Forward-Looking Statements
This report contains certain forward-looking statements (all statements other
than with respect to historical fact) within the meaning of the federal
securities laws, which are intended to be covered by the safe harbors created
thereby. Investors are cautioned that all forward-looking statements involve
known and unknown risks and uncertainties including, without limitation, those
described in this report and in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2011 and listed below in this report, some of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.
Actual results could differ materially and adversely from those contemplated by
any forward-looking statement. In light of the significant risks and
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. We
undertake no obligation to publicly release any revisions to any forward-looking
statements in this discussion to reflect events and circumstances occurring
after the date hereof or to reflect unanticipated events.
Forward-looking statements and our liquidity, financial condition and results of
operations, may be affected by the following risks and uncertainties and the
other risks and uncertainties discussed in this report and in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2011 under "Item 1A. - Risk
Factors," as well as other unknown risks and uncertainties:
† the risk that payments from third-party payors, including government
healthcare programs, may decrease or not increase as our costs increase;
† adverse developments affecting the medical practices of our physician
partners;
† our ability to maintain favorable relations with our physician partners;
† our ability to compete for physician partners, managed care contracts,
patients and strategic relationships;
† our ability to acquire and develop additional surgery centers on favorable
terms;
† our ability to grow revenues by increasing procedure volume while
maintaining operating margins and profitability at our existing centers;
† our ability to manage the growth in our business;
† our ability to obtain sufficient capital resources to complete
acquisitions and develop new surgery centers;
† adverse weather and other factors beyond our control that may affect our
surgery centers;
† adverse impacts on our business associated with current and future
economic conditions;
† our failure to comply with applicable laws and regulations;
† the risk of changes in legislation, regulations or regulatory
interpretations that may negatively affect us;
† the risk of becoming subject to federal and state investigation;
† uncertainties regarding the impact of the Health Reform Law;
† the risk of regulatory changes that may obligate us to buy out the
ownership interests of physicians who are minority owners of our surgery
centers;
† potential liabilities associated with our status as a general partner of
limited partnerships;
† liabilities for claims brought against our facilities;
† our legal responsibility to minority owners of our surgery centers, which
may conflict with our interests and prevent us from acting solely in our best
interests;
† potential write-off of all or a portion of intangible assets; and
† potential liabilities relating to the tax deductibility of goodwill.
17
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
Overview
We acquire, develop and operate ambulatory surgery centers, or centers or ASCs,
in partnership with physicians. As of June 30, 2012, we had 228 operating ASCs,
of which we owned a majority interest (primarily 51%) in 225 ASCs and owned a
minority interest in three ASCs (one of which is consolidated). The following
table presents the number of procedures performed at our continuing centers and
changes in the number of ASCs in operation, under development and under letter
of intent for the three and six months ended June 30, 2012 and 2011. An ASC is
deemed to be under development when a limited partnership or limited liability
company has been formed with the physician partners to develop the ASC.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Procedures 385,630 338,331 768,180 656,601
Continuing centers in operation, end of
period (consolidated) 226 206 226 206
Continuing centers in operation, end of
period (unconsolidated) 2 - 2 -
Average number of continuing centers in
operation, during period 225 206 225 203
New centers added during period 1 5 2 6
Centers discontinued during period - 1 2 2
Centers under development, end of period - 1 - 1
Centers under letter of intent, end of
period 7 4 7 4
Of the continuing centers in operation at June 30, 2012, 147 centers performed
gastrointestinal endoscopy procedures, 39 centers performed procedures in
multiple specialties, 35 centers performed ophthalmology procedures and seven
centers performed orthopedic procedures. We intend to expand primarily through
the acquisition and development of additional ASCs and through future
same-center growth. During the six months ended June 30, 2012, we experienced
same-center revenue growth of 4%. We estimate that 1% of this increase was a
result of improved winter weather conditions in 2012 compared to 2011. We
expect our same-center revenue growth for 2012 to be 2% to 3%. Our growth
strategy also includes the acquisition and development of additional surgery
centers, which we expect on an annual basis would generate additional operating
income of $25 million to $29 million. We anticipate that because the majority
of these acquisitions would occur in the latter part of 2012, their contribution
to our 2012 operating income would not be significant.
