UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

          

________________

 

Form 10-Q

________________

 

(Mark One) 

 

Commission file number: 000-51251

________________

LifePoint Hospitals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

(615) 920-7000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable 

(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 ☑    No ☐

 

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 ☑    No ☐

 

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:

 

 

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

 

As of October  17, 2014, the number of outstanding shares of the registrant’s Common Stock was 45,272,620.

 

 

 

 

---

 

LifePoint Hospitals, Inc.

 

TABLE OF CONTENTS

 

 

 

 

 

---

 

 

 

 

 

 

 

---

 

 

 

 

_________________________________

 

 

 

---

 

 

 

 

 

 

---

 

 

 

 

 

___________

 

 

 

---

 

Note 1. Organization, Basis of Presentation and Recently Issued Accounting Pronouncements

Organization

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, 2014, on a consolidated basis, the Company operated 68 hospital campuses in 21 states. Unless noted otherwise, discussions in these notes pertain to the Company’s continuing operations, which exclude the results of those facilities that have previously been disposed prior to the adoption of Accounting Standards Update (“ASU”) No. 2014-8, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014‑8”).

Basis of Presentation

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Additionally, the accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company through its direct or indirect ownership of a majority interest and exclusive rights granted to the Company as the sole general partner or controlling member of such entities, including Duke LifePoint Healthcare, a joint venture between LifePoint and a wholly-controlled affiliate of Duke University Health System, Inc.  Furthermore, the Company consolidates any entities for which it receives the majority of the entity’s expected returns or is at risk for the majority of the entity’s expected losses based upon its investment or financial interest in the entity.  All significant intercompany accounts and transactions within the Company have been eliminated in consolidation.

Recently Issued Accounting Pronouncements

ASU No. 2014-9, “Revenue from Contracts with Customers”

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9”).  ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

---

 

Among other provisions and in addition to expanded disclosure about the nature, amount, timing and uncertainty of revenue, as well as certain additional quantitative and qualitative disclosures, ASU 2014-9 changes the healthcare industry specific presentation guidance under ASU 2011-7, “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.”    The provisions of ASU 2014-9 are effective for annual periods beginning after December 15, 2016, including interim periods within those years.  Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of ASU 2014-9 will have on its revenue recognition policies and procedures, financial position, result of operations, cash flows, financial disclosures and control framework.

 

ASU No. 2014-8, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”

 

In April 2014, the FASB issued ASU 2014-8.  Among other provisions and in addition to expanded disclosures, ASU 2014-8 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results.  Additionally, ASU 2014-8 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss, attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale.  The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period. 

 

As more fully discussed in Note 6, during the three months ended September 30, 2014, the Company entered into a definitive agreement to sell certain assets of River Parishes Hospital (“River Parishes”), located in LaPlace, Louisiana, and discontinue its operation.  The Company has determined that the sale of River Parishes does not qualify for discontinued operations treatment in accordance with the provisions of ASU 2014-8. However, the Company has made the additional required disclosures.

 

Note 2. Revenue Recognition and Accounts Receivable

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 Company’s 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 Company’s 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 Company’s accompanying unaudited condensed consolidated financial statements are recorded at the net amount expected to be received.

---

 

The Company’s 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, 2014 and 2013 (in millions):

 

The primary uncertainty of the Company’s 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 Company’s policies.

The following is a summary of the Company’s activity in the allowance for doubtful accounts for the nine months ended September 30, 2014 (in millions):

 

 

The allowances for doubtful accounts as a percent of gross accounts receivable, net of contractual discounts were 50.1% and 55.4% as of September 30, 2014 and December 31, 2013, respectively. The decrease in the resulting ratio of the allowances for doubtful accounts as a percentage of gross accounts receivable, net of contractual discounts, at September 30, 2014 as compared to December 31, 2013 is primarily the result of our recent acquisitions. Additionally, as of September 30, 2014 and December 31, 2013, the allowances for doubtful accounts plus certain contractual allowances and discounts related to self-pay patients as a percentage of self-pay receivables were 87.5% and 86.5%, respectively.

