Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - UNITED SURGICAL PARTNERS INTERNATIONAL INC | d81793exv32w2.htm |
EX-31.1 - EX-31.1 - UNITED SURGICAL PARTNERS INTERNATIONAL INC | d81793exv31w1.htm |
EX-31.2 - EX-31.2 - UNITED SURGICAL PARTNERS INTERNATIONAL INC | d81793exv31w2.htm |
EX-32.1 - EX-32.1 - UNITED SURGICAL PARTNERS INTERNATIONAL INC | d81793exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2011 | ||
or
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 333-144337
United Surgical Partners
International, Inc.
(Exact name of registrant as
specified in its charter)
Delaware
|
75-2749762 | |
(State or other jurisdiction
of incorporation or organization) |
(IRS Employer Identification Number) |
|
15305 Dallas Parkway, Suite 1600 Addison, Texas (Address of principal executive offices) |
75001 (Zip Code) |
(972) 713-3500
(Registrants telephone
number, including area code)
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 o No þ
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 during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer o
|
Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do
not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The number of shares of Common Stock of the Registrant
outstanding at May 3, 2011 was 100.
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Note: Items 1A, 2, 3, 4 and 5 of Part II are omitted
because they are not applicable.
2
Table of Contents
PART I.
FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
United Surgical Partners International, Inc.:
We have reviewed the accompanying consolidated balance sheet of
United Surgical Partners International, Inc. and subsidiaries
(the Company) as of March 31, 2011, and the related
consolidated statements of income, comprehensive income (loss),
changes in equity and cash flows for the three-month periods
ended March 31, 2011 and 2010. These consolidated financial
statements are the responsibility of the Companys
management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
May 3, 2011
3
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Consolidated
Balance Sheets
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In thousands except share data) | ||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 44,568 | $ | 60,253 | ||||
Accounts receivable, net of allowance for doubtful accounts of
$7,220 and $7,481, respectively
|
46,860 | 50,082 | ||||||
Other receivables
|
25,818 | 15,242 | ||||||
Inventories of supplies
|
8,840 | 9,191 | ||||||
Deferred tax asset, net
|
14,747 | 14,961 | ||||||
Prepaids and other current assets
|
22,730 | 14,682 | ||||||
Total current assets
|
163,563 | 164,411 | ||||||
Property and equipment, net
|
199,238 | 202,260 | ||||||
Investments in unconsolidated affiliates
|
391,796 | 393,561 | ||||||
Goodwill
|
1,278,368 | 1,268,663 | ||||||
Intangible assets, net
|
318,588 | 319,213 | ||||||
Other assets
|
22,349 | 24,631 | ||||||
Total assets
|
$ | 2,373,902 | $ | 2,372,739 | ||||
LIABILITIES AND EQUITY | ||||||||
Accounts payable
|
$ | 21,302 | $ | 23,488 | ||||
Accrued salaries and benefits
|
20,779 | 26,153 | ||||||
Due to affiliates
|
112,491 | 116,104 | ||||||
Accrued interest
|
18,629 | 8,714 | ||||||
Current portion of long-term debt
|
24,523 | 22,386 | ||||||
Other current liabilities
|
63,961 | 67,815 | ||||||
Total current liabilities
|
261,685 | 264,660 | ||||||
Long-term debt, less current portion
|
1,020,516 | 1,047,440 | ||||||
Other long-term liabilities
|
27,889 | 26,615 | ||||||
Deferred tax liability, net
|
132,900 | 131,205 | ||||||
Total liabilities
|
1,442,990 | 1,469,920 | ||||||
Noncontrolling interests redeemable (Note 4)
|
84,875 | 81,668 | ||||||
Equity:
|
||||||||
United Surgical Partners International, Inc. (USPI)
stockholders equity:
|
||||||||
Common stock, $0.01 par value; 100 shares authorized,
issued and outstanding
|
| | ||||||
Additional paid-in capital
|
782,703 | 784,573 | ||||||
Accumulated other comprehensive loss
|
(55,591 | ) | (66,351 | ) | ||||
Retained earnings
|
84,256 | 68,535 | ||||||
Total USPI stockholders equity
|
811,368 | 786,757 | ||||||
Noncontrolling interests non-redeemable (Note 4)
|
34,669 | 34,394 | ||||||
Total equity
|
846,037 | 821,151 | ||||||
Total liabilities and equity
|
$ | 2,373,902 | $ | 2,372,739 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Consolidated
Statements of Income
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, |
March 31, |
|||||||
2011 | 2010 | |||||||
(Unaudited in thousands) | ||||||||
Revenues:
|
||||||||
Net patient service revenues
|
$ | 127,666 | $ | 120,448 | ||||
Management and contract service revenues
|
17,276 | 15,129 | ||||||
Other revenues
|
2,148 | 2,294 | ||||||
Total revenues
|
147,090 | 137,871 | ||||||
Equity in earnings of unconsolidated affiliates
|
17,932 | 14,288 | ||||||
Operating expenses:
|
||||||||
