7 | 20.4 | 2.8 | 1.4 | 6.8 | ||||||||||||||||||
Rents and leases | 8.6 | 1.0 | 7.7 | 1.0 | 0.9 | 10.7 | ||||||||||||||||||
Insurance | 9.3 | 1.1 | 7.5 | 1.0 | 1.8 | 24.2 | ||||||||||||||||||
Physician recruiting | 7.2 | 0.9 | 7.5 | 1.0 | (0.3 | ) | (3.8 | ) | ||||||||||||||||
Contract services | 54.0 | 6.6 | 44.4 | 6.0 | 9.6 | 21.7 | ||||||||||||||||||
Non-income taxes | 22.5 | 2.7 | 19.0 | 2.6 | 3.5 | 18.3 | ||||||||||||||||||
Other | 36.3 | 4.4 | 25.0 | 3.5 | 11.3 | 45.6 | ||||||||||||||||||
$ | 205.3 | 25.0 | $ | 171.1 | 23.2 | $ | 34.2 | 20.0 | % | |||||||||||||||
Same-hospital: |
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Professional fees | $ | 26.2 | 3.5 | % | $ | 23.7 | 3.2 | % | $ | 2.5 | 9.9 | % | ||||||||||||
Utilities | 15.4 | 2.1 | 15.9 | 2.1 | (0.5 | ) | (2.3 | ) | ||||||||||||||||
Repairs and maintenance | 20.4 | 2.7 | 20.4 | 2.8 | | | ||||||||||||||||||
Rents and leases | 7.3 | 1.0 | 7.7 | 1.0 | (0.4 | ) | (4.6 | ) | ||||||||||||||||
Insurance | 8.6 | 1.2 | 7.5 | 1.0 | 1.1 | 15.0 | ||||||||||||||||||
Physician recruiting | 7.0 | 0.9 | 7.5 | 1.0 | (0.5 | ) | (6.4 | ) | ||||||||||||||||
Contract services | 48.3 | 6.5 | 44.4 | 6.0 | 3.9 | 8.9 | ||||||||||||||||||
Non-income taxes | 20.6 | 2.7 | 19.0 | 2.6 | 1.6 | 8.4 | ||||||||||||||||||
Other | 34.6 | 4.5 | 25.0 | 3.5 | 9.6 | 38.2 | ||||||||||||||||||
$ | 188.4 | 25.1 | $ | 171.1 | 23.2 | $ | 17.3 | 10.1 | % |
45
For the three months ended September 30, 2012, our other operating expenses increased to $188.4 million, or 10.1% on a same-hospital basis as compared to $171.1 million for the same period last year. This increase for the three months ended September 30, 2012 was primarily a result of increases in professional fees, contract services and other.
We continue to experience increasing professional fees in connection with our utilization of hospitalists and in areas such as operating room and emergency room physician coverage. We expect this trend to continue and that professional fees as a percentage of revenues will increase in future periods.
On a same-hospital basis, our contract services expense increased primarily as a result of increased fees and expenses related to our conversion of the clinical and patient accounting information system applications at several of our hospitals. Additionally, for the three months ended September 30, 2012, we estimate that we incurred approximately $3.1 million of additional contract service expenses related to our implementation of our EHR initiatives as compared to $1.3 million for the same period last year.
Finally, our other expenses increased primarily as a result of approximately $6.2 million in legal and consulting fees related to our recent acquisitions, including Marquette General and Woods Memorial. Additional increases in other expenses are the result of an increase in our estimated legal reserves related to a billing matter at one of our hospitals as well as higher and additional software maintenance expense as a result of our on-going investments in information systems as the result of various initiatives and requirements, including compliance with the HITECH Act.
We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the three months ended September 30, 2012, we recognized $4.8 million and $7.2 million in Medicare and Medicaid EHR incentive payments, respectively, as compared to $11.0 million in Medicaid EHR incentive payments recognized in the same period last year. We did not recognize any Medicare EHR incentive payments during the three months ended September 30, 2011.
For the three months ended September 30, 2012, our depreciation and amortization expense increased by $7.0 million, or 17.3% to $47.7 million, or 5.9% of revenues, on a continuing operations basis as compared to $40.7 million, or 5.5% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of our recent acquisitions, including Marquette General, Woods Memorial, Twin County, Maria Parham and Person Memorial as well as a result of significant increases in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We estimate that we incurred approximately $3.0 million in depreciation expense during the three months ended September 30, 2012 related to our EHR initiatives as compared to $1.1 million for the same period last year. Additionally, we have experienced increases in depreciation expense relating to capital improvement projects completed during 2011 and the first nine months of 2012. We anticipate that our depreciation and amortization expense as a percentage of revenues will continue to increase in future periods.
Our interest expense was comparable for the three months ended September 30, 2012 and 2011 at $24.5 million and $24.3 million, respectively. Effective July 24, 2012, we replaced our credit agreement with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders (the Prior Credit Agreement) with a new senior secured credit agreement with, among others, Citibank, N.A., as administrative agent, and the lenders party thereto (the Senior Credit Agreement). For a further discussion of our debt and corresponding interest rates, see Liquidity and Capital Resources Debt.
46
In connection with our replacement of the Prior Credit Agreement with the Senior Credit Agreement during the three months ended September 30, 2012, we recorded $4.4 million of debt extinguishment costs. The debt extinguishment costs include $2.4 million of previously capitalized loan costs and $2.0 million of loan costs related to the issuance of the Senior Credit Agreement.
Our provision for income taxes was $11.4 million for the three months ended September 30, 2012 compared to $22.8 million for the same period last year. The $11.4 million decrease in the provision for income taxes was primarily attributable to a $31.7 million decrease in income from continuing operations before income taxes for the three months ended September 30, 2012 compared to the same period last year.
On April 5, 2012, a settlement agreement (the Rural Floor Settlement) was signed between HHS, the Secretary of HHS, CMS and a large number of healthcare service providers, including our hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMSs calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 from federal fiscal year 1998 through and including federal fiscal year 2011 for healthcare service providers that participated in certain court cases and group appeals. As a result of the Rural Floor Settlement, we recognized $33.0 million of additional Medicare revenue included under the caption Revenues before provision for doubtful accounts and approximately $6.0 million of costs, which are included under the captions Other operating expenses and Salaries and benefits for the nine months ended September 30, 2012.