 

Note 3. General and Administrative Costs

 

The majority of the Company’s 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 $63.3 million and $42.5 million for the three months ended September 30, 2014 and 2013, respectively, and $169.4 million and $133.5 million for the nine months ended September 30, 2014 and 2013, respectively.  Included in the Company’s hospital support center overhead costs are depreciation and amortization expense related to the Company’s information systems platforms as well as transactional expenses related to the Company’s recent acquisitions, including legal and consulting fees.

 

---

 

Note 4.  Fair Value of Financial Instruments

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 Company’s financial instruments are further described as follows.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

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.

 

Long-Term Debt

The carrying amounts and fair values of the Company’s senior secured term loan facility (the “Term Facility”) and senior secured incremental term loans (the “Incremental Term Loans”) under its senior secured credit agreement with, among others, Citibank, N.A. as administrative agent, and the lenders party thereto (the “Senior Credit Agreement”), 6.625%  unsecured senior notes due October 1, 2020 (the “6.625% Senior Notes”), 5.5% unsecured senior notes due December 1, 2021 (the “5.5% Senior Notes”) and 3½% convertible senior subordinated notes due May 15, 2014 (the “3½% Notes”) as of September 30, 2014 and December 31, 2013 were as follows (in millions):

 

The fair values of the Term Facility, the Incremental Term Loans, the 6.625% Senior Notes and the 5.5% 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 were estimated based on the quoted market prices determined using the closing share price of the Company’s common stock and categorized as Level 1 within the fair value hierarchy in accordance with ASC 820-10. As more fully discussed in Note 8, effective May 12, 2014, the Company issued $400.0 million of additional 5.5% Senior Notes at a premium of $12.0 million for total net proceeds from the issuance of $412.0 million.  The net proceeds from this additional issuance were used to fund, in part, the cash-settled portion of the maturity or conversion of the 3½% Notes on or before May 15, 2014.

 

---

 

Note 5. Acquisitions

 

Conemaugh Health System (“Conemaugh”)

 

Effective September 1, 2014,  through Duke LifePoint Healthcare,  the Company acquired Conemaugh for total consideration, including net working capital, of approximately $125.0 million, comprised of $115.0 million in cash and the issuance of a warrant with an estimated fair value of $10.0 million. The warrant provides the seller rights to purchase 290,514 shares of the Company’s common stock, exercisable ratably beginning one year from the date of issuance to three years after the date of issuance. The warrant expires ten years from the date of issuance. The warrants, classified as a liability and included under the caption “Other long-term liabilities” in the Company’s accompanying unaudited condensed consolidated balance sheets,  were valued using an option pricing model and will be marked-to-market until settlement. 

 

Conemaugh is comprised of Conemaugh Memorial Medical Center, a 470 bed acute care hospital, 39 bed rehabilitation facility and 30 bed long-term care facility located in Johnstown, Pennsylvania, Meyersdale Medical Center, a 20 bed critical access hospital located in Meyersdale, Pennsylvania, and Miners Medical Center, a 30 bed acute care hospital located in Hastings, Pennsylvania. The Company has committed to invest in Conemaugh an additional $425.0 million in capital expenditures and improvements over the next ten years.  The results of operations of Conemaugh are included in the Company’s results of operations beginning on September 1, 2014. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition of Conemaugh have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the subsequent settlement for purchased working capital and final appraisals. The Company expects to finalize its analysis over the next twelve months. 

 

In connection with the Company’s acquisition of Conemaugh, the seller self-disclosed various potentially non-compliant physician arrangements under the Centers for Medicare and Medicaid Services (“CMS”) voluntary self-disclosure protocol.  This self-disclosure is pending with CMS.  To the extent that the potential settlement exceeds the seller’s indemnification threshold in accordance with the asset purchase agreement, the Company will likely be responsible for funding any deficit. As part of the Company’s preliminary purchase price allocation, the Company has made a reasonable estimate of its potential exposure for this matter and at September 30, 2014 has recorded a reserve of $14.0 million.   