While we own less than 100% of each of the entities that own the centers, our
consolidated statements of earnings include 100% of the results of operations of
each of our consolidated entities, reduced by the noncontrolling partners'
interests share of the net earnings or loss of the surgery center entities. The
noncontrolling ownership interest in each limited partnership or limited
liability company is generally held directly or indirectly by physicians who
perform procedures at the center. Our share of the profits and losses of two
non-consolidated entities are reported in equity in earnings of unconsolidated
affiliates in our statement of earnings.
Sources of Revenues
Substantially all of our revenues are derived from facility fees charged for
surgical procedures performed in our surgery centers. This fee varies depending
on the procedure, but usually includes all charges for operating room usage,
special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly. At
certain of our centers, our revenues include charges for anesthesia services
delivered by medical professionals employed or contracted by our centers. Our
revenues are recorded net of estimated contractual adjustments from third-party
medical service payors.
ASCs depend upon third-party reimbursement programs, including governmental and
private insurance programs, to pay for services rendered to patients. The
amount of payment a surgery center receives for its services may be adversely
affected by market and cost factors as well as other factors over which we have
no control, including changes to the Medicare and Medicaid payment systems and
the cost containment and utilization decisions of third-party payors. We
derived approximately 28% and 31% of our revenues in the six months ended June
30, 2012 and 2011, respectively, from governmental healthcare programs,
primarily Medicare and Medicare managed programs, and the remainder from a wide
mix of commercial payors and patient co-pays and deductibles. The Medicare
program currently pays ASCs in accordance with predetermined fee schedules.
Effective January 1, 2008, CMS revised the payment system for services provided
in ASCs, and the phase-in of the revised rates was completed in 2011. Under the
revised payment system, ASCs are paid based upon a percentage of the payments to
hospital outpatient departments pursuant to the hospital outpatient prospective
payment system and reimbursement rates for ASCs are increased annually based on
increases in the consumer price index, or CPI. The revised payment system
resulted in a significant reduction in the reimbursement rates for
gastroenterology procedures, which comprised approximately 75% of the procedures
performed by our surgery centers, and certain ophthalmology and pain
procedures. We estimate that our net earnings per share were negatively
impacted by the revised payment system by $0.05 in 2008, an additional $0.07 in
2009, an additional $0.06 in 2010 and an additional $0.05 in 2011.
18
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
Effective for fiscal year 2011 and subsequent years, the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation
Act of 2010, or the Health Reform Law, provides for the annual CPI increases
applicable to ASCs to be reduced by a productivity adjustment, which will be
based on historical nationwide productivity gains. The final reimbursement rates
announced by CMS in November 2011 for 2012, reflect a 1.6% net increase, which
we estimate will positively impact our 2012 revenue by approximately $5.0
million. There can be no assurance that CMS will not further revise the payment
system, or that any annual CPI increases will be material. We estimate that
recently announced preliminary reimbursement rates for 2013 by CMS, which are
subject to final approval in November 2012, would positively impact our 2013
revenue by approximately $4.0 million.
Pursuant to the Budget Control Act of 2011, or BCA, a bipartisan joint
congressional committee was formed to identify deficit reductions of $1.2
trillion by November 23, 2011. Because the committee failed to propose a plan to
cut the deficit by the deadline, the BCA requires automatic spending reductions
of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit
reductions enacted by Congress and debt service costs. The percentage reduction
for Medicare may not be more than 2% for a fiscal year, with a uniform
percentage reduction across all Medicare programs. We are unable to predict how
these spending reductions will be structured or how they would impact the
Company, what other deficit reduction initiatives may be proposed by Congress or
whether Congress will attempt to suspend or restructure the automatic budget
cuts.
The Health Reform Law represents significant change across the healthcare
industry. The Health Reform Law contains a number of provisions designed to
reduce Medicare program spending, including the annual productivity adjustment,
discussed above, that reduces payment updates to ASCs, effective since fiscal
year 2011. However, the Health Reform Law also expands coverage of uninsured
individuals through a combination of public program expansion and private sector
health insurance reforms. For example, the Health Reform Law, as enacted,
expands eligibility under existing Medicaid programs, imposes financial
penalties on individuals who fail to carry insurance coverage, creates
affordability credits for those not enrolled in an employer-sponsored health
plan, requires each state to establish a health insurance exchange and permits
states to create federally funded, non-Medicaid plans for low-income residents
not eligible for Medicaid. The Health Reform Law also establishes a number of
private health insurance market reforms, including a ban on lifetime limits and
pre-existing condition exclusions, new benefit mandates and increased dependent
coverage.