The following table presents the components of revenues for the nine months ended September 30, 2012 and 2011 (dollars in millions):
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Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase | % Increase | |||||||||||||
Continuing operations: |
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Revenues before provision for doubtful accounts | $ | 2,963.1 | $ | 2,628.2 | $ | 334.9 | 12.7 | % | ||||||||
Provision for doubtful accounts | 464.6 | 383.4 | 81.2 | 21.2 | ||||||||||||
Revenues | $ | 2,498.5 | $ | 2,244.8 | $ | 253.7 | 11.3 | |||||||||
Same-hospital: |
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Revenues before provision for doubtful accounts | $ | 2,781.3 | $ | 2,628.2 | $ | 153.1 | 5.8 | % | ||||||||
Provision for doubtful accounts | 437.3 | 383.4 | 53.9 | 14.1 | ||||||||||||
Revenues | $ | 2,344.0 | $ | 2,244.8 | $ | 99.2 | 4.4 |
47
The following table shows the sources of our revenues before provision for doubtful accounts by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the nine months ended September 30, 2012 and 2011 (in millions):
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Continuing Operations | Same-Hospital | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | |||||||||||||||||||||||||
Medicare | $ | 881.3 | 35.3 | % | $ | 788.5 | 35.1 | % | $ | 826.6 | 35.3 | % | $ | 788.5 | 35.1 | % | ||||||||||||||||
Medicaid | 362.6 | 14.5 | 324.5 | 14.5 | 333.8 | 14.2 | 324.5 | 14.5 | ||||||||||||||||||||||||
HMOs, PPOs and other private insurers | 1,191.6 | 47.7 | 1,066.3 | 47.5 | 1,126.8 | 48.1 | 1,066.3 | 47.5 | ||||||||||||||||||||||||
Self-pay | 491.1 | 19.7 | 419.4 | 18.7 | 460.6 | 19.7 | 419.4 | 18.7 | ||||||||||||||||||||||||
Other | 36.5 | 1.4 | 29.5 | 1.3 | 33.5 | 1.4 | 29.5 | 1.3 | ||||||||||||||||||||||||
Revenues before provision for doubtful accounts | 2,963.1 | 118.6 | 2,628.2 | 117.1 | 2,781.3 | 118.7 | 2,628.2 | 117.1 | ||||||||||||||||||||||||
Provision for doubtful accounts | (464.6 | ) | (18.6 | ) | (383.4 | ) | (17.1 | ) | (437.3 | ) | (18.7 | ) | (383.4 | ) | (17.1 | ) | ||||||||||||||||
Revenues | $ | 2,498.5 | 100.0 | % | $ | 2,244.8 | 100.0 | % | $ | 2,344.0 | 100.0 | % | $ | 2,244.8 | 100.0 | % |
Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the nine months ended September 30, 2012 and 2011:
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Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase | % Increase | |||||||||||||
Revenues per equivalent admission continuing operations | $ | 7,450 | $ | 7,063 | $ | 387 | 5.5 | |||||||||
Revenues per equivalent admission same-hospital | $ | 7,478 | $ | 7,063 | $ | 415 | 5.9 |
The following table shows the key drivers of our revenues before provision for doubtful accounts for the nine months ended September 30, 2012 and 2011:
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Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Continuing operations: |
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Admissions | 148,326 | 147,620 | 706 | 0.5 | ||||||||||||
Equivalent admissions | 335,365 | 317,826 | 17,539 | 5.5 | ||||||||||||
Medicare case mix index | 1.29 | 1.29 | | | ||||||||||||
Average length of stay (days) | 4.4 | 4.3 | 0.1 | 2.3 | ||||||||||||
Inpatient surgeries | 40,008 | 39,962 | 46 | 0.1 | ||||||||||||
Outpatient surgeries | 127,402 | 117,836 | 9,566 | 8.1 | ||||||||||||
Emergency room visits | 851,182 | 767,227 | 83,955 | 10.9 | ||||||||||||
Outpatient factor | 2.26 | 2.15 | 0.11 | 5.0 | ||||||||||||
Same-hospital: |
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Admissions | 140,366 | 147,620 | (7,254 | ) | (4.9 | ) | ||||||||||
Equivalent admissions | 313,437 | 317,826 | (4,389 | ) | (1.4 | ) | ||||||||||
Medicare case mix index | 1.30 | 1.29 | 0.01 | 0.8 | ||||||||||||
Average length of stay (days) | 4.3 | 4.3 | | | ||||||||||||
Inpatient surgeries | 37,718 | 39,962 | (2,244 | ) | (5.6 | ) | ||||||||||
Outpatient surgeries | 120,247 | 117,836 | 2,411 | 2.0 | ||||||||||||
Emergency room visits | 788,188 | 767,227 | 20,961 | 2.7 | ||||||||||||
Outpatient factor | 2.23 | 2.15 | 0.08 | 3.7 |
48
For the nine months ended September 30, 2012, our same-hospital revenues before provision for doubtful accounts increased by $153.1 million or 5.8%, to $2,781.3 million as compared to $2,628.2 million for the same period last year. Same-hospital admissions decreased 4.9% over the same period in the prior year while same-hospital equivalent admissions decreased at a more modest 1.4%. The decrease in same-hospital admissions was primarily a result of decreases in our one day stay admissions that started in the second quarter of 2012 and accelerated through the third quarter of 2012. The same-hospital equivalent admissions continue to be favorably impacted by stronger outpatient surgeries, higher emergency room visits and overall growth in our oncology, cardiology and imaging services. This increase in our same-hospital revenues before provision for doubtful accounts is largely a result of the following:
| Increases in our same-hospital Medicare revenue of approximately $38.1 million or 4.8%; |
| Increases in our same-hospital HMOs, PPOs and other private insurers revenue of approximately $60.5 million or 5.7%; and |
| Increases in our same-hospital self-pay revenue of approximately $41.2 million or 9.8%. |
Increases in our same-hospital Medicare revenues were largely driven by the impact of recognizing $33.0 million related to the Rural Floor Settlement during the nine months ended September 30, 2012, increases in our Medicare case mix index and overall higher reimbursement rates. These increases were partially offset by the negative impact of a higher level of denials as a result of RAC audits as compared to the same period last year. For the nine months ended September 30, 2012, our RAC audits resulted in approximately $9.0 million of higher revenue reductions compared to the same period in the prior year.
Our same-hospital HMOs, PPOs and other private insurer revenue increased primarily as a result of higher contracted rates partially offset by unfavorable equivalent admission volumes compared to the same period of the prior year. Finally, same-hospital self-pay revenue increased primarily as a result of higher emergency room visits from our self-pay population, overall high levels of unemployment in the majority of our communities and pricing increases. Increases in our self-pay revenues attributed to an increase in our provision for doubtful accounts, as further discussed in our analysis of our provision for doubtful accounts.
The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the nine months ended September 30, 2012 and 2011 (dollars in millions):
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Related key indicators: |
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Charity care write-offs | $ | 80.7 | 3.2 | % | $ | 67.7 | 3.0 | % | $ | 13.0 | 19.2 | % | ||||||||||||
Self-pay revenues, net of charity care write-offs and uninsured discounts | $ | 491.1 | 19.7 | % | $ | 419.4 | 18.7 | % | $ | 71.7 | 17.1 | % | ||||||||||||
Net revenue days outstanding (at end of period) | 57.5 | N/A | 49.5 | N/A | 8.0 | 16.2 | % | |||||||||||||||||
Same-hospital: |
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Related key indicators: |
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Charity care write-offs | $ | 76.9 | 3.3 | % | $ | 67.7 | 3.0 | % | $ | 9.2 | 13.6 | % | ||||||||||||
Self-pay revenues, net of charity care write-offs and uninsured discounts | $ | 460.6 | 19.7 | % | $ | 419.4 | 18.7 | % | $ | 41.2 | 9.8 | % | ||||||||||||
Net revenue days outstanding (at end of period) | 52.6 | N/A | 49.5 | N/A | 3.1 | 6.3 | % |
For the nine months ended September 30, 2012, our provision for doubtful accounts increased by $81.2 million, or 21.2%, to $464.6 million on a continuing operations basis and by $53.9 million, or 14.1%, to $437.3 million on a same-hospital basis as compared to the same period last year. This increase was primarily the result of increases in self-pay revenues during the nine months ended September 30, 2012.
49
Same-hospital self-pay revenues increased by $41.2 million over the same period last year and represented 19.7% of revenues. Self-pay revenues continued to increase for both our inpatient and outpatient services, which were primarily driven by higher self-pay volumes. Additionally, as a result of a decrease in our reimbursement under a New Mexico state program that provides for supplemental support and funding for the care of indigent patients we have experienced an increase of approximately $2.8 million in our charity care write-offs during the nine months ended September 30, 2012 compared to the same period in the prior year.
Our increased provision for doubtful accounts was partially offset by an increase in up-front cash collections for the three months ended September 30, 2012, as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Estimates, in the 2011 Annual Report on Form 10-K.