 

Haywood Regional Medical Center (“Haywood”)

Effective August 1, 2014,  through Duke LifePoint Healthcare, the Company acquired Haywood, a 169 bed acute care hospital located in Clyde,  North Carolina for approximately $28.5 million, including net working capital. The Company has committed to invest in Haywood an additional $36.0 million in capital expenditures and improvements over the next eight years.  The results of operations of Haywood are included in the Company’s results of operations beginning on August 1, 2014. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition of Haywood have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the subsequent settlement for purchased working capital and final appraisals. The Company expects to finalize its analysis over the next twelve months.    

WestCare Health System (“WestCare”)

Effective August 1, 2014,  through Duke LifePoint Healthcare, the Company acquired WestCare for approximately $19.0 million, including net working capital and the assumption of certain capital leases. WestCare is comprised of Harris Regional Hospital, an 86 bed acute care hospital located in Sylva, North Carolina, and Swain County Hospital, a 48 bed critical access hospital located in Bryson City,  North Carolina.  The Company has committed to invest in WestCare an additional $43.0 million in capital expenditures and improvements over the next eight years.  The results of operations of WestCare are included in the Company’s results of operations beginning on August 1, 2014. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition of WestCare have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the subsequent settlement for purchased working capital and final appraisals. The Company expects to finalize its analysis over the next twelve months.    

---

 

Rutherford Regional Medical Center (“Rutherford”)

Effective June 1, 2014,  through Duke LifePoint Healthcare, the Company acquired an 80% interest in an entity that owns Rutherford, a 143 bed acute care hospital located in Rutherfordton,  North Carolina for approximately $27.2 million, including net working capital. The Company has committed to invest in Rutherford an additional $60.0 million in capital expenditures and improvements over the next ten years.  The results of operations of Rutherford are included in the Company’s results of operations beginning on June 1, 2014. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition of Rutherford have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the subsequent settlement for purchased working capital and final appraisals. The Company expects to finalize its analysis during 2014.    

Wilson Medical Center (“Wilson”)

Effective March 1, 2014, through Duke LifePoint Healthcare, the Company acquired an 80% interest in an entity that owns Wilson, a 294 bed hospital and 90 bed long-term care facility located in Wilson, North Carolina for approximately $59.8 million, including net working capital. The Company has committed to invest in Wilson an additional $120.0 million in capital expenditures and improvements over the next ten years.  The results of operations of Wilson are included in the Company’s results of operations beginning on March 1, 2014. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition of Wilson have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the subsequent settlement for purchased working capital and final appraisals. The Company expects to finalize its analysis during 2014.    

Note 6. Divestiture

 

In September 2014, the Company entered into a definitive agreement to sell certain assets of River Parishes and discontinue its operation. The Company expects to complete the transaction during the fourth quarter of 2014.  Included in the Company’s consolidated results of operations are net operating losses before income taxes attributable to River Parishes of $1.1 million and $1.0 million for the three months ended September 30, 2014 and 2013, respectively, and $1.2 million and $3.5 million for the nine months ended September 30, 2014 and 2013, respectively. The assets that have been classified as held for sale in connection with the River Parishes transaction totaled $3.7 million and are included under the caption “Other current assets” in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2014.

 

In connection with the Company’s entry into a definitive agreement to sell certain assets of River Parishes and discontinue its operation, the Company recognized an impairment charge of $12.2 million, or $0.16 loss per diluted share, during the three months ended September 30, 2014. The impairment charge includes the write-down of property, equipment and allocated goodwill to their estimated fair values.

 

 

Note 7. Goodwill and Intangible Assets 

Goodwill

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 Company’s business comprises a single reporting unit for impairment test purposes. For the purposes of these analyses, the Company’s 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, 2013 and did not incur an impairment charge.

---

 

Intangible Assets

Summary of Intangible Assets

 

The following table provides information regarding the Company’s intangible assets, which are included in the accompanying unaudited condensed consolidated balance sheets at September 30, 2014 and December 31, 2013 (in millions):

 

 

Contract-Based Physician Minimum Revenue Guarantees

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.