Many health plans are required to cover, without cost-sharing, certain
preventive services designated by the U.S. Preventive Services Task Force,
including screening colonoscopies. Medicare must now also cover these
preventive services without cost-sharing, and, beginning in 2013, states that
provide Medicaid coverage of these preventive services without cost-sharing will
receive a one percentage point increase in their federal medical assistance
percentage for these services.
Health insurance market reforms that expand insurance coverage may result in an
increased volume for certain procedures at our centers. However, many of these
provisions of the Health Reform Law will not become effective until 2014 or
later, and these provisions may be amended or repealed or their impact could be
offset by reductions in reimbursement under the Medicare program. On June 28,
2012, the United States Supreme Court upheld the constitutionality of the Health
Reform Law except for provisions that would have allowed the Department of
Health and Human Services to penalize states that do not implement the Medicaid
expansion of the law with the loss of existing federal Medicaid funding. It is
unclear how many states will decline to implement the Medicaid expansion and
what the resulting impact will be on the number of uninsured individuals.
Repeal of the Health Reform Law continues to be a theme in political campaigns
during this election year.
Because of the many variables involved, including the law's complexity, lack of
implementing regulations or interpretive guidance, gradual implementation, and
possible amendment or repeal, we are unable to predict the net effect of the
reductions in Medicare spending, the expected increases in revenues from
increased procedure volumes, and numerous other provisions in the law that may
affect the Company. We are further unable to foresee how individuals and
employers will respond to the choices afforded them by the Health Reform Law.
Thus, we cannot predict the full impact of the Health Reform Law on the Company
at this time.
CMS is increasing its administrative audit efforts through the nationwide
expansion of the recovery audit contractor, or RAC, program. RACs are private
contractors that conduct post-payment reviews of providers and suppliers that
bill Medicare to detect and correct improper payments for services. The Health
Reform Law expands the RAC program's scope to include Medicaid claims. In
addition to RACs, other contractors, such as Medicaid Integrity Contractors,
perform payment audits to identify and correct improper payments. We could
incur costs associated with appealing any alleged overpayments and be required
to repay any alleged overpayments identified by these or other administrative
audits.
We expect value-based purchasing programs, including programs that condition
reimbursement on patient outcome measures, to become more common and to involve
a higher percentage of reimbursement amounts. Effective January 15, 2009, CMS
promulgated three national coverage determinations that prevent Medicare from
paying for certain serious, preventable medical errors performed in any
healthcare facility, such as surgery performed on the wrong patient or the wrong
site. Several commercial payors also do not reimburse providers for certain
preventable adverse events. In addition, a 2006 federal law authorizes CMS to
require ASCs to submit data on certain quality measures. In addition, CMS
established a quality reporting program for ASCs under which ASCs that fail to
report on five quality measures beginning on October 1, 2012 will receive a 2%
reduction in reimbursement for calendar year 2014. Further, the Health Reform
Law required the Department of Health and Human Services, or HHS, to present a
plan to Congress for implementing a value-based purchasing system that would tie
Medicare payments to ASCs to quality and efficiency measures. On April 18, 2011,
HHS reported to Congress on its plan for implementing a value-based purchasing
program for ASCs. HHS recommended a phase-in timeframe for implementation and
described the initial steps to include a quality reporting program such as CMS
is implementing this year. The Health Reform Law also requires HHS to study
whether to expand to ASCs its current policy of not paying additional amounts
for care provided to treat conditions acquired during an inpatient hospital
stay.