Our net revenue days outstanding on a continuing operations basis increased to 57.5 and included just 30 days of net revenue for our recent Marquette General acquisition. After normalizing for a full quarter of revenue for Marquette General, we estimated that on a continuing operations basis our net revenue days outstanding would have been 54.4. Our continuing operations net revenue days outstanding increased primarily as a result of higher than average net revenue days outstanding at our recently acquired hospitals, increases in our insured accounts receivable due to an increase in Medicare prepayment audit activity and new managed Medicaid payors in a few of our markets.
The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the nine months ended September 30, 2012 and 2011:
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Salaries and benefits (dollars in millions) | $ | 1,130.2 | 45.2 | % | $ | 1,011.2 | 45.0 | % | $ | 119.0 | 11.8 | % | ||||||||||||
Man-hours per equivalent admission | 101.5 | N/A | 97.7 | N/A | 3.8 | 3.8 | % | |||||||||||||||||
Salaries and benefits per equivalent admission | $ | 3,378 | N/A | $ | 3,174 | N/A | $ | 204 | 6.4 | % | ||||||||||||||
Same-hospital: |
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Salaries and benefits (dollars in millions) | $ | 1,051.3 | 44.8 | % | $ | 1,011.2 | 45.0 | % | $ | 40.1 | 4.0 | % | ||||||||||||
Man-hours per equivalent admission | 100.6 | N/A | 97.7 | N/A | 2.9 | 2.9 | % | |||||||||||||||||
Salaries and benefits per equivalent admission | $ | 3,361 | N/A | $ | 3,174 | N/A | $ | 187 | 5.9 | % |
For the nine months ended September 30, 2012, our salaries and benefits expense increased to $1,051.3 million, or 4.0%, on a same-hospital basis as compared to $1,011.2 million for the same period last year. Additionally, our man-hours per equivalent admission increased to 100.6, or 2.9% for the nine months ended September 30, 2012 on a same-hospital basis as compared to 97.7 for the same period last year. These increases in our in our same-hospital salaries and benefits expense and man-hours per equivalent admission are primarily a result of the impact of an increasing number of employed physicians and their related support staff. On a same-hospital basis, the number of our employed physicians, including hospitalists and their related support staff, increased by 238 to 1,273 from 1,035 for the same period last year. The increase in our employed physicians and their related support staff resulted in an increase of $16.8 million in our salaries and benefits expense on a same-hospital basis for the nine months ended September 30, 2012 as compared to the same period last year. Additionally, in connection with our acquisition of Marquette General, we assumed the
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employment of approximately 140 physicians As we continue to employ an increasing number of medical professionals, including physicians, we anticipate that salaries and benefits as a percentage of revenues will increase in future periods.
Additionally, our same-hospital salaries and benefits expense increased as a result of higher medical and employee benefits costs, the impact of compensation increases for our employees and severance costs related to our shared centralized resource initiatives. Primarily in connection with our shared centralized resource initiatives implementation process, we incurred severance and retention costs for our affected workforce of approximately $2.0 million for the nine months ended September 30, 2012. We estimate we will recognize approximately $6.1 million of additional severance and retention costs over the remaining implementation periods.
Furthermore, for the nine months ended September 30, 2012, we estimate that we incurred approximately $6.6 million of additional salaries and benefits expense related to our implementation of our EHR initiatives as compared to $4.6 million for the same period last year.
The following table summarizes our supplies and supplies per equivalent admission for the nine months ended September 30, 2012 and 2011:
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Supplies (dollars in millions) | $ | 382.7 | 15.3 | % | $ | 346.7 | 15.4 | % | $ | 36.0 | 10.4 | % | ||||||||||||
Supplies per equivalent admission | $ | 1,141 | N/A | $ | 1,091 | N/A | $ | 50 | 4.7 | % | ||||||||||||||
Same-hospital: |
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Supplies (dollars in millions) | $ | 355.1 | 15.2 | % | $ | 346.7 | 15.4 | % | $ | 8.4 | 2.4 | % | ||||||||||||
Supplies per equivalent admission | $ | 1,133 | N/A | $ | 1,091 | N/A | $ | 42 | 3.9 | % |
For the nine months ended September 30, 2012, our supplies expense increased to $355.1 million, or 2.4% on a same-hospital basis as compared to $346.7 million for the same period last year. This increase in our same-hospital supplies expense for the nine months ended September 30, 2012 was primarily a result of an increase in our supplies expense per equivalent admission to $1,133, or 3.9%, as compared to $1,091 for the same period last year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies, predominantly cancer related pharmaceuticals and other pharmacy supplies.
The following table summarizes our other operating expenses for the nine months ended September 30, 2012 and 2011 (dollars in millions):
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase | % Increase | |||||||||||||||||||
Continuing operations: |
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Professional fees | $ | 84.4 | 3.4 | % | $ | 71.0 | 3.2 | % | $ | 13.4 | 18.7 | % | ||||||||||||
Utilities | 46.8 | 1.9 | 43.7 | 1.9 | 3.1 | 7.2 | ||||||||||||||||||
Repairs and maintenance | 63.6 | 2.5 | 58.7 | 2.6 | 4.9 | 8.3 | ||||||||||||||||||
Rents and leases | 24.8 | 1.0 | 22.2 | 1.0 | 2.6 | 11.8 | ||||||||||||||||||
Insurance | 29.7 | 1.2 | 25.4 | 1.1 | 4.3 | 17.1 | ||||||||||||||||||
Physician recruiting | 21.9 | 0.9 | 20.6 | 0.9 | 1.3 | 6.5 | ||||||||||||||||||
Contract services | 156.5 | 6.3 | 131.5 | 5.9 | 25.0 | 19.0 | ||||||||||||||||||
Non-income taxes | 68.0 | 2.7 | 55.4 | 2.5 | 12.6 | 22.7 | ||||||||||||||||||
Other | 93.8 | 3.8 | 67.3 | 3.1 | 26.5 | 39.5 | ||||||||||||||||||
$ | 589.5 | 23.7 | $ | 495.8 | 22.2 | $ | 93.7 | 18.9 | % |
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | % of Revenues | 2011 | % of Revenues | Increase (Decrease) |
% Increase (Decrease) |
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Same-hospital: |
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Professional fees | $ | 78.1 | 3.3 | % | $ | 71.0 | 3.2 | % | $ | 7.1 | 9.8 | % | ||||||||||||
Utilities | 43.6 | 1.9 | 43.7 | 1.9 | (0.1 | ) | (0.1 | ) | ||||||||||||||||
Repairs and maintenance | 60.6 | 2.6 | 58.7 | 2.6 | 1.9 | 3.1 | ||||||||||||||||||
Rents and leases | 22.5 | 1.0 | 22.2 | 1.0 | 0.3 | 1.5 | ||||||||||||||||||
Insurance | 28.2 | 1.2 | 25.4 | 1.1 | 2.8 | 11.2 | ||||||||||||||||||
Physician recruiting | 21.4 | 0.9 | 20.6 | 0.9 | 0.8 | 4.0 | ||||||||||||||||||
Contract services | 145.9 | 6.2 | 131.5 | 5.9 | 14.4 | 10.9 | ||||||||||||||||||
Non-income taxes | 61.3 | 2.6 | 55.4 | 2.5 | 5.9 | 10.7 | ||||||||||||||||||
Other | 90.0 | 3.8 | 67.3 | 3.1 | 22.7 | 33.7 | ||||||||||||||||||
$ | 551.6 | 23.5 | $ | 495.8 | 22.2 | $ | 55.8 | 11.3 | % |
For the nine months ended September 30, 2012, our other operating expenses increased to $551.6 million, or 11.3% on a same-hospital basis as compared to $495.8 million for the same period last year. This increase for the nine months ended September 30, 2012 was primarily a result of increases in professional fees, contract services, non-income taxes and other.