Salaries, benefits, and other employee costs
|
39,461 | 37,263 | ||||||
Medical services and supplies
|
24,418 | 24,426 | ||||||
Other operating expenses
|
23,832 | 22,056 | ||||||
General and administrative expenses
|
9,780 | 8,549 | ||||||
Provision for doubtful accounts
|
1,746 | 1,882 | ||||||
Net (gain) loss on deconsolidations, disposals and impairments
|
(499 | ) | 316 | |||||
Depreciation and amortization
|
7,328 | 7,303 | ||||||
Total operating expenses
|
106,066 | 101,795 | ||||||
Operating income
|
58,956 | 50,364 | ||||||
Interest income
|
171 | 364 | ||||||
Interest expense
|
(17,205 | ) | (17,974 | ) | ||||
Other, net
|
72 | 335 | ||||||
Total other expense, net
|
(16,962 | ) | (17,275 | ) | ||||
Income from continuing operations before income taxes
|
41,994 | 33,089 | ||||||
Income tax expense
|
(9,868 | ) | (7,647 | ) | ||||
Income from continuing operations
|
32,126 | 25,442 | ||||||
Discontinued operations, net of tax (Note 2):
|
||||||||
Income from discontinued operations
|
1 | 204 | ||||||
Loss on disposal of discontinued operations
|
(694 | ) | | |||||
Total earnings (loss) from discontinued operations
|
(693 | ) | 204 | |||||
Net income
|
31,433 | 25,646 | ||||||
Less: Net income attributable to noncontrolling interests
|
(15,712 | ) | (13,635 | ) | ||||
Net income attributable to USPIs common stockholder
|
$ | 15,721 | $ | 12,011 | ||||
Amounts attributable to USPIs common stockholder:
|
||||||||
Income from continuing operations, net of tax
|
$ | 16,419 | $ | 11,772 | ||||
Earnings (loss) from discontinued operations, net of tax
|
(698 | ) | 239 | |||||
Net income attributable to USPIs common stockholder
|
$ | 15,721 | $ | 12,011 | ||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
(Unaudited in thousands) | ||||||||
Net income
|
$ | 31,433 | $ | 25,646 | ||||
Other comprehensive income:
|
||||||||
Foreign currency translation adjustments
|
9,509 | (14,588 | ) | |||||
Unrealized gain on interest rate swaps, net of tax
|
1,251 | 300 | ||||||
Total other comprehensive income (loss)
|
10,760 | (14,288 | ) | |||||
Comprehensive income
|
42,193 | 11,358 | ||||||
Comprehensive income attributable to noncontrolling interests
|
(15,712 | ) | (13,635 | ) | ||||
Comprehensive income (loss) attributable to USPIs common
stockholder
|
$ | 26,481 | $ | (2,277 | ) | |||
See accompanying notes to consolidated financial statements.
6
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the Three Months Ended March 31, 2011
AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the Three Months Ended March 31, 2011
USPIs Common Stockholder | ||||||||||||||||||||||||||||||||
Accumulated |
||||||||||||||||||||||||||||||||
Additional |
Other |
Noncontrolling |
||||||||||||||||||||||||||||||
Comprehensive |
Outstanding |
Paid-in |
Comprehensive |
Retained |
Interests |
|||||||||||||||||||||||||||
Total | Income (Loss) | Shares | Par Value | Capital | Loss | Earnings | Non-Redeemable | |||||||||||||||||||||||||
(Unaudited in thousands, except share amounts) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2010
|
$ | 821,151 | $ | | 100 | $ | | $ | 784,573 | $ | (66,351 | ) | $ | 68,535 | $ | 34,394 | ||||||||||||||||
Distributions to noncontrolling interests
|
(1,578 | ) | | | | | | | (1,578 | ) | ||||||||||||||||||||||
Purchases of noncontrolling interests
|
(23 | ) | | | | 4 | | | (27 | ) | ||||||||||||||||||||||
Sales of noncontrolling interests
|
(2,052 | ) | | | | (2,324 | ) | | | 272 | ||||||||||||||||||||||
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
450 | | | | 450 | | | | ||||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income
|
17,329 | 15,721 | | | | | 15,721 | 1,608 | ||||||||||||||||||||||||
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
Unrealized gain on interest rate swaps, net of tax
|
1,251 | 1,251 | | | | 1,251 | | | ||||||||||||||||||||||||
Foreign currency translation adjustments
|
9,509 | 9,509 | | | | 9,509 | | | ||||||||||||||||||||||||
Other comprehensive income
|
10,760 | 10,760 | | | | | | | ||||||||||||||||||||||||
Comprehensive income
|
28,089 | $ | 26,481 | | | | | | 1,608 | |||||||||||||||||||||||
Balance, March 31, 2011
|
$ | 846,037 | 100 | $ | | $ | 782,703 | $ | (55,591 | ) | $ | 84,256 | $ | 34,669 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the Three Months Ended March 31, 2010
AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the Three Months Ended March 31, 2010
USPIs Common Stockholder | ||||||||||||||||||||||||||||||||
Accumulated |
||||||||||||||||||||||||||||||||
Additional |
Other |
Noncontrolling |
||||||||||||||||||||||||||||||
Comprehensive |
Outstanding |
Paid-in |
Comprehensive |
Retained |
Interests |
|||||||||||||||||||||||||||
Total | Income (Loss) | Shares | Par Value | Capital | Loss | Earnings | Non-Redeemable | |||||||||||||||||||||||||