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
In addition to payment from governmental programs, ASCs derive a significant
portion of their revenues from private healthcare insurance plans. These plans
include both standard indemnity insurance programs as well as managed care
programs, such as PPOs and HMOs. The strengthening of managed care systems
nationally has resulted in substantial competition among providers of surgery
center services that contract with these systems. Exclusion from participation
in a managed care network could result in material reductions in patient volume
and revenue. Some of our competitors have greater financial resources and
market penetration than we do. We believe that all payors, both governmental
and private, will continue their efforts over the next several years to reduce
healthcare costs and that their efforts will generally result in a less stable
market for healthcare services. While no assurances can be given concerning the
ultimate success of our efforts to contract with healthcare payors, we believe
that our position as a low?cost alternative for certain surgical procedures
should enable our surgery centers to compete effectively in the evolving
healthcare marketplace.
Critical Accounting Policies
A summary of significant accounting policies is disclosed in our 2011 Annual
Report on Form 10-K. Our critical accounting policies are further described
under the caption "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in our 2011 Annual
Report on Form 10-K. There have been no changes in the nature of our critical
accounting policies or the application of those policies since December 31,
2011.
Results of Operations
Our revenues are directly related to the number of procedures performed at our
centers. Our overall growth in procedure volume is impacted directly by the
increase in the number of centers in operation and the growth in procedure
volume at existing centers. We increase our number of centers through both
acquisitions and developments. Procedure growth at any existing center may
result from additional contracts entered into with third-party payors, increased
market share of our physician partners, additional physicians utilizing the
center and/or scheduling and operating efficiencies gained at the surgery
center. A significant measurement of how much our revenues grow from year to
year for existing centers is our same-center revenue percentage. We define our
same-center group each year as those centers that contain full year-to-date
operations in both comparable reporting periods, including the expansion of the
number of operating centers associated with a limited partnership or limited
liability company. Our 2012 same-center group, comprised of 202 centers and
constituting approximately 89% of our total number of centers, had 3% and 4%
revenue growth during the three and six months ended June 30, 2012,
respectively. We have revised our same-center revenue growth expectations for
2012 to a 2% to 3% increase. Our revised estimate is a result of improved
results experienced in the three months ended March 31, 2012 and reflects
positive rate adjustments from CMS in 2012 versus negative rate adjustments
experienced in prior years.
Expenses directly and indirectly related to procedures performed at our surgery
centers include clinical and administrative salaries and benefits, supply cost
and other operating expenses such as linen cost, repair and maintenance of
equipment, billing fees and bad debt expense. The majority of our corporate
salary and benefits cost is associated directly with the number of centers we
own and manage and tends to grow in proportion to the growth of our centers in
operation. Our centers and corporate offices also incur costs that are more
fixed in nature, such as lease expense, legal fees, property taxes, utilities
and depreciation and amortization.
Surgery center profits are allocated to our noncontrolling partners in
proportion to their individual ownership percentages and reflected in the
aggregate as total net earnings attributable to noncontrolling interests and are
presented after net earnings. The noncontrolling partners of our center limited
partnerships and limited liability companies typically are organized as general
partnerships, limited partnerships or limited liability companies that are not
subject to federal income tax. Each noncontrolling partner shares in the
pre-tax earnings of the center of which it is a partner. Accordingly, net
earnings attributable to the noncontrolling interests in each of our center
limited partnerships and limited liability companies are generally determined on
a pre-tax basis, and pre-tax earnings are presented before net earnings
attributable to noncontrolling interests have been subtracted.
Accordingly, the effective tax rate on pre-tax earnings as presented has been
reduced to approximately 16%. However, the effective tax rate based on pre-tax
earnings attributable to AmSurg Corp. common shareholders, on an annual basis,
will remain near the historical percentage of 40%. We file a consolidated
federal income tax return and numerous state income tax returns with varying tax
rates. Our income tax expense reflects the blending of these rates.
Net earnings from continuing operations attributable to AmSurg Corp. common
shareholders are disclosed on the unaudited consolidated statements of earnings.
Our interest expense results primarily from our borrowings used to fund
acquisition and development activity, as well as interest incurred on capital
leases. See "- Liquidity and Capital Resources."