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, 2014 and December 31, 2013, the Company’s liability for contract-based physician minimum revenue guarantees was $10.6 million and $11.5 million, respectively. These amounts are included as a current liability under the caption “Other current liabilities” in the Company’s accompanying unaudited condensed consolidated balance sheets.

 

Non-Competition Agreements

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.

---

 

Certificates of Need and Certificates of Need Exemptions

The construction or acquisition of new facilities, the expansion of existing facilities and the addition of new services and certain equipment at the Company’s 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.

Licenses, Provider Numbers, Accreditations and Other

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.

 

Note 8. Long-Term Debt

 

Issuance of Additional 5.5% Senior Notes

 

Effective May 12, 2014, the Company issued in a private placement $400.0 million of additional 5.5% Senior Notes with terms substantially identical to those of the initial offering of the 5.5% Senior Notes completed on December 6, 2013.  The additional notes were issued at a premium of $12.0 million for total net proceeds from the issuance of $412.0 million which were used to fund, in part, the cash-settled portion of the maturity or conversion of the 3½% Notes on or before May 15, 2014.   Including the impact of the premium, the additional 5.5% Senior Notes were issued at an effective rate of 4.9%.  In connection with the issuance of the additional 5.5% Senior Notes, the Company capitalized $5.5 million of deferred loan costs.

 

Maturity and Conversion of 3½% Notes

 

Effective May 15, 2014, the 3½% Notes matured.  Prior to maturity, certain holders of the 3½% Notes exercised their right to convert per $1,000 in principal held for (i) an amount in cash, 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 of the Company’s common stock 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. Upon maturity or conversion of the 3½% Notes, the Company delivered to the holders cash of approximately $574.2 million and approximately 0.6 million shares of its common stock previously held in treasury at an average historical cost basis of $35.86 per share, or $23.0 million.

 

Note 9.  Income Taxes

 

The Company’s income tax provision was $55.2 million for an effective income tax rate of 34.7% during the nine months ended September 30, 2014 as compared to $55.5 million for an effective income tax rate of 37.7% during the nine months ended September 30, 2013.  The Company’s effective income tax rate was lower during the nine months ended September 30, 2014 as a result of the reversal of a previously established valuation allowance against its deferred tax assets for federal net operating losses generated by the Company’s physician practice operations in the state of Michigan, which were previously thought to be unrecoverable.  The impact of the reversal during the nine months ended September 30, 2014 resulted in an increase to net income of $6.0 million, or $0.13 per diluted share.   

 

---

 

Note 10. Common Stock in Treasury

The Company’s Board of Directors has 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 in accordance with a repurchase plan adopted in 2011, as subsequently amended and extended in February 2013 (the “2011 Repurchase Plan”) and a repurchase plan adopted in the first quarter of 2014 (the “2014 Repurchase Plan”).  The 2011 Repurchase Plan provided for the repurchase of up to $350.0 million in shares of the Company’s common stock, and the Company has repurchased all shares authorized for repurchase under this plan. The 2014 Repurchase Plan provides for the repurchase of up to $150.0 million in shares of the Company’s common stock through October 1, 2015. The Company is not obligated to repurchase any specific number of shares under the 2014 Repurchase Plan.  The Company has designated the shares repurchased in accordance with its repurchase plans as treasury stock.

In connection with the 2011 Repurchase Plan, the Company repurchased approximately 3.0 million and 0.7 million shares for an aggregate purchase price, including commissions, of $164.7 million and $30.1 million at an average purchase price of $54.33 and $45.76 per share during the nine months ended September 30, 2014 and 2013, respectively.   As of September 30, 2014, the Company had remaining authority to repurchase the entire  $150.0 million in shares in accordance with the 2014 Repurchase Plan.

Additionally, the Company redeems shares from employees for minimum statutory tax withholding purposes upon vesting of certain stock awards granted pursuant to the Company’s various stockholder approved stock-based compensation plans. The Company redeemed approximately 0.1 million and 0.2 million shares vested under these plans for an aggregate purchase price of approximately $7.6 million and $8.4 million during the nine months ended September 30, 2014 and 2013, respectively. The Company has designated these shares as treasury stock. 