(Unaudited in thousands, except share amounts) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2009
|
$ | 798,003 | $ | | 100 | $ | | $ | 789,505 | $ | (58,845 | ) | $ | 27,292 | $ | 40,051 | ||||||||||||||||
Distributions to noncontrolling interests
|
(1,702 | ) | | | | | | | (1,702 | ) | ||||||||||||||||||||||
Purchases of noncontrolling interests
|
(88 | ) | | | | (28 | ) | | | (60 | ) | |||||||||||||||||||||
Sales of noncontrolling interests
|
(2,797 | ) | | | | (2,950 | ) | | | 153 | ||||||||||||||||||||||
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
532 | | | | 532 | | | | ||||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income
|
13,518 | 12,011 | | | | | 12,011 | 1,507 | ||||||||||||||||||||||||
Other comprehensive loss:
|
||||||||||||||||||||||||||||||||
Unrealized gain on interest rate swaps, net of tax
|
300 | 300 | | | | 300 | | | ||||||||||||||||||||||||
Foreign currency translation adjustments
|
(14,588 | ) | (14,588 | ) | | | | (14,588 | ) | | | |||||||||||||||||||||
Other comprehensive loss
|
(14,288 | ) | (14,288 | ) | | | | | | | ||||||||||||||||||||||
Comprehensive income (loss)
|
(770 | ) | $ | (2,277 | ) | | | | | | 1,507 | |||||||||||||||||||||
Balance, March 31, 2010
|
$ | 793,178 | 100 | $ | | $ | 787,059 | $ | (73,133 | ) | $ | 39,303 | $ | 39,949 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
8
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Unaudited in thousands) | ||||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$ | 31,433 | $ | 25,646 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Loss (earnings) from discontinued operations
|
693 | (204 | ) | |||||
Provision for doubtful accounts
|
1,746 | 1,882 | ||||||
Depreciation and amortization
|
7,328 | 7,303 | ||||||
Amortization of debt issue costs
|
887 | 790 | ||||||
Deferred income taxes
|
2,209 | 3,729 | ||||||
Net (gain) loss on deconsolidations, disposals and impairments
|
(499 | ) | 316 | |||||
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
7,193 | 1,412 | ||||||
Equity-based compensation
|
443 | 415 | ||||||
Increases (decreases) in cash from changes in operating assets
and liabilities, net of effects from purchases of new businesses:
|
||||||||
Accounts receivable
|
1,425 | 1,548 | ||||||
Other receivables
|
(6,846 | ) | (1,455 | ) | ||||
Inventories of supplies, prepaids and other current assets
|
(2,904 | ) | (2,754 | ) | ||||
Accounts payable and other current liabilities
|
(3,029 | ) | (234 | ) | ||||
Long-term liabilities
|
1,478 | 230 | ||||||
Net cash provided by operating activities
|
41,557 | 38,624 | ||||||
Cash flows from investing activities:
|
||||||||
Purchases of new businesses and equity interests, net of cash
received
|
(7,161 | ) | (1,067 | ) | ||||
Proceeds from sales of businesses and equity interests
|
2,628 | 1,720 | ||||||
Purchases of property and equipment
|
(7,047 | ) | (8,148 | ) | ||||
Purchases of marketable securities
|
(5,000 | ) | | |||||
Returns of capital from unconsolidated affiliates
|
545 | 461 | ||||||
(Increase) decrease in deposits and notes receivable
|
2,985 | (1,503 | ) | |||||
Net cash used in investing activities
|
(13,050 | ) | (8,537 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from long-term debt
|
5,431 | 3,089 | ||||||
Payments on long-term debt
|
(30,862 | ) | (10,909 | ) | ||||
Decrease in cash held on behalf of unconsolidated affiliates
|
(3,727 | ) | (5,027 | ) | ||||
Purchases and sales of noncontrolling interests, net
|
468 | 651 | ||||||
Distributions to noncontrolling interests
|
(15,517 | ) | (14,064 | ) | ||||
Net cash used in financing activities
|
(44,207 | ) | (26,260 | ) | ||||
Cash flows of discontinued operations:
|
||||||||
Operating cash flows
|
| 795 | ||||||
Investing cash flows
|
| (501 | ) | |||||
Financing cash flows
|
| (135 | ) | |||||
Net cash provided by discontinued operations
|
| 159 | ||||||
Effect of exchange rate changes on cash and cash equivalents
|
15 | (85 | ) | |||||
Net (decrease) increase in cash and cash equivalents
|
(15,685 | ) | 3,901 | |||||
Cash and cash equivalents at beginning of period
|
60,253 | 34,890 | ||||||
Cash and cash equivalents at end of period
|
$ | 44,568 | $ | 38,791 | ||||
Supplemental information:
|
||||||||
Interest paid
|
$ | 6,445 | $ | 7,276 | ||||
Income taxes paid
|
12,902 | 3,503 | ||||||
Non-cash transactions:
|
||||||||
Assets acquired under capital lease obligations
|
$ | 579 | $ | 1,278 |
See accompanying notes to consolidated financial statements
9
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1) | Basis of Presentation |
(a) | Description of Business |
United Surgical Partners International, Inc., a Delaware
Corporation, and subsidiaries (USPI or the Company) was formed
in February 1998 for the primary purpose of ownership and
operation of ambulatory surgery centers, surgical hospitals and
related businesses in the United States and the United Kingdom.