As physician shortages continue, we have experienced increasing professional fees in areas such as emergency room physician coverage and hospitalists. We expect this trend to continue and that professional fees as a percentage of revenues will increase in future periods.
On a same-hospital basis, our contract services expense increased primarily as a result of increased fees and expenses related to our conversion of the clinical and patient accounting information system applications at several of our hospitals, costs associated with contracted laboratory services and relocation fees incurred in connection with our recently completed and opened replacement facility for Clark Regional Medical Center. Additionally, for the nine months ended September 30, 2012, we estimate that we incurred approximately $7.8 million of additional contract service expenses related to our implementation of our EHR initiatives as compared to $3.3 million for the same period last year.
Our non-income taxes increased primarily as a result of increases in state provider tax assessments for those Supplemental Payment Programs in which we participate.
Finally, our other expenses increased primarily as a result of additional legal fees incurred in connection with the Rural Floor Settlement and approximately $8.8 million in legal and consulting fees related to our recent acquisitions, including Marquette General, Woods Memorial and Twin County. Additional increases in other expenses are the result of an increase in our estimated legal reserves related to a billing matter at one of our hospitals as well as higher and additional software maintenance expense as a result of our on-going investments in information systems as the result of various initiatives and requirements, including compliance with the HITECH Act.
We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the nine months ended September 30, 2012, we recognized $4.8 million and $9.9 million in Medicare and Medicaid EHR incentive payments, respectively, as compared to $15.2 million Medicaid EHR incentive payments recognized in the same period last year. We did not recognize any Medicare EHR incentive payments during the nine months ended September 30, 2011.
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For the nine months ended September 30, 2012, our depreciation and amortization expense increased by $18.7 million, or 15.5% to $139.7 million, or 5.6% of revenues, on a continuing operations basis as compared to $121.0 million, or 5.4% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of our recent acquisitions, including Marquette General, Woods Memorial, Twin County, Maria Parham and Person Memorial as well as a result of significant increases in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We estimate that we incurred approximately $7.8 million in depreciation expense during the nine months ended September 30, 2012 related to our EHR initiatives as compared to $2.8 million for the same period last year. Additionally, we have experienced increases in depreciation expense relating to capital improvement projects completed during 2011 and the first nine months of 2012. We anticipate that our depreciation and amortization expense as a percentage of revenues will continue to increase in future periods.
Our interest expense decreased by $5.9 million, or 7.3%, to $75.7 million, for the nine months ended September 30, 2012, as compared to $81.6 million for the same period last year. This decrease was primarily a result of the maturity of our interest rate swap effective May 30, 2011. With the maturity of our interest rate swap a larger portion of our total outstanding debt has become subject to floating interest rates that are lower than the previously fixed rate under the interest rate swap agreement of 5.585%. Additionally, effective July 24, 2012, we replaced the Prior Credit Agreement with the Senior Credit Agreement. For a further discussion of our debt and corresponding interest rates, see Liquidity and Capital Resources Debt.
In connection with our replacement of the Prior Credit Agreement with the Senior Credit Agreement during the nine months ended September 30, 2012, we recorded $4.4 million of debt extinguishment costs. The debt extinguishment costs include $2.4 million of previously capitalized loan costs and $2.0 million of loan costs related to the issuance of the Senior Credit Agreement.
During the nine months ended September 30, 2012, we incurred a $3.1 million impairment charge from continuing operations. This impairment charge relates to the write-off of certain capitalized information system costs which we have determined are no longer a necessary component of our ongoing information technology strategy.
Our provision for income taxes $69.8 million for the nine months ended September 30, 2012 compared to $76.5 million for the same period last year. The $6.7 million decrease in the provision for income taxes was primarily attributable to a $15.8 million decrease in income from continuing operations before income taxes for the nine months ended September 30, 2012 compared to the same period last year.
Our primary sources of liquidity are cash flows provided by our operations and our debt borrowings. We believe that our internally generated cash flows and the amounts available under our debt agreements will be adequate to service existing debt, finance internal growth and fund capital expenditures and certain small to mid-size hospital acquisitions.
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The following table presents summarized cash flow information for the three and nine months ended September 30, 2012 and 2011 (in millions):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net cash flows provided by continuing operations | $ | 84.3 | $ | 110.0 | $ | 262.3 | $ | 318.3 | ||||||||
Less: Purchases of property and equipment | (47.3 | ) | (49.3 | ) | (157.4 | ) | (153.8 | ) | ||||||||
Free operating cash flow | 37.0 | 60.7 | 104.9 | 164.5 | ||||||||||||
Acquisitions, net of cash acquired | (162.3 | ) | (36.6 | ) | (182.4 | ) | (63.1 | ) | ||||||||
Proceeds from borrowings | 490.0 | | 490.0 | | ||||||||||||
Payments of borrowings | (443.7 | ) | (0.1 | ) | (443.7 | ) | (0.1 | ) | ||||||||
Repurchases of common stock | (0.3 | ) | (99.4 | ) | (6.2 | ) | (141.2 | ) | ||||||||
Payment of debt financing costs | (9.6 | ) | (0.3 | ) | (9.6 | ) | (0.4 | ) | ||||||||
Proceeds from exercise of stock options | 15.9 | 0.1 | 21.4 | 34.6 | ||||||||||||
Other | (1.4 | ) | (0.8 | ) | (2.7 | ) | (2.3 | ) | ||||||||
Net decrease in cash and cash equivalents | $ | (74.4 | ) | $ | (76.4 | ) | $ | (28.3 | ) | $ | (8.0 | ) |
The non-GAAP metric of free operating cash flow is an important liquidity measure for us. Our computation of free operating cash flow consists of net cash flows provided by continuing operations less cash flows used for the purchase of property and equipment.
Our cash flows provided by continuing operations for the three months ended September 30, 2012 were negatively impacted by lower net income and increases in the amount and timing of payments for income taxes. These decreases were partially offset by decreases in the amount and timing of payments for accounts payable and interest.
Our cash flows provided by continuing operations for the nine months ended September 30, 2012 were negatively impacted by increases in the amount and timing of cash payments made for income taxes and self-insurance claims as well as an increase in our insured accounts receivable and outstanding accounts receivable for certain of our recent acquisitions. These decreases were partially offset by increases as a result of the receipt of approximately $33.0 million related to the Rural Floor Settlement as well as decreases in the amount and timing of payments for interest and accrued salaries.
We believe that free operating cash flow is useful to investors and management as a measure of the ability of our business to generate cash and to repay and incur additional debt. Computations of free operating cash flow may differ from company to company. Therefore, free operating cash flow should be used as a complement to, and in conjunction with, our consolidated statements of cash flows presented in our unaudited condensed consolidated financial statements included elsewhere in this report.
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We continue to make significant, targeted investments at our hospitals to add new technologies, modernize facilities and expand the services available. These investments should assist in our efforts to attract and retain physicians, to offset outmigration of patients and to make our hospitals more desirable to our employees and potential patients.
The following table reflects our capital expenditures for the three and nine months ended September 30, 2012 and 2011 (dollars in millions):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Capital projects | $ | 15.2 | $ | 17.9 | $ | 59.1 | $ | 54.4 | ||||||||
Routine | 10.8 | 11.0 | 28.0 | 41.2 | ||||||||||||
Information systems | 21.3 | 20.4 | 70.3 | 58.2 | ||||||||||||
47.3 | 49.3 | 157.4 | 153.8 | |||||||||||||
Depreciation expense | 46.2 | 40.0 | 135.2 | 118.9 | ||||||||||||
Ratio of capital expenditures to depreciation expense | 102.4 | % | 123.3 | % | 116.4 | % | 129.4 | % |
We have a formal and intensive review procedure for the authorization of capital expenditures. The most important financial measure of acceptability for a discretionary capital project is whether its projected discounted cash flow return on investment exceeds our projected cost of capital for that project. We expect to continue to invest in information systems, modern technologies, emergency room and operating room expansions, the construction of medical office buildings for physician expansion and the reconfiguration of the flow of patient care. Throughout 2011 and the first nine months of 2012, we have experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We anticipate this trend to continue during the fourth quarter of 2012.