 

Furthermore, as more fully discussed in Note 8, upon the conversion of the 3½% Notes on or before May 15, 2014, the Company delivered to holders of the 3½% Notes approximately 0.6 million shares of its common stock previously held in treasury at an average historical cost basis of $35.86 per share, or $23.0 million.

 

Note 11. Stock-Based Compensation 

 

Overview

 

The Company issues stock-based awards, including stock options and other stock-based awards (nonvested stock, restricted stock, restricted stock units and performance shares) to certain officers, employees and non-employee directors in accordance with the Company’s 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 award’s requisite service period based on the estimated grant date fair value.

Effective June 4, 2013, upon the approval of the Company’s stockholders, the Company replaced the Amended and Restated 1998 Long-Term Incentive Plan (the “1998 LTIP”) and the Amended and Restated Outside Directors Stock and Incentive Compensation Plan (the “ODSICP”) with the 2013 Long-Term Incentive Plan (the “2013 LTIP”), a new combined plan covering all of the Company’s employees and non-employee directors.  The 2013 LTIP provides for 3.6 million shares available for grant at a rate of 1.00 share for each stock option or appreciation rights award granted and 2.09 shares for each full-value award granted.  No shares remain available for new awards to be granted under the 1998 LTIP or the ODSICP.

---

 

Stock Options

The Company granted options to purchase 716,150 and 60,600 shares of the Company’s common stock to certain officers and employees in accordance with the 2013 LTIP during the nine months ended September 30, 2014 and 2013, respectively.  Additionally, the Company granted options to purchase 735,200 shares of the Company’s common stock to certain officers and employees in accordance with the 1998 LTIP during the nine months ended September 30,  2013 prior to its replacement with the 2013 LTIP.  Options to purchase shares granted to the Company’s officers and employees in accordance with the 2013 LTIP and the 1998 LTIP were granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, determined based on the closing price on the trading date immediately prior to the grant date. The options granted during the nine months ended September 30, 2014 and 2013 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 HW-II because it considers characteristics of fair value option pricing, such as an option’s 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 Company’s 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.

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, 2014 and 2013:

 

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2014 and 2013 was $14.0 million and $11.7 million, respectively. The Company received $4.8 million and $6.2 million in cash from stock option exercises for the three months ended September 30, 2014 and 2013, respectively, and $23.1 million and $34.4 million in cash from stock option exercises for the nine months ended September 30, 2014 and 2013, respectively.  The actual tax benefit realized for the tax deductions from stock option exercises was $2.3 million and $0.7 million for the nine months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014, there was $12.2 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.

---

 

Other Stock-Based Awards

The Company granted 369,871 and 52,962 restricted stock units to certain officers, employees and non-employee directors in accordance with the 2013 LTIP during the nine months ended September 30, 2014 and 2013, respectively.  Additionally, the Company granted 410,000 restricted stock units to certain officers and employees in accordance with the 1998 LTIP during the nine months ended September 30, 2013 prior to its replacement with the 2013 LTIP. Excluding the fair value of the performance-based awards granted during the nine months ended September 30, 2014, the fair value of these restricted stock units was determined based on the closing price of the Company’s common stock on the day prior to the grant date. The restricted stock units granted during the nine months ended September 30, 2014 and 2013 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 restricted stock units granted during the nine months ended September 30, 2014, 236,000 were performance-based awards.   In addition to requiring continuing service of the employee, the percentage of these restricted stock units that are earned at the end of the performance period is determined based on the Company’s three-year annualized total shareholder return relative to a peer group, Standard and Poor’s  Global Industry Classification Standard’s Sub-industry:  Health Care Facilities with over $500.0 million in revenues or its equivalent. The number of shares payable at the end of the three-year performance period ranges from 0% to 100% of the targeted units, with any portion of the award that exceeds 100% up to 200% of the targeted units settled in cash equal to the fair market value on the date certification of the level of performance is achieved.  For valuation purposes, the awards were bifurcated into their two independent sub-award components for the portion that would be settled in the Company’s common stock and for the portion that would be settled in cash and their respective fair values were estimated using the Monte-Carlo simulation valuation model.  The Company recognizes compensation expense for the portion of the award that would ultimately be settled in the Company’s common stock for the targeted units at its Monte-Carlo simulation value if the requisite service period is rendered, even if the market condition is never satisfied.  The Company will classify as a liability and recognize compensation expense for the portion of the award that would ultimately be settled in cash for the targeted units at its Monte-Carlo simulation value that will be marked-to-market until settlement. 