At March 31, 2011, the Company, headquartered in Dallas,
Texas, operated 191 short-stay surgical facilities. Of these 191
facilities, the Company consolidates the results of 58 and
accounts for 133 under the equity method. The Company operates
in two countries, with 186 of its 191 facilities located in the
United States of America; the remaining five facilities are
located in the United Kingdom. The majority of the
Companys U.S. facilities are jointly owned with local
physicians and a
not-for-profit
healthcare system that has other healthcare businesses in the
region. At March 31, 2011, the Company had agreements with
not-for-profit
healthcare systems providing for joint ownership of 134 of the
Companys 186 U.S. facilities and also providing a
framework for the construction or acquisition of additional
facilities in the future. All of the Companys
U.S. facilities include physician owners.
Global Healthcare Partners Limited (Global), a USPI subsidiary
incorporated in England, manages and owns three surgical
hospitals and an oncology center in the greater London area and
a diagnostic and surgery center in Edinburgh, Scotland.
The Company is subject to changes in government legislation that
could impact Medicare, Medicaid, and foreign government
reimbursement levels and is also subject to increased levels of
managed care penetration and changes in payor patterns that may
impact the level and timing of payments for services rendered.
The Company maintains its books and records on the accrual basis
of accounting, and the accompanying consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The
accompanying consolidated financial statements and notes should
be read in conjunction with the Companys December 31,
2010
Form 10-K.
It is managements opinion that the accompanying
consolidated financial statements reflect all adjustments
necessary for a fair presentation of the results for the periods
presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with GAAP
requires management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts in the consolidated financial statements for
prior periods have been reclassified to conform to the 2011
presentation. Net operating results have not been affected by
these reclassifications.
(2) | Discontinued Operations and Other Dispositions |
Sales of consolidated subsidiaries in which the Company has no
continuing involvement are classified as discontinued
operations, as are consolidated subsidiaries that are held for
sale. The gains or losses on these transactions are classified
within discontinued operations in the Companys
consolidated statements of income. Also, the Company has
reclassified its historical results of operations to remove the
operations of these entities from its revenues and expenses,
collapsing the net income or loss from these operations into a
single line within discontinued operations.
Discontinued operations consist of an endoscopy business and
surgical facility, which were sold in December 2010 and two
investments in surgery centers that were designated as held for
sale at December 31, 2010 and were sold in February 2011.
The estimated net loss on disposal of these operations was
recorded in the fourth quarter of 2010 and adjusted in the first
quarter of 2011.
10
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
The table below summarizes certain amounts related to the
Companys discontinued operations for the periods presented
(in thousands):
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Revenues
|
$ | 575 | $ | 6,972 | ||||
Income from discontinued operations before income taxes
|
$ | 1 | $ | 313 | ||||
Income tax expense
|
| (109 | ) | |||||
Income from discontinued operations
|
$ | 1 | $ | 204 | ||||
Loss on disposal of discontinued operations before income taxes
|
$ | (1,174 | ) | $ | | |||
Income tax benefit
|
480 | | ||||||
Total loss from disposal of discontinued operations
|
$ | (694 | ) | $ | | |||
(3) | Investments in Unconsolidated Affiliates |
The Companys facilities are generally operated through
separate legal entities in which the Company holds an equity
interest. Other investors include physicians who utilize the
facility and, in a majority of cases, a local
not-for-profit
health system.