An analysis and roll-forward of our long-term debt during the first nine months of 2012 is as follows (in millions):
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December 31, 2011 |
Proceeds from Borrowings | Payments of Borrowings | Other(a) | Amortization of Convertible Debt Discounts |
September 30, 2012 |
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Senior Credit Agreement: |
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Term Facility | $ | | $ | 450.0 | $ | | $ | | $ | | $ | 450.0 | ||||||||||||
Revolving Facility | | 40.0 | | | | 40.0 | ||||||||||||||||||
Term B Loans | 443.7 | | (443.7 | ) | | | | |||||||||||||||||
6.625% Senior Notes | 400.0 | | | | | 400.0 | ||||||||||||||||||
3½% Notes | 575.0 | | | | | 575.0 | ||||||||||||||||||
3¼% Debentures | 225.0 | | | | | 225.0 | ||||||||||||||||||
Unamortized discounts on 3¼% Debentures and 3½% Notes | (55.5 | ) | | | | 19.2 | (36.3 | ) | ||||||||||||||||
Capital leases | 9.1 | 2.5 | (1.7 | ) | 0.6 | | 10.5 | |||||||||||||||||
$ | 1,597.3 | $ | 492.5 | $ | (445.4 | ) | $ | 0.6 | $ | 19.2 | $ | 1,664.2 |
(a) | Represents the assumption of capital lease obligations in connection with certain acquisitions completed during the nine months ended September 30, 2012. |
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We use leverage, or our total debt to total capitalization ratio, to make financing decisions. The following table illustrates our financial statement leverage and the classification of our debt at September 30, 2012 and December 31, 2011 (dollars in millions):
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September 30, 2012 | December 31, 2011 | Increase (Decrease) | ||||||||||
Current portion of long-term debt | $ | 13.6 | $ | 1.9 | $ | 11.7 | ||||||
Long-term debt | 1,650.6 | 1,595.4 | 55.2 | |||||||||
Unamortized discounts of convertible debt instruments | 36.3 | 55.5 | (19.2 | ) | ||||||||
Total debt, excluding unamortized discounts of convertible debt instruments | 1,700.5 | 1,652.8 | 47.7 | |||||||||
Total LifePoint Hospitals, Inc. stockholders' equity | 2,095.2 | 1,945.2 | 150.0 | |||||||||
Total capitalization | $ | 3,795.7 | $ | 3,598.0 | $ | 197.7 | ||||||
Total debt to total capitalization | 44.8 | % | 45.9 | % | (110) bps | |||||||
Percentage of: |
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Fixed rate debt, excluding unamortized discounts of convertible debt instruments | 71.2 | % | 73.2 | % | ||||||||
Variable rate debt | 28.8 | 26.8 | ||||||||||
100.0 | % | 100.0 | % | |||||||||
Percentage of: |
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Senior debt | 53.0 | % | 51.6 | % | ||||||||
Subordinated debt, excluding unamortized discounts of convertible debt instruments | 47.0 | 48.4 | ||||||||||
100.0 | % | 100.0 | % |
Effective July 24, 2012, we replaced the Prior Credit Agreement with the Senior Credit Agreement. The Senior Credit Agreement matures on July 24, 2017 and provides for a $450.0 million senior secured term loan facility (the Term Facility) and a $350.0 million senior secured revolving credit facility (the Revolving Facility). The proceeds from the issuance of the Term Facility were used to repay the $443.7 million outstanding term B loans (the Term B Loans) under the Prior Credit Agreement and to pay fees and expenses related to the entry into the Senior Credit Agreement. The Term Facility requires scheduled quarterly repayments in an amount equal to 2.5% per annum for each of the first, second and third years and 5.0% per annum for the fourth year and first three quarters of the fifth year, with the balance due at maturity. Additionally, the Term Facility is subject to mandatory prepayments based on excess cash flow, as well as upon the occurrence of certain other events, as specifically described in the Senior Credit Agreement. The Senior Credit Agreement is guaranteed on a senior basis by our subsidiaries with certain limited exceptions.
The Senior Credit Agreement provides for the issuance of letters of credit up to $75.0 million. Issued letters of credit reduce the amounts available under the Revolving Facility. As of September 30, 2012, we had $29.8 million in letters of credit outstanding that were related to the self-insured retention level of its general and professional liability insurance and workers compensation programs as security for payment of claims.
During September 2012, we borrowed $40.0 million under the Revolving Facility for general purposes. Under the terms of the Senior Credit Agreement, amounts available for borrowing under the Revolving Facility were $280.2 million as of September 30, 2012.
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Interest on the outstanding borrowings under the Senior Credit Agreement is payable at our option at either an adjusted London Interbank Offer Rate (LIBOR) or an adjusted base rate plus an applicable margin. The applicable margin under the Senior Credit Agreement ranges from 1.50% to 2.50% for LIBOR loans and from 0.50% to 1.50% for adjusted base rate loans based on our total leverage ratio, calculated in accordance with the Senior Credit Agreement.
As of September 30, 2012, the applicable annual interest rates under the Term Facility and the Revolving Facility were 1.97% and 1.98%, respectively, which were based on the 30-day adjusted LIBOR plus the applicable margins. The 30-day adjusted LIBOR was 0.22% and 0.23% for the Term Facility and the Revolving Facility, respectively, as of September 30, 2012. The weighted-average applicable annual interest rate for the three months ended September 30, 2012 under the Senior Credit Agreement was 2.02%.
The Senior Credit Agreement requires us to satisfy a maximum total leverage ratio not to exceed 5.00:1.00 through June 30, 2014 with a step-down to 4.75:1.00 through June 30, 2015, 4.50:1.00 through June 30, 2016 and 4.25:1.00 through the remaining term and as determined on a trailing four quarter basis. We were in compliance with this covenant as of September 30, 2012.
In addition, the Senior Credit Agreement contains certain customary affirmative and negative covenants, which among other things, limit our ability to incur additional debt, create liens, merge, consolidate, enter into acquisitions, sell assets, effect sale leaseback transactions, pay dividends, pay subordinated debt and effect transactions with our affiliates. It does not contain provisions that would accelerate the maturity dates upon a downgrade in our credit rating. However, a downgrade in our credit rating could adversely affect our ability to obtain other capital sources in the future and could increase our cost of borrowings.
Effective September 23, 2010, we issued in a private placement $400.0 million of 6.625% unsecured senior notes due October 1, 2020 (the 6.625% Senior Notes) with The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from this issuance were partially used to repay a portion of the then outstanding borrowings under the Term B Loans. The 6.625% Senior Notes bear interest at the rate of 6.625% per year, payable semi-annually on April 1 and October 1, commencing April 1, 2011. The 6.625% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of our existing and future subsidiaries that guarantee the Senior Credit Agreement.
We may redeem up to 35% of the aggregate principal amount of the 6.625% Senior Notes, at any time before October 1, 2013, with the net cash proceeds of one or more qualified equity offerings at a redemption price equal to 106.625% of the principal amount to be redeemed, plus accrued and unpaid interest, provided that at least 65% of the aggregate principal amount of the 6.625% Senior Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering.