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
The following table shows certain statement of earnings items expressed as a
percentage of revenues for the three and six months ended June 30, 2012 and
2011:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits 30.7 30.4 31.0 30.8
Supply cost 14.3 12.8 14.2 12.7
Other operating expenses 21.0 21.5 20.8 21.4
Depreciation and amortization 3.2 3.3 3.2 3.3
Total operating expenses 69.2 68.0 69.2 68.2
Equity in earnings of unconsolidated
affiliates 0.1 - 0.1 -
Operating income 30.9 32.0 30.9 31.8
Interest expense 1.8 2.0 1.8 2.1
Earnings from continuing operations
before income taxes 29.1 30.0 29.1 29.7
Income tax expense 4.8 4.7 4.8 4.7
Net earnings from continuing operations,
net of income tax 24.3 25.3 24.3 25.0
Discontinued operations:
Earnings from operations of discontinued
interests in surgery centers,
net of income tax expense - - - 0.2
Loss on disposal of discontinued
interests in surgery centers,
net of income tax expense (0.3) (0.6) (0.4) (0.3)
Net loss from discontinued operations (0.3) (0.6) (0.4) (0.1)
Net earnings 24.0 24.7 23.9 24.9
Less net earnings attributable to
noncontrolling interests:
Net earnings from continuing operations 17.3 18.5 17.3 18.4
Net earnings from discontinued
operations - - - 0.1
Total net earnings attributable to
noncontrolling interests 17.3 18.5 17.3 18.5
Net earnings attributable to AmSurg
Corp. common shareholders 6.7% 6.2% 6.6% 6.4%
Amounts attributable to AmSurg Corp. common
shareholders:
Earnings from continuing operations, net
of income tax 7.0% 6.8% 6.9% 6.6%
Discontinued operations, net of income
tax (0.3%) (0.6%) (0.3%) (0.2%)
Net earnings attributable to AmSurg
Corp. common shareholders 6.7% 6.2% 6.6% 6.4%
The number of procedures performed in our ASCs increased by 47,301, or 14%, to
385,630, and 111,579, or 17%, to 768,180 in the three and six months ended June
30, 2012, respectively, from 338,331 and 656,601 in the comparable 2011
periods. Revenues increased $44.1 million, or 24%, to $231.6 million and $96.5
million, or 26%, to $461.8 million in the three and six months ended June 30,
2012, respectively, from $187.5 million and $365.2 million in the comparable
2011 periods. The increase in procedure and revenue growth is primarily
attributable to the additional centers acquired in 2011 and 2012 and our
same-center revenue growth as follows:
† centers acquired or opened in 2011, which contributed $38.5 million and
$81.0 million of additional revenues in the three and six months ended June 30,
2012, respectively, due to having a full period of operations in 2012;
† $5.2 million and $14.6 million of revenue growth for the three and six
months ended June 30, 2012, respectively, recognized by our 2012 same-center
group, reflecting a 3% and 4% increase, respectively, primarily as a result of
procedure growth; and
† centers acquired in 2012, which generated $515,000 and $730,000 in
revenues during the three and six months ended June 30, 2012, respectively.
The percentage increase in revenues in excess of the percentage increase in
procedures is due primarily to the centers acquired in the latter half of 2011,
the majority of which are multi-specialty centers and which have a higher
average net revenue per procedure than the mix of centers we operated during the
three and six months ended June 30, 2011.
21
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
Salaries and benefits increased by 24% and 28% to $71.0 million and $143.4
million in the three and six months ended June 30, 2012, respectively, from
$57.1 million and $112.4 million in the comparable 2011 periods. Salaries and
benefits as a percentage of revenues increased by 30 basis points and 20 basis
points in the three and six months ended June 30, 2012, respectively, compared
to June 30, 2011, primarily due to increases in center and corporate salaries
and benefits. Staff at newly acquired and developed centers, as well as the
additional staffing required at existing centers, resulted in a 24% and 27%
increase in salaries and benefits at our surgery centers in the three and six
months ended June 30, 2012, respectively. Furthermore, we experienced a 26% and
32% increase in salaries and benefits at our corporate offices during the three
and six months ended June 30, 2012, over the comparable 2011 periods, due to
higher bonus expense in 2012 as compared to 2011, additional equity compensation
expense, additional staff employed to manage the additional centers added over
the prior year and the impact of annual salary adjustments.