The Company controls 58 of these entities and therefore
consolidates their results. However, the Company accounts for an
increasing majority (133 of its 191 facilities at March 31,
2011) as investments in unconsolidated affiliates, i.e.,
under the equity method, as the Companys level of
influence is significant but does not reach the threshold of
controlling the entity. The majority of these investments are
partnerships or limited liability companies, which require the
associated tax benefit or expense to be recorded by the partners
or members. Summarized financial information for the
Companys equity method investees on a combined basis is as
follows (amounts are in thousands, except number of facilities,
and reflect 100% of the investees results on an aggregated
basis and are unaudited):
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Unconsolidated facilities operated at period-end
|
133 | 110 | ||||||
Income statement information:
|
||||||||
Revenues
|
$ | 347,815 | $ | 294,700 | ||||
Operating expenses:
|
||||||||
Salaries, benefits, and other employee costs
|
84,895 | 72,221 | ||||||
Medical services and supplies
|
79,802 | 69,211 | ||||||
Other operating expenses
|
83,472 | 69,910 | ||||||
Gain on assets disposals, net
|
(412 | ) | (40 | ) | ||||
Depreciation and amortization
|
15,478 | 12,979 | ||||||
Total operating expenses
|
263,235 | 224,281 | ||||||
Operating income
|
84,580 | 70,419 | ||||||
Interest expense, net
|
(7,300 | ) | (6,123 | ) | ||||
Other, net
|
(13 | ) | (488 | ) | ||||
Income before income taxes
|
$ | 77,267 | $ | 63,808 | ||||
11
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Balance sheet information:
|
||||||||
Current assets
|
$ | 282,115 | $ | 260,015 | ||||
Noncurrent assets
|
567,853 | 438,956 | ||||||
Current liabilities
|
164,634 | 152,105 | ||||||
Noncurrent liabilities
|
402,884 | 303,139 |
The Company regularly engages in the purchase and sale of equity
interests with respect to its investments in unconsolidated
affiliates that do not result in a change of control. These
transactions are primarily the acquisitions and sales of equity
interests in unconsolidated surgical facilities and the
investment of additional cash in surgical facilities under
development. During the three months ended March 31, 2011,
these transactions resulted in a net cash outflow of
approximately $6.0 million, which is summarized as follows:
Effective Date
|
Facility Location | Amount | ||||
Investments
|
||||||
January 2011
|
Dallas, Texas(1) | $1.3 million | ||||
January 2011
|
Rancho Mirage, California(2) | 0.5 million | ||||
January 2011
|
Edinburgh, Scotland(3) | 1.1 million | ||||
March 2011
|
Plano, Texas(4) | 1.9 million | ||||
March 2011
|
Oklahoma City, Oklahoma(5) | 1.2 million | ||||
Total
|
$6.0 million | |||||
(1) | Represents additional capital the Company contributed to a joint venture with one of the Companys not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. The Company already was providing management services to the facility. The remainder of this facility is owned by local physicians. | |
(2) | Acquisition of additional equity interest in a surgical facility in which the Company already held an investment. This facility is jointly owned with physicians and continues to be accounted for under the equity method. | |
(3) | Acquisition of a 50% noncontrolling interest in diagnostic and surgery facility in which the Company had no previous involvement. | |
(4) | Represents additional capital the Company contributed to a joint venture with one of the Companys not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. The remainder of this facility is owned by local physicians. The Company also acquired the right to manage this facility. | |
(5) | Represents additional capital the Company contributed to a facility in which it holds an equity interest. |
(4) | Noncontrolling Interests |
The Company controls and therefore consolidates the results of
58 of its 191 facilities. Similar to its investments in
unconsolidated affiliates, the Company regularly engages in the
purchase and sale of equity interests with respect to its
consolidated subsidiaries that do not result in a change of
control. These transactions are accounted for as equity
transactions, as they are undertaken among the Company, its
consolidated subsidiaries, and noncontrolling interests, and
their cash flow effect is classified within financing activities.
12
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
During the three months ended March 31, 2011, the Company
purchased and sold equity interests in various consolidated
subsidiaries in the amounts of $0.2 million and
$0.7 million, respectively. The basis difference between
the Companys carrying amount and the proceeds received or
paid in each transaction is recorded as an adjustment to
additional paid-in capital. The impact of these transactions is
summarized as follows (in thousands):
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Net income attributable to USPI
|
$ | 15,721 | $ | 12,011 | ||||
Transfers to the noncontrolling interests:
|
||||||||
Decrease in USPIs additional paid-in capital for sales of
subsidiaries equity interests
|
(2,324 | ) | (2,950 | ) | ||||
Increase (decrease) in USPIs additional paid-in capital
for purchases of subsidiaries equity interests
|
4 | (28 | ) | |||||
Net transfers to noncontrolling interests
|
(2,320 | ) | (2,978 | ) | ||||
Change in equity from net income attributable to USPI and
transfers to noncontrolling interests
|
$ | 13,401 | $ | 9,033 | ||||
Upon the occurrence of certain fundamental regulatory changes,
the Company could be obligated, under the terms of its
investees partnership and operating agreements, to
purchase some or all of the noncontrolling interests related to
the Companys consolidated subsidiaries. These repurchase
requirements are limited to the portions of its facilities that
are owned by physicians who perform surgery at the
Companys facilities and would be triggered by regulatory
changes making the existing ownership structure illegal. While
the Company is not aware of events that would make the
occurrence of such a change probable, regulatory changes are
outside the control of the Company. Accordingly, the
noncontrolling interests subject to these repurchase provisions,
and the income attributable to those interests, have been
classified outside of equity and are carried as
noncontrolling interests redeemable on
the Companys consolidated balance sheets. The activity for
the three months ended March 31, 2011 and 2010 is
summarized below (in thousands):
Noncontrolling |
||||
Interests |
||||
Redeemable-2011 | ||||
Balance, December 31, 2010
|
$ | 81,668 | ||
Net income attributable to noncontrolling interests
|
14,104 | |||
Distributions to noncontrolling interests
|
(13,939 | ) | ||
Purchases of noncontrolling interests
|
(145 | ) | ||
Sales of noncontrolling interests
|
3,187 | |||
Balance, March 31, 2011
|
$ | 84,875 | ||
Noncontrolling |
||||
Interests |
||||
Redeemable-2010 | ||||
Balance, December 31, 2009
|
$ | 63,865 | ||
Net income attributable to noncontrolling interests
|
12,128 | |||
Distributions to noncontrolling interests
|
(12,452 | ) | ||
Purchases of noncontrolling interests
|
(195 | ) | ||
Sales of noncontrolling interests
|
3,708 | |||
Deconsolidation of noncontrolling interests and other
|
75 | |||
Balance, March 31, 2010
|
$ | 67,129 | ||
13
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
(5) | Other Investments |
The consolidated financial statements include the financial
statements of USPI and its wholly-owned and controlled
subsidiaries. The Company also determines if it is the primary
beneficiary of (and therefore should consolidate) any entity
whose operations it does not control with voting rights. At
March 31, 2011, the Company consolidated one entity in
accordance with this accounting guidance.