We may redeem the 6.625% Senior Notes, in whole or in part, at any time prior to October 1, 2015 at a price equal to 100% of the principal amount of the notes redeemed plus an applicable makewhole premium, plus accrued and unpaid interest, if any, to the date of redemption. We may redeem the 6.625% Senior Notes, in whole or in part, at any time on or after October 1, 2015, plus accrued and unpaid interest, if any, to the date of redemption plus a redemption price equal to a percentage of the principal amount of the notes redeemed based on the following redemption schedule:
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October 1, 2015 to September 30, 2016 | 103.313 | % | ||
October 1, 2016 to September 30, 2017 | 102.208 | % | ||
October 1, 2017 to September 30, 2018 | 101.104 | % | ||
October 1, 2018 and thereafter | 100.000 | % |
If we experience a change of control under certain circumstances, we must offer to repurchase all of the notes at a price equal to 101.000% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
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The 6.625% Senior Notes contain customary affirmative and negative covenants, which among other things, limit our ability to incur additional debt, create liens, pay dividends, effect transactions with our affiliates, sell assets, pay subordinated debt, merge, consolidate, enter into acquisitions and effect sale leaseback transactions.
The 3½% convertible senior subordinated notes due May 15, 2014 (the 3½% Notes) bear interest at the rate of 3½% per year, payable semi-annually on May 15 and November 15. The 3½% Notes are convertible prior to March 15, 2014 under the following circumstances: (1) if the price of our common stock reaches a specified threshold during specified periods; (2) if the trading price of the 3½% Notes is below a specified threshold; or (3) upon the occurrence of specified corporate transactions or other events. On or after March 15, 2014, holders may convert the 3½% Notes at any time prior to the close of business on the scheduled trading day immediately preceding May 15, 2014, regardless of whether any of the foregoing circumstances has occurred.
Subject to certain exceptions, we will deliver cash and shares of our common stock upon conversion of each $1,000 principal amount of the 3½% Notes as follows: (i) an amount in cash, which we refer to as the principal return, equal to the sum of, for each of the 20 volume-weighted average price trading days during the conversion period, the lesser of the daily conversion value for such volume-weighted average price trading day and $50; and (ii) a number of shares in an amount equal to the sum of, for each of the 20 volume-weighted average price trading days during the conversion period, any excess of the daily conversion value above $50. Our ability to pay the principal return in cash is subject to important limitations imposed by the Senior Credit Agreement and the agreements or indentures governing any additional indebtedness that we incur in the future. If we do not make any payments we are obligated to make under the terms of the 3½% Notes, holders may declare an event of default.
The initial conversion rate is 19.3095 shares of our common stock per $1,000 principal amount of the 3½% Notes (subject to certain events). This represents an initial conversion price of approximately $51.79 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.
Upon the occurrence of a fundamental change (as specified in the indenture), each holder of the 3½% Notes may require us to purchase some or all of the 3½% Notes at a purchase price in cash equal to 100% of the principal amount of the 3½% Notes surrendered, plus any accrued and unpaid interest.
The indenture for the 3½% Notes does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior or secured debt or other indebtedness, or the issuance or repurchase of securities by us. The indenture contains no covenants or other provisions to protect holders of the 3½% Notes in the event of a highly leveraged transaction or other events that do not constitute a fundamental change.
The 3¼% convertible senior subordinated debentures due August 15, 2025 (the 3¼% Debentures) bear interest at the rate of 3¼% per year, payable semi-annually on February 15 and August 15. The 3¼% Debentures are convertible (subject to certain limitations imposed by the Senior Credit Agreement) under the following circumstances: (1) if the price of our common stock reaches a specified threshold during the specified periods; (2) if the trading price of the 3¼% Debentures is below a specified threshold; (3) if the 3¼% Debentures have been called for redemption; or (4) if specified corporate transactions or other specified events occur. Subject to certain exceptions, we will deliver cash and shares of our common stock, as follows: (i) an amount in cash, which we refer to as the principal return, equal to the lesser of (a) the principal amount of the 3¼% Debentures surrendered for conversion and (b) the product of the conversion rate and the average price of our common stock, as set forth in the indenture governing the securities, which we refer to as the conversion value; and (ii) if the conversion value is greater than the principal return, an amount in shares of our common stock. Our ability to pay the principal return in cash is subject to important limitations imposed by the Senior Credit Agreement and the agreements or indentures governing any additional indebtedness that we incur in the future. Based on the terms of the Senior Credit Agreement, in certain
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circumstances, even if any of the foregoing conditions to conversion have occurred, the 3¼% Debentures will not be convertible, and holders of the 3¼% Debentures will not be able to declare an event of default under the 3¼% Debentures.
The initial conversion rate for the 3¼% Debentures is 16.3345 shares of our common stock per $1,000 principal amount of 3¼% Debentures (subject to adjustment in certain events). This is equivalent to a conversion price of $61.22 per share of common stock. In addition, if certain corporate transactions that constitute a change of control occur on or prior to February 20, 2013, we will increase the conversion rate in certain circumstances, unless such transaction constitutes a public acquirer change of control and we elect to modify the conversion rate into public acquirer common stock.
On or after February 20, 2013, we may redeem for cash some or all of the 3¼% Debentures at any time at a price equal to 100% of the principal amount of the 3¼% Debentures to be purchased, plus any accrued and unpaid interest. Holders may require us to purchase for cash some or all of the 3¼% Debentures on February 15, 2013, February 15, 2015 and February 15, 2020 or upon the occurrence of a fundamental change, at 100% of the principal amount of the 3¼% Debentures to be purchased, plus any accrued and unpaid interest.
The indenture for the 3¼% Debentures does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior or secured debt or other indebtedness, or the issuance or repurchase of securities by us. The indenture contains no covenants or other provisions to protect holders of the 3¼% Debentures in the event of a highly leveraged transaction or fundamental change.
We expect the level of spending for capital expenditures for the remainder of 2012 to be comparable with the fourth quarter of 2011. We are reconfiguring some of our hospitals to more effectively accommodate patient services and to provide for a greater variety of services, as well as implementing various information system initiatives in our efforts to comply with the HITECH Act. For the three and nine months ended September 30, 2012, we spent $21.3 million and $70.3 million, respectively, on information systems. We anticipate spending approximately $80.0 million to $90.0 million on information systems in 2012. At September 30, 2012, we had uncompleted projects with an estimated additional cost to complete and equip of approximately $64.2 million. We anticipate funding these expenditures through cash provided by operating activities, available cash and borrowings available under the Senior Credit Agreement.
Our business strategy contemplates the selective acquisition of additional hospitals and other healthcare service providers, and we regularly review potential acquisitions. These acquisitions may, however, require additional financing. We regularly evaluate opportunities to sell additional equity or debt securities, obtain credit agreements from lenders or restructure our long-term debt or equity for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders.
In connection with our acquisitions of Marquette General and an 80% interest in Twin County, both through our Duke LifePoint Healthcare joint venture, we have committed to invest the remaining $321.7 million of an initial $350.0 million over the next ten years, subject to certain offsets, and $20.0 million over the next ten years, respectively, in capital expenditures and improvements.
We believe that cash generated from our operations and borrowings available under the Senior Credit Agreement will be sufficient to meet our working capital needs, the purchase prices for any potential facility acquisitions, planned capital expenditures and other expected operating needs over the next twelve months and into the foreseeable future prior to the maturity dates of our outstanding debt.
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We have various contractual obligations, which are recorded as liabilities in our unaudited condensed consolidated financial statements included elsewhere in this report. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our unaudited condensed consolidated financial statements but are required to be disclosed. For example, we are required to make certain minimum lease payments for the use of property under certain of our operating lease agreements. During the three months ended September 30, 2012, we replaced the Prior Credit Agreement with the Senior Credit Agreement and borrowed $40.0 million under the Revolving Facility for general purposes.