Supply cost was $33.2 million and $65.4 million in the three and six months
ended June 30, 2012, respectively, an increase of $9.2 million and $19.0
million, or 39% and 41%, over supply cost in the comparable 2011 periods. The
increase was primarily the result of additional procedure volume and an increase
in our average supply cost per procedure of 20% in the six months ended June 30,
2012. This increase in our average supply cost per procedure is a result of the
acquisition of 18 multi-specialty centers acquired in the latter part of 2011,
which generally have higher supply cost per procedure than single specialty
centers and an increase in certain drug costs at our gastroenterology centers
due to supply shortages.
Other operating expenses increased $8.3 million, or 21%, and $17.9 million, or
23%, to $48.7 million and $96.1 million in the three and six months ended June
30, 2012, respectively, from $40.4 million and $78.2 million in the comparable
2011 periods. The additional expense in the 2012 period resulted primarily
from:
† centers acquired or opened during 2011, which resulted in an increase of
$8.4 million and $17.4 million in other operating expenses in the three and six
months ended June 30, 2012, respectively; and
† an increase of $2.0 million and $3.8 million in other operating expenses
at our 2012 same-center group in the three and six months ended June 30, 2012,
respectively, resulting primarily from general inflationary cost increases.
Additionally, other operating expenses during the three and six months ended
June 30, 2011 included $1.1 million of transaction related costs associated with
the acquisition of the NSC centers in 2011.
Depreciation and amortization expense increased $1.3 million, or 22%, and $2.7
million, or 23%, in the three and six months ended June 30, 2012, respectively,
primarily as a result of centers acquired during 2011 and 2012.
We anticipate further increases in operating expenses in 2012, primarily due to
additional acquired centers and potential additional start-up centers.
Typically, a start-up center will incur start-up losses while under development
and during its initial months of operation and will experience lower revenues
and operating margins than an established center. This typically continues
until the case load at the center grows to a more normal operating level, which
generally is expected to occur within 12 months after the center opens. During
the six months ended June 30, 2012, we had one center under development that
commenced operations.
Interest expense increased $528,000, or 15%, and $855,000, or 11%, to $4.2
million and $8.4 million in the three and six months ended June 30, 2012,
respectively, from $3.6 million and $7.6 million in the comparable periods in
2011. This increase was primarily due to additional long-term debt outstanding
during 2012 resulting from our acquisition activities in 2012 and 2011. See
"-Liquidity and Capital Resources."
We recognized income tax expense of $11.3 million and $22.2 million in the three
and six months ended June 30, 2012, respectively, compared to $8.9 million and
$17.2 million in the comparable 2011 periods. Our effective tax rate in 2012
was 16.5% of earnings from continuing operations before income taxes. This
differs from the federal statutory income tax rate of 35.0% primarily due to the
exclusion of the noncontrolling interests' share of pre-tax earnings and the
impact of state income taxes. Because we deduct goodwill amortization for tax
purposes only, approximately 50% to 60% of our income tax expense is deferred
and our deferred tax liability continues to increase, which would only be due in
part or in whole upon the disposition of a portion or all of our surgery
centers.
During the six months ended June 30, 2012, we classified two additional surgery
centers in discontinued operations, of which one center was sold and one was
closed during the period. We pursued the disposition of these centers due to
our assessment of their limited growth opportunities. These centers' results of
operations and gains and losses associated with their dispositions have been
classified as discontinued operations in all periods presented. We recognized
an after-tax loss on the disposition of discontinued interests in surgery
centers of $660,000 and $1.6 million during the three and six months ended June
30, 2012, respectively, and $1.1 million and $1.3 million during the three and
six months ended June 30, 2011, respectively. The net loss derived from the
operations of the discontinued surgery centers was $0 and $110,000 during the
three and six months ended June 30, 2012 and the net earnings derived from the
operations of the discontinued surgery centers was $60,000 and $758,000 during
the three and six months ended June 30, 2011.