This entity operates and manages seven surgical facilities in
the Houston, Texas area. Despite not holding a controlling
voting interest, the Company is the primary beneficiary because
the Company has lent the entity funds to purchase surgical
facilities, but the Company does not have full recourse to the
entitys other owner with respect to repayment of the
loans. As the entity earns management fees and receives cash
distributions of earnings from the surgical facilities, a
portion of those proceeds are used to repay the loans prior to
being eligible for distribution to the entitys other
owner. At March 31, 2011 and 2010, $7.9 million and
$11.2 million, respectively, of such advances are
outstanding and are included in other long-term assets. The
Company has no exposure for the entitys losses beyond this
investment. Accordingly, the Company did not provide any
financial or other support to the entity that it was not
previously contractually required to provide during the three
months ended March 31, 2011 or 2010. At March 31, 2011
and 2010, the total assets of this entity were
$79.6 million and $54.3 million, and the total
liabilities owed to third parties were $20.6 million and
$33.3 million, respectively. Such amounts are included in
the accompanying consolidated balance sheets.
The Company also has investments in two unconsolidated variable
interest entities in which it is not considered the primary
beneficiary. These entities own real estate and fixed assets
that are leased to various surgical facilities. The total assets
of these entities were $6.6 million and $8.7 million,
and the total liabilities of these entities were
$7.8 million and $8.7 million at March 31, 2011
and 2010, respectively. The Companys investment in these
entities and maximum exposure to loss as a result of its
involvement with these entities is not material. The Company did
not provide any financial or other support to these entities
that it was not previously contractually required to provide
during the three months ended March 31, 2011 or 2010.
(6) | Interest Rate Swaps |
The Company does not enter into derivative contracts for
speculative purposes but has at times entered into interest rate
swaps to fix the rate of interest owed on a portion of its
variable rate debt. By using derivative financial instruments to
hedge exposures to changes in interest rates, the Company
exposes itself to credit risk and market risk. Credit risk is
the failure of the counterparty to perform under the terms of
the derivative contract. If the fair value of a derivative
contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. The Company minimizes the
credit risk in derivative instruments by entering into
transactions with counterparties who maintain a strong credit
rating. Market risk is the risk of an adverse effect on the
value of a derivative instrument that results from a change in
interest rates. This risk essentially represents the risk that
variable interest rates decline to a level below the fixed rate
the Company has locked in. The market risk associated with
interest rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market
risk that may be undertaken.
At the inception of the interest rate swap, the Company formally
documents the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging
instrument, the hedged item, the nature of the risk being
hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed prospectively and
retrospectively, and a description of the method of measuring
ineffectiveness. The Company also formally assesses, both at the
hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate U.K. debt, on
February 29, 2008, the Company entered into an interest
rate swap agreement for a notional amount of
£20.0 million
14
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
($32.1 million). The interest rate swap required the
Company to pay 4.99% and it received interest at a variable rate
of three-month GBP-LIBOR. The interest rate swap matured on
March 31, 2011.
The Company entered into a new interest swap effective
March 31, 2011 for a notional amount of
£18.0 million ($28.9 million). The interest rate
swap requires the Company to pay 1.45% and to receive interest
at a variable rate of three-month GBP-LIBOR (currently 0.8%),
and is reset quarterly. No collateral is required under the
interest rate swap agreement. The swap matures in June 2012.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate senior secured credit
facility, effective July 24, 2008, the Company entered into
a three-year interest rate swap agreement for a notional amount
of $200.0 million. The interest rate swap requires the
Company to pay 3.6525% and to receive interest at a variable
rate of three-month USD-LIBOR (0.3% at March 31,
2011), which is reset quarterly. No collateral is required under
the interest rate swap agreement.
The proceeds from the swaps are used to settle the
Companys interest obligations on the hedged portion of the
variable rate debt, which has the overall outcome of the Company
paying and expensing a fixed rate of interest on the hedged debt.