Of the restricted stock units granted during the nine months ended September 30, 2013, 322,000 were performance-based awards that,  in addition to requiring continuing service of an employee, the vesting of which 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 performance-based awards will cliff-vest three years after the grant date. The performance criteria for the 322,000 performance-based awards granted during the nine months ended September 30, 2013 have not been met and are still subject to continuing service requirements and the three year cliff-vesting provisions.  For purposes of estimating compensation expense for these performance-based awards, the Company has assumed that the performance goals will be achieved. If the performance goals are not met for these performance-based awards, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed. 

Notwithstanding the specific grant vesting requirements, award agreements under the 2013 LTIP and the 1998 LTIP may provide for accelerated vesting in certain circumstances.  Generally, award agreements provide for full vesting upon the death or disability of the participant.  Some award agreements also provide for partial or full vesting upon involuntary termination of employment, provided that if the award is performance-based then the accelerated vesting would occur only if the performance goals are attained.

As of September 30, 2014,  there was $27.7 million of total estimated unrecognized compensation cost related to other stock-based awards. 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 Company’s total stock-based compensation expense as well as the total recognized tax benefits related thereto for the three and nine months ended September 30, 2014 and 2013 (in millions):

 

 

The Company did not capitalize any stock-based compensation cost during the three or nine months ended September 30, 2014 or 2013. As of September 30, 2014, there was $39.9 million of total estimated unrecognized compensation cost related to all of the Company’s 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 1.7 years.

 

Note 12. Commitments and Contingencies 

Legal Proceedings and General Liability Claims

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 addition, 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. Although the healthcare industry has seen numerous ongoing investigations related to compliance and billing practices, hospitals, in particular, continue to be a primary enforcement target for the Office of the Inspector General (“OIG”), the Department of Justice (“DOJ”) and other governmental fraud and abuse programs. Certain of the Company’s individual facilities have received, and from time to time, other facilities may receive, 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 the Company’s financial position, results of operations and liquidity.

 

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 imposed an affirmative obligation on healthcare providers to report and refund any overpayments received. “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 are deemed to be fraudulent and become violations 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 the 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 Company’s acquisitions of Marquette General Health System (“Marquette General”) and Conemaugh, the two sellers self-disclosed various potentially non-compliant physician arrangements under the CMS voluntary self-disclosure protocol.  These self-disclosures are pending with CMS.  With respect to Marquette General, to the extent that the seller’s satisfaction of its retained liabilities, including those under its CMS voluntary self-disclosure, causes its net proceeds from the acquisition to be less than $15.0 million, the Company has agreed to pay additional purchase consideration to the seller.  With respect to Conemaugh, to the extent that the potential settlement exceeds the seller’s indemnification threshold in accordance with the asset purchase agreement, the Company will likely be responsible for funding any deficit.  The Company has made reasonable estimates of its potential exposure for these two matters and at September 30, 2014 has recorded reserves for Marquette General and Conemaugh of $18.0 million and $14.0 million, respectively.

 

On September 16, 2013, the Company and two of its hospitals made a voluntary self-disclosure to the Civil Division of the DOJ. The voluntary self-disclosure related to concerns regarding the clinical appropriateness of certain interventional cardiology procedures conducted by one physician in each of these hospitals' cardiac catheterization laboratories.  On September 24, 2013, the U.S. Attorney's Office in the district in which one of these hospitals is located served a subpoena requesting information related to the subject matter of the voluntary self-disclosure. The hospital that received the subpoena has produced responsive documents, including patient files. The Company continues to cooperate with the government in addressing these matters, including a review of procedures that were performed by these physicians.