The following is an update of our contractual obligations at September 30, 2012 for our long-term debt obligations reflecting these transactions (in millions):
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Payment Due by Period | ||||||||||||||||||||
Contractual Obligation | Total | October 1, 2012 to December 31, 2012 | 2013 - 2014 | 2015 - 2016 | After 2016 | |||||||||||||||
Long-term debt(a) | $ | 2,095.8 | $ | 19.1 | $ | 717.8 | $ | 126.6 | $ | 1,232.3 |
(a) | Included in long-term debt obligations are principal and interest owed on our outstanding debt obligations. We used the 1.97% and 1.98% effective interest rates at September 30, 2012 for our $450.0 million outstanding Term Facility and $40.0 million outstanding Revolving Facility, respectively, to estimate interest payments on these variable rate debt instruments. Holders of our $225.0 million outstanding 3¼% Debentures may require us to purchase for cash some or all of the 3¼% Debentures on February 15, 2013, February 15, 2015, and February 15, 2020. For purposes of the above table, we assumed that our 3¼% Debentures would be outstanding during the entire term, which ends on August 15, 2025. These amounts exclude our unamortized convertible debt discounts and related non-cash amortization. |
Except for the replacement of the Prior Credit Agreement with the Senior Credit Agreement, our borrowing of $40.0 million under the Revolving Facility for general purposes and the remaining $321.7 million of an initial $350.0 million we have committed to spend over the next ten years in connection with our acquisition of Marquette General, subject to certain offsets, as mentioned previously in Liquidity and Capital Resources Outlook there have been no other material changes in our contractual obligations presented in the 2011 Annual Report on Form 10-K or our quarterly reports on Form 10-Q for the three months ended March 31, 2012 and June 30, 2012.
We had standby letters of credit outstanding of $29.8 million as of September 30, 2012, all of which relates to the self-insured retention levels of our professional and general liability insurance and workers compensation programs as security for the payment of claims.
The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:
| it requires assumptions to be made that were uncertain at the time the estimate was made; and |
| changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition. |
Our critical accounting estimates include the following areas:
| Revenue recognition and accounts receivable; |
| Goodwill impairment analysis; |
| Reserves for self-insurance claims; |
| Accounting for stock-based compensation; and |
| Accounting for income taxes. |
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Please refer to Note 11 to our accompanying unaudited condensed consolidated financial statements included elsewhere in this report for a discussion of our material financial contingencies, including:
| Legal proceedings and general liability claims; |
| Physician commitments; |
| Capital expenditure commitments; |
| Shared centralized resource model arrangements; |
| Hospital support center lease; and |
| Marquette acquisition contingent obligations. |
The following discussion relates to our exposure to market risk based on changes in interest rates:
As of September 30, 2012, we had outstanding debt, excluding $36.3 million of unamortized discounts on our convertible debt instruments, of $1,700.5 million, 28.8%, or $490.0 million, of which was subject to variable rates of interest.
The carrying amounts and fair values of the Term Facility and the Revolving Facility under the Senior Credit Agreement, the Term B Loans under the Prior Credit Agreement, the 6.625% Senior Notes, the 3½% Notes and the 3¼% Debentures as of September 30, 2012 and December 31, 2011 were as follows (in millions):
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Carrying Amount | Fair Value | |||||||||||||||
September 30, 2012 | December 31, 2011 | September 30, 2012 | December 31, 2011 | |||||||||||||
Term Facility | $ | 450.0 | $ | | $ | 443.3 | $ | | ||||||||
Revolving Facility | $ | 40.0 | $ | | $ | 37.6 | $ | | ||||||||
Term B Loans | $ | | $ | 443.7 | $ | | $ | 432.6 | ||||||||
6.625% Senior Notes | $ | 400.0 | $ | 400.0 | $ | 430.0 | $ | 413.0 | ||||||||
3½% Notes, excluding unamortized discount | $ | 575.0 | $ | 575.0 | $ | 621.0 | $ | 592.3 | ||||||||
3¼% Debentures, excluding unamortized discount | $ | 225.0 | $ | 225.0 | $ | 225.6 | $ | 230.3 |
The fair values of the Term Facility, the Revolving Facility, the Term B Loans and the 6.625% Senior Notes were estimated based on the average bid and ask price as determined using published rates and categorized as Level 2 within the fair value hierarchy in accordance with ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10). The fair values of the 3½% Notes and the 3¼% Debentures were estimated based on the quoted market prices determined using the closing share price of our common stock and categorized as Level 1 within the fair value hierarchy in accordance with ASC 820-10. Effective July 24, 2012, we repaid the $443.7 million outstanding Term B Loans with the issuance of the $450.0 million Term Facility.
Certain of our outstanding cash balances are invested overnight with high credit quality financial institutions. We do not hold direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities. We did not have significant exposure to changing interest rates on invested cash at September 30, 2012. As a result, the interest rate market risk implicit in these investments at September 30, 2012, if any, was low.
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We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis.
There has been no change in our internal control over financial reporting during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Hospitals are subject to the regulation and oversight of various state and federal governmental agencies. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or whistleblower, suits against hospitals that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. The healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focal areas of the Office of the Inspector General (OIG) and other governmental fraud and abuse programs. Certain of our individual facilities have received, and from time to time, other facilities may receive, government inquiries from federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material adverse effect on our financial position, results of operations and liquidity.
In addition, hospitals are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance.
In May 2009, our hospital in Andalusia, Alabama (Andalusia Regional Hospital) produced documents responsive to a request received from the U.S. Attorneys Office for the Western District of New York regarding an investigation they are conducting with respect to the billing of kyphoplasty (spine-related) procedures. Based on a review of the number of the kyphoplasty procedures performed at all of our other hospitals, as part of our effort to cooperate with the U.S. Attorneys Office, by letter dated January 20, 2010 we identified to the U.S. Attorneys Office four additional facilities at which the number of inpatient kyphoplasty procedures approximated those performed at Andalusia Regional Hospital. We have completed our review of the relevant medical records and we are continuing to cooperate with the governments investigation.
In December 2011, Jackson Purchase Medical Center, in Mayfield, Kentucky, received a request from an agent of the OIG, HHS, for information regarding the relationship between the hospital and a physician on its medical staff and that physicians use of a hospital-employed advanced nurse practitioner, as well as lease arrangements between the hospital and physician. The U.S. Attorneys Office for the Western District of Kentucky is also involved in this inquiry. The hospital is currently subject to a Corporate Integrity Agreement with the OIG, effective June 26, 2011. We have, and will continue to, cooperate with the government in this matter.
In addition to legal proceedings initiated by government agencies and third parties, all hospitals have an obligation to report and refund promptly any overpayments received once identified. Overpayments in this context include any amount received from a government program by a provider to which it is not entitled, regardless of the cause. Such overpayments become obligations in violation of the False Claims Act if not reported and refunded within 60 days of identification. Hospitals can meet the obligation to report and refund in three ways: (1) refunding overpayments directly to the program, (2) self-disclosing the overpayment to the OIG via its voluntary self disclosure protocol (with respect to False Claims Act and other violations not related to the Stark law), and (3) self-disclosing to CMS via the self-referral disclosure protocol (with respect to overpayments caused by potential violations of the Stark law only) for which CMS has the authority to reduce the amounts otherwise owed.
In connection with our acquisition of Marquette General, we agreed that, to the extent that Marquette General Hospital, Inc.s (the Marquette Seller) satisfaction of its retained liabilities, which includes the Marquette Sellers healthcare liabilities related to the self disclosure obligations as well as other obligations (Marquette Contingent Obligations), causes its net proceeds to be reduced to less than $15.0 million, we would pay additional purchase consideration to the Marquette Seller. We made reasonable estimates and
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recorded an aggregate of $25.3 million representing the preliminary fair values of our potential obligation to the Marquette Seller related to the Marquette Contingent Obligations. We do not control and cannot predict with certainty the amount the Marquette Seller will owe any agency or creditor. Therefore, the final amounts paid in settlement, if any, could materially differ from amounts currently recorded. To the extent we are required to pay additional purchase consideration pursuant to the information described above, the amounts paid will reduce on a dollar-for-dollar basis, the remaining $321.7 million of the initial $350.0 million in capital improvements and physician recruitment commitment at Marquette General. Our Marquette Contingent Obligations are further described in Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this report.