Noncontrolling interests in net earnings for the three and six months ended June
30, 2012 increased $5.3 million, or 15%, and $12.5 million, or 19%, from the
comparable 2011 periods, primarily as a result of noncontrolling interests in
earnings at surgery centers recently added to operations. As a percentage of
revenues, noncontrolling interests decreased to 17.3% from 18.5%, and to 17.3%
from 18.5% in the three and six months ended June 30, 2012, respectively, as a
result of the Company's higher ownership percentage in centers acquired in the
prior year. The net loss from discontinued operations attributable to
noncontrolling interests was $0 and $60,000 during the three and six months
ended June 30, 2012, respectively, and the net earnings from discontinued
operations attributable to noncontrolling interests were $29,000 and $458,000
during the three and six months ended June 30, 2011, respectively.
22
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2012 and 2011 were $37.6 million and $32.9
million, respectively. At June 30, 2012, we had working capital of $107.4
million, compared to $109.6 million at December 31, 2011. Operating activities
for the six months ended June 30, 2012 generated $143.6 million in cash flow
from operations, compared to $113.0 million in the six months ended June 30,
2011. The increase in operating cash flow resulted primarily from higher net
earnings in the 2012 period over the comparable period. Positive operating cash
flows of individual centers are the sole source of cash used to make
distributions to our wholly-owned subsidiaries, as well as to the partners,
which we are obligated to make on a monthly basis in accordance with each
partnership's partnership or operating agreement. Distributions to
noncontrolling interests, which is considered a financing activity, in the six
months ended June 30, 2012 and 2011 were $82.8 million and $67.4 million,
respectively. Distributions to noncontrolling interests increased $15.4
million, primarily as a result of additional centers in operation and positive
same-center growth, resulting in greater operating cash available for
distributions.
The principal source of our operating cash flow is the collection of accounts
receivable from governmental payors, commercial payors and individuals. Each of
our surgery centers bills for services as delivered, usually within several days
following the date of the procedure. Generally, unpaid amounts that are 30 days
past due are rebilled based on a standard set of procedures. If amounts remain
uncollected after 60 days, our surgery centers proceed with a series of
late-notice notifications until amounts are either collected, contractually
written off in accordance with contracted rates or determined to be
uncollectible, typically after 90 to 120 days. Receivables determined to be
uncollectible are written off and such amounts are applied to our estimate of
allowance for bad debts as previously established in accordance with our policy
for bad debt expense. The amount of actual write-offs of account balances for
each of our surgery centers is continuously compared to established allowances
for bad debt to ensure that such allowances are adequate. At June 30, 2012 and
2011, our net accounts receivable represented 34 and 31 days of revenue
outstanding, respectively. The increase in our days outstanding is primarily
due to the addition of 18 multi-specialty centers during the second half of
2011, which typically experience slightly longer collection cycles than single
specialty centers.
During the six months ended June 30, 2012, we had total acquisitions and capital
expenditures of $24.5 million, which included:
† $10.0 million for the acquisition of interests in ASCs and related
transactions;
† $14.2 million for new or replacement property at existing centers,
including $168,000 in new capital leases; and
† $520,000 for centers under development.
At June 30, 2012, we had unfunded construction and equipment purchase
commitments for centers under development or under renovation of approximately
$3.0 million, which we intend to fund through additional borrowings of long-term
debt, operating cash flow and capital contributions by our partners. During the
six months ended June 30, 2012, we received $29,000 in capital contributions by
our partners.
At June 30, 2012 and December 31, 2011, we had contingent purchase price
obligations of $3.1 million and $5.2 million, respectively. During the six
months ended June 30, 2012, we funded through operating cash flow $1.8 million
of our purchase price obligations. The remaining purchase price obligations are
related to our acquisition of 17 centers from National Surgical Care, Inc.
("NSC") on September 1, 2011. We have agreed to pay as additional consideration
an amount up to $7.5 million based on a multiple of the excess earnings over the
targeted earnings of the acquired centers, if any, from the period of January 1,
2012 to December 31, 2012. In addition, $3.5 million of the purchase price was
placed in an escrow fund to allow for any working capital adjustments up to
$500,000, with the remainder allocated to potential indemnity claims, if any,
which must be asserted by us within one year of the transaction date. During the
six months ended June 30, 2012, the Company paid NSC $115,000 to settle the
working capital adjustment and authorized the release from escrow of $500,000
related to the working capital adjustment. As of June 30, 2012, we recorded in
other long-term liabilities on our consolidated balance sheet a purchase price
obligation related to the fair value of the potential additional consideration
due to NSC.