 

The government investigations are ongoing, no patient claims have been made and it is not possible to estimate what, if any, claims will be brought. When appropriate, and following reviews by independent interventional cardiologists, the Company intends to notify those patients of these two physicians who may have received an unnecessary procedure of such fact. Patients from the hospitals at which these two physicians practiced may assert claims against the hospital that, if successful, could result in the hospitals being found liable.  The government investigations may also result in damages, fines and penalties. The Company cannot, however, reasonably estimate the potential liability in connection with these matters, and no liability has been recorded as of September 30, 2014.

 

The Company does not control and cannot predict with certainty the progress or final outcome of discussions with government agencies, investigations and legal proceedings against the Company.  Therefore, the final amounts paid to resolve the foregoing matters could be material and could materially differ from amounts currently recorded, if any.  Any such changes in estimate will impact the Company’s future results of operations and cash flows.

Physician Commitments

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 physician’s 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 physician’s practice.  The Company has committed to advance a maximum amount of approximately $27.2 million at September 30, 2014.  The actual amount of such commitments to be subsequently advanced to physicians is estimated at $10.6 million and often depends upon the financial results of a physician’s 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 Company’s 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.  Additionally, the Company is subject to annual commitments for certain physician recruiting activities, including the continuation of existing or initiation of new activities with several of its facilities. 

---

 

Capital Expenditure Commitments

    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 $74.8 million in costs related to uncompleted projects as of September 30, 2014, which is included under the caption “Construction in progress” in the Company’s accompanying unaudited condensed consolidated balance sheet. At September 30, 2014, these uncompleted projects had an estimated cost to complete and equip of approximately $88.1 million.  Additionally, the Company is subject to annual capital expenditure commitments in connection with several of its facilities.  As part of the Company’s current acquisition strategy, management expects capital expenditure commitments to be a significant component of future purchase transactions. At September 30, 2014, the Company estimated its total remaining capital expenditure commitments, including commitments for routine projects, to be approximately $1,670.0 million.

Acquisitions

 

The Company has historically acquired businesses with prior operating histories. Acquired businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, medical and general professional liabilities, workers compensation liabilities, previous tax liabilities and unacceptable business practices. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.   

---

 

Note 13. Earnings Per Share 

 

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (dollars and shares in millions, except per share amounts):

 

 

  

The Company’s convertible debt instruments have been included in the calculation of diluted earnings per share whether or not the contingent requirements were met for conversion when their conversion price was less than the average market price of the Company’s common stock for the period the convertible debt instruments were outstanding.  Additionally, certain outstanding stock-based awards have been included in the calculation of diluted earnings per share to the extent they were dilutive for the three or nine months ended September 30, 2014 and 2013.

 

---

 

Note 14. Guarantor and Non-Guarantor Supplementary Information

 

The 6.625% Senior Notes and the 5.5% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of the Company’s existing subsidiaries that guarantee the Senior Credit Agreement. The guarantees are subject to customary release provisions set forth in the agreements for the 6.625% Senior Notes and the 5.5% Senior Notes. 

 

The condensed consolidating financial information for the parent issuer, 100% owned guarantor subsidiaries, non-guarantor subsidiaries, certain eliminations and the Company is presented below for the three and nine months ended September 30, 2014 and 2013 and as of September 30, 2014 and December 31, 2013.  Prior year amounts have been reclassified to conform to current year presentation.

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2014

(In millions)

 

 

 

 

 

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2013

(In millions)

 

 

 

---

 

 

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2014

(In millions)  

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2013

(In millions)  

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Balance Sheets
September 30, 2014

(In millions)  

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Balance Sheets
December 31, 2013

(In millions)

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended September 30, 2014

(In millions)

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended September 30, 2013

(In millions)

 

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2014

(In millions)

 

 

---

 

LIFEPOINT HOSPITALS, INC.
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2013

(In millions)