The Company recognizes all derivative instruments as either
assets or liabilities at fair value in the consolidated balance
sheet. The Company designated the interest rate swaps as cash
flow hedges of certain of its variable-rate borrowings. For
derivative instruments that are designated and qualify as a cash
flow hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive
income (loss) and reclassified to earnings in the same period or
periods during which the hedged transaction affects earnings.
Gains and losses on the derivatives representing either hedge
ineffectiveness or hedge components excluded from the assessment
of effectiveness are recognized in current earnings and would be
classified as interest expense in the Companys
consolidated statements of income. The Company recorded no
expense related to ineffectiveness for the three months ended
March 31, 2011 or 2010. For both the three months ended
March 31, 2011 and 2010, the Company reclassified
$2.0 million, out of other comprehensive income to interest
expense related to the swaps. During the next twelve months, if
current interest rates remain at March 31, 2011 levels, the
Company will record approximately $2.2 million more
interest expense than if it had not entered into the interest
rate swaps.
At March 31, 2011 and 2010, the fair value of the
U.S. interest rate swap was approximately $2.1 million
(other current liabilities) and $7.4 million (other long
term liabilities), respectively, with the offset to other
comprehensive income (loss). At March 31, 2010, the fair
value of the U.K. interest rate swap was approximately
$1.2 million (recorded in other current liabilities), with
the offset to other comprehensive income (loss). The new U.K.
swap had a fair value of zero at inception on March 31,
2011. During the three months ended March 31, 2011 and
2010, the amounts, net of taxes, recorded in other comprehensive
income (loss) related to the interest rate swaps were
$1.3 million and $0.3 million, respectively. The
estimated fair value of the interest rate swaps was determined
using present value models of the contractual payments. Inputs
to the models were based on prevailing LIBOR market data and
incorporate credit data that measure nonperformance risk. The
estimated fair value represents the theoretical exit cost the
Company would have to pay to transfer the obligations to a
market participant with similar credit risk. The interest rate
swap agreements are classified within Level 2 of the
valuation hierarchy.
(7) | Fair Value of Financial Instruments |
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. The Company uses fair value measurements based on
quoted prices in active markets for identical assets or
liabilities (Level 1), significant other observable inputs
(Level 2) or unobservable inputs for assets or
liabilities (Level 3), depending on the nature of the item
being valued. The estimated fair values may not be
representative of actual values that will be realized or settled
in the future.
15
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these
instruments. The fair value of the Companys interest rate
swaps is disclosed in Note 6.
The fair value of the Companys long-term debt is
determined by either (i) estimation of the discounted
future cash flows of the debt at rates currently quoted or
offered to the Company for similar debt instruments of
comparable maturities by its lenders, or (ii) quoted market
prices at the reporting date for the traded debt securities. At
March 31, 2011, both the aggregate carrying amount and
estimated fair value of long-term debt was approximately
$1.1 billion. At March 31, 2010, both the aggregate
carrying amount and estimated fair value of long-term debt was
approximately $1.1 billion.
The Company purchased $5.0 million of marketable
securities, primarily corporate bonds and U.S. Treasury
securities, during the three months ended March 31, 2011,
which are included in other current assets on the accompanying
consolidated balance sheet. The Company has designated these
securities as
available-for-sale.
At March 31, 2011, the carrying value of such securities
approximates fair value. The fair value of these securities are
classified within Level 2 of the valuation hierarchy, and
are based on closing market prices of the investments when
applicable, or alternatively, valuations utilizing market data
and other observable inputs.
(8) | Equity-Based Compensation |
The Company accounts for equity-based compensation, such as
stock options and other stock-based awards to employees and
directors, at fair value. The fair value of the compensation is
measured at the date of grant and recognized as expense over the
recipients requisite service period.
The Companys equity-based compensation consists primarily
of stock options and restricted stock granted by the
Companys parent, USPI Group Holdings, Inc., to certain
employees and members of the board of directors. The fair value
of stock options was estimated at the date of grant using the
Black-Scholes formula based on assumptions derived from
historical experience.