During the six months ended June 30, 2011, we received approximately $3.4
million in cash from the sale of our interests in three surgery centers.
On June 29, 2012, we amended our revolving credit agreement which we utilize to,
among other things, finance our acquisition and development projects and any
future stock repurchase programs. As a result of the amendment, the
availability under the credit agreement was increased $25.0 million to $475.0
million; the maturity date was extended from April 2016 to June 2017; and the
interest rate spread on our LIBOR option was reduced to LIBOR plus 1.5% to 2.25%
from LIBOR plus 1.75% to 2.75%.
During the six months ended June 30, 2012, we had net repayments on long-term
debt of $39.1 million. At June 30, 2012, we had $316.0 million outstanding
under our revolving credit agreement and $75.0 million outstanding pursuant to
our senior secured notes. We were in compliance with all covenants contained in
our revolving credit agreement and note purchase agreement.
During the six months ended June 30, 2012, we received approximately $6.7
million from the exercise of options under our employee stock option plans. The
tax benefit received from the exercise of those options was approximately
$529,000.
In October 2010, our Board of Directors authorized a stock repurchase program
for up to $40.0 million of our outstanding common stock to be purchased over the
following 18 months. On April 24, 2012, our Board of Directors approved a new
stock repurchase program for up to $40.0 million of our shares of common stock
through November 1, 2013. We intend to fund the purchase price for shares
acquired under the plan using primarily cash generated from the proceeds
received when employees exercise stock options, cash generated from our
operations or borrowings
23
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (continued)
under our revolving credit facility. During the six months ended June 30, 2012,
we repurchased 216,994 shares for $6.0 million in order to mitigate the dilutive
effect of shares issued pursuant to stock option exercises. In addition, we
repurchased approximately 48,100 shares with a value of $1.3 million to cover
payroll withholding taxes in connection with the vesting of restricted stock
awards in accordance with the restricted stock agreements.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, amended
Accounting Standards Codification 220, "Presentation of Comprehensive Income."
This amendment requires companies to present the components of net income and
other comprehensive income either as one continuous statement or as two
consecutive statements. It eliminates the option to present components of other
comprehensive income as part of the statement of changes in stockholders'
equity. In December 2011, the FASB issued ASU 2011-12, which is an update to the
amendment issued in June 2011. This amendment defers the specific requirements
to present items that are reclassified from accumulated other comprehensive
income to net income separately with their respective components of net income
and other comprehensive income. The amended guidance, which must be applied
retroactively, is effective for interim and annual periods beginning after
December 15, 2011, with earlier adoption permitted. This Accounting Standards
Update, or ASU, impacts presentation only and had no effect on our consolidated
financial position, results of operations or cash flows.
In July 2011, the FASB issued ASU 2011-07, which requires healthcare
organizations that perform services for patients for which the ultimate
collection of all or a portion of the amounts billed or billable cannot be
determined at the time services are rendered to present all bad debt expense
associated with patient service revenue as an offset to the patient service
revenue line item in the statement of operations. The ASU also requires
qualitative disclosures about our policy for recognizing revenue and bad debt
expense for patient service transactions and quantitative information about the
effects of changes in the assessment of collectability of patient service
revenue. This ASU is effective for fiscal years beginning after December 15,
2011. We have evaluated ASU 2011-07 and have determined that the requirements
of this ASU are not applicable to us as the ultimate collection of our patient
service revenue is generally determinable at the time of service, and therefore,
the ASU did not have an impact on our consolidated financial position, results
of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08, which simplifies how entities
test goodwill for impairment. Previous guidance required an entity to perform a
two-step goodwill impairment test at least annually by comparing the fair value
of a reporting unit with its carrying amount, including goodwill, and recording
an impairment loss if the fair value is less than the carrying amount. This ASU
allows an entity to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount. If an entity determines after that assessment that it is not
more likely than not that the fair value of a reporting unit is less than its
carrying amount, then performing the two-step impairment test is not required.
This ASU is applicable to interim and annual goodwill impairment tests performed
for fiscal years beginning after December 15, 2011, and was adopted effective
January 1, 2012. The adoption of this ASU did not have an impact on our
consolidated financial position, results of operations or cash flows.