During August 2012, Minden Medical Center (Minden) finalized an independent review of the medical necessity of certain services rendered to patients in its intensive outpatient psychiatric (IOP) program, which was managed by a third party, Allegiance Health Management, Inc. (Allegiance). This review was commenced by Minden in 2011 and, in August 2011, the hospital voluntarily disclosed its concerns regarding these services to the OIG pursuant to the OIGs self disclosure protocol. On January 3, 2012, Minden received notice that it had been accepted into the OIGs self disclosure protocol. Shortly after receiving this notice, Bolivar Medical Center (Bolivar) received a subpoena from the OIG seeking information about its IOP program and its relationship with Allegiance. Minden and Bolivar continue to cooperate with the government in addressing these matters.
There have been no material changes in our risk factors from those disclosed in the 2011 Annual Report on Form 10-K.
In accordance with repurchase plans adopted in 2010 and 2011, our Board of Directors authorized the repurchase of outstanding shares of our common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other customary factors. The 2010 repurchase plan provided for the repurchase of up to $150.0 million in shares of our common stock, and we have repurchased all shares authorized for repurchase under this plan. The 2011 repurchase plan provides for the repurchase of up to $250.0 million in shares of our common stock. We are not obligated to repurchase any specific number of shares under our 2011 repurchase plan. Through September 30, 2012, we have repurchased approximately 1.8 million shares for an aggregate purchase price, including commissions, of approximately $65.2 million in accordance with the 2011 repurchase plan. As of September 30, 2012 we had remaining authority to repurchase up to an additional $184.8 million in shares in accordance with the 2011 repurchase plan. We have designated the shares repurchased in accordance with the repurchase plans as treasury stock. In connection with the 2011 repurchase plan, we recently entered into a trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of our common stock during the blackout period (the 10b5-1 Trading Plan). The 10b5-1 Trading Plan became effective on September 15, 2012 and will expire on October 30, 2012.
Additionally, we redeem shares from employees for minimum statutory tax withholding purposes upon vesting of certain stock awards granted pursuant to our Amended and Restated 1998 Long-Term Incentive Plan (LTIP) and Amended and Restated Management Stock Purchase Plan (MSPP). We redeemed a nominal number of certain vested LTIP and MSPP shares during the three months ended September 30, 2012 and 2011. During the nine months ended September 30, 2012 and 2011, we redeemed approximately 0.2 million and 0.1 million shares of certain vested LTIP and MSPP shares for an aggregate purchase price of approximately $6.1 million and $5.9 million, respectively. We have designated these shares as treasury stock.
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The following table summarizes our share repurchase activity by month for the three months ended September 30, 2012:
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Total Number of Shares Purchased |
Weighted Average Price Paid per Share |
Total Number of Shares Purchased as Part of a Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (In millions) |
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July 1, 2012 to July 31, 2012(a) | 8,307 | $ | 40.98 | | $ | 184.8 | ||||||||||
August 1, 2012 to August 31, 2012 | | $ | | | $ | 184.8 | ||||||||||
September 1, 2012 to September 30, 2012(a) | 565 | $ | 43.00 | | $ | 184.8 | ||||||||||
Total | 8,872 | $ | 41.11 | | $ | 184.8 |
(a) | Shares redeemed for tax withholding purposes upon vesting of certain previously granted stock awards under our various stockholder-approved stock-based compensation plans. |
On August 12, 2012, the Company entered into an Indemnification Agreement with Jeffrey S. Sherman and Michael S. Coggin (collectively, the Indemnitees). All of the current directors of the Company and certain of its officers executed a similar form on August 29, 2008. The Indemnification Agreement provides that the Company shall indemnify the Indemnitees, to the fullest extent permitted by Delaware law, subject to certain exceptions, against expenses, judgments, fines and other amounts actually and reasonably incurred in connection his or her service as a director or officer, as the case may be, and provides for rights to advancement of expenses and contribution. The forgoing description of the Indemnification Agreement is not complete and is qualified in its entirety by reference to the full text of the form of Indemnification Agreement between the Company and each of the Indemnities, which is filed as Exhibit 10.2 and is incorporated herein by reference.
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Exhibit Number | Description of Exhibits | |||
3.1 | | Amended and Restated Certificate of Incorporation (incorporated by reference from exhibits to the Registration Statement on Form S-8 filed by LifePoint Hospitals, Inc. on April 19, 2005, File No. 333-124151). | ||
3.2 | | Fourth Amended and Restated By-Laws of LifePoint Hospitals, Inc. (incorporated by reference from exhibits to the LifePoint Hospitals, Inc. Current Report on Form 8-K dated December 15, 2010, File No. 000-51251). | ||
10.1 | | Credit Agreement, dated as of July 24, 2012, among LifePoint Hospitals, Inc., as borrower, the lenders referred to therein, Citibank, N.A. as administrative agent, Bank of America, N.A. and Barclays Bank PLC, as co-syndication agents, and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Barclays Bank PLC as joint lead arrangers and joint bookrunners (incorporated by reference from exhibits to the LifePoint Hospitals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, File No. 000-51251). | ||
10.2 | | Form of Indemnification Agreement (filed herewith). | ||
31.1 | | Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | | Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | ||
32.1 | | Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | | Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | ||
101.INS | | XBRL Instance Document* | ||
101.XSD | | XBRL Taxonomy Extension Schema Document* | ||
101.CAL | | XBRL Taxonomy Calculation Linkbase Document* | ||
101.DEF | | XBRL Taxonomy Definition Linkbase Document* | ||
101.LAB | | XBRL Taxonomy Label Linkbase Document* | ||
101.PRE | | XBRL Taxonomy Presentation Linkbase Document* |
* | Furnished electronically herewith |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LifePoint Hospitals, Inc.
By: | /s/ Michael S. Coggin![]() Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |
Date: October 26, 2012
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Exhibit Number | Description of Exhibits | |||
3.1 | | Amended and Restated Certificate of Incorporation (incorporated by reference from exhibits to the Registration Statement on Form S-8 filed by LifePoint Hospitals, Inc. on April 19, 2005, File No. 333-124151). | ||
3.2 | | Fourth Amended and Restated By-Laws of LifePoint Hospitals, Inc. (incorporated by reference from exhibits to the LifePoint Hospitals, Inc. Current Report on Form 8-K dated December 15, 2010, File No. 000-51251). | ||
10.1 | | Credit Agreement, dated as of July 24, 2012, among LifePoint Hospitals, Inc., as borrower, the lenders referred to therein, Citibank, N.A. as administrative agent, Bank of America, N.A. and Barclays Bank PLC, as co-syndication agents, and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Barclays Bank PLC as joint lead arrangers and joint bookrunners (incorporated by reference from exhibits to the LifePoint Hospitals, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, File No. 000-51251). | ||
10.2 | | Form of Indemnification Agreement (filed herewith). | ||
31.1 | | Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | | Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | ||
32.1 | | Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | | Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | ||
101.INS | | XBRL Instance Document* | ||
101.XSD | | XBRL Taxonomy Extension Schema Document* | ||
101.CAL | | XBRL Taxonomy Calculation Linkbase Document* | ||
101.DEF | | XBRL Taxonomy Definition Linkbase Document* | ||
101.LAB | | XBRL Taxonomy Label Linkbase Document* | ||
101.PRE | | XBRL Taxonomy Presentation Linkbase Document* |
* | Furnished electronically herewith |