Total equity-based compensation included in the consolidated
statements of income, classified by income statement line item,
is as follows (in thousands):
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Salaries, benefits and other employee costs
|
$ | 156 | $ | 140 | ||||
General and administrative expenses
|
287 | 275 | ||||||
Discontinued operations
|
| 64 | ||||||
Expense before income tax benefit
|
443 | 479 | ||||||
Income tax benefit
|
(82 | ) | (101 | ) | ||||
Total equity-based compensation expense, net of tax
|
$ | 361 | $ | 378 | ||||
16
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
Total equity-based compensation, included in the consolidated
statements of income, classified by type of award, is as follows
(in thousands):
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Share awards
|
$ | 331 | $ | 318 | ||||
Stock options
|
112 | 161 | ||||||
Expense before income tax benefit
|
443 | 479 | ||||||
Income tax benefit
|
(82 | ) | (101 | ) | ||||
Total equity-based compensation expense, net of tax
|
$ | 361 | $ | 378 | ||||
(9) | Segment Disclosures |
The Companys business is the operation of surgical
facilities and related businesses in the United States and the
United Kingdom. The Companys chief operating decision
maker, as that term is defined in the accounting standard,
regularly reviews financial information about its surgical
facilities for assessing performance and allocating resources
both domestically and abroad. Accordingly, the Companys
reportable segments consist of (1) U.S. based
facilities and (2) United Kingdom based facilities and are
as follows (in thousands):
United |
United |
|||||||||||
Three Months Ended March 31, 2011
|
States | Kingdom | Total | |||||||||
Net patient service revenues
|
$ | 99,670 | $ | 27,996 | $ | 127,666 | ||||||
Other revenues
|
19,424 | | 19,424 | |||||||||
Total revenues
|
$ | 119,094 | $ | 27,996 | $ | 147,090 | ||||||
Depreciation and amortization
|
$ | 5,344 | $ | 1,984 | $ | 7,328 | ||||||
Operating income
|
53,864 | 5,092 | 58,956 | |||||||||
Net interest expense
|
(16,382 | ) | (652 | ) | (17,034 | ) | ||||||
Income tax expense
|
(8,648 | ) | (1,220 | ) | (9,868 | ) | ||||||
Total assets
|
2,031,704 | 342,198 | 2,373,902 | |||||||||
Capital expenditures
|
2,471 | 5,155 | 7,626 |
United |
United |
|||||||||||
Three Months Ended March 31, 2010
|
States | Kingdom | Total | |||||||||
Net patient service revenues
|
$ | 94,101 | $ | 26,347 | $ | 120,448 | ||||||
Other revenues
|
17,423 | | 17,423 | |||||||||
Total revenues
|
$ | 111,524 | $ | 26,347 | $ | 137,871 | ||||||
Depreciation and amortization
|
$ | 5,636 | $ | 1,667 | $ | 7,303 | ||||||
Operating income
|
46,007 | 4,357 | 50,364 | |||||||||
Net interest expense
|
(16,257 | ) | (1,353 | ) | (17,610 | ) | ||||||
Income tax expense
|
(6,832 | ) | (815 | ) | (7,647 | ) | ||||||
Total assets
|
2,004,793 | 309,054 | 2,313,847 | |||||||||
Capital expenditures
|
4,255 | 5,171 | 9,426 |
17
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
(10) | Related Party Transactions |
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in the Company, in the amount of
$0.5 million for the three months ended March 31, 2011
and 2010. Such amounts accrue at an annual rate of
$2.0 million. The Company pays $1.0 million in cash
per year with the unpaid balance due and payable upon a change
in control. At March 31, 2011, the Company had
approximately $4.0 million accrued related to this
management fee, which is included in other long-term liabilities
in the accompanying consolidated balance sheet.
(11) | Commitments and Contingencies |
As of March 31, 2011, the Company had issued guarantees of
the indebtedness and other obligations of its investees to third
parties, which could potentially require the Company to make
maximum aggregate payments totaling approximately
$59.6 million. Of the total, $14.4 million relates to
the obligations of consolidated subsidiaries, whose obligations
are included in the Companys consolidated balance sheet
and related disclosures, and $36.8 million of the remaining
$45.2 million relates to the obligations of unconsolidated
affiliated companies, whose obligations are not included in the
Companys consolidated balance sheet and related
disclosures. The remaining $8.4 million represents a
guarantee of the obligations of three facilities which have been
sold. The Company has full recourse to the buyers with respect
to these amounts.
The Company has recorded long-term liabilities totaling
approximately $0.5 million related to the guarantees the
Company has issued to unconsolidated affiliates on or after
January 1, 2003, and has not recorded any liabilities
related to guarantees issued prior to that date. Generally,
these arrangements (a) consist of guarantees of real estate
and equipment financing, (b) are secured by the related
property and equipment, (c) require payments by the
Company, when the collateral is insufficient, in the event of a
default by the investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2022, and (e) provide no recourse for the Company
to recover any amounts from third parties. The Company also has
$1.6 million of letters of credit outstanding.
(12) | Subsequent Events |
The Company has entered into letters of intent with various
entities regarding possible joint venture, development, or other
transactions. These possible joint ventures, developments of new
facilities, or other transactions are in various stages of
negotiation.
(13) | Condensed Consolidating Financial Statements |
The following information is presented as required by
regulations of the Securities and Exchange Commission (SEC) in
connection with the subordinated notes that have been registered
with the SEC. This information is not routinely prepared for use
by management. The operating and investing activities of the
separate legal entities included in the consolidated financial
statements are fully interdependent and integrated. Accordingly,
the operating results of the separate legal entities are not
representative of what the operating results would be on a
stand-alone basis. Revenues and operating expenses of the
separate legal entities include intercompany charges for
management and other services.
The $240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes, all due 2017 (the Notes), were issued
in a private offering on April 19, 2007 and were
subsequently registered as publicly traded securities through a
Form S-4
declared effective by the SEC on July 25, 2007. The
exchange offer was completed in August 2007. The Notes are
unsecured senior subordinated obligations of the Company;
however, the Notes are guaranteed by all of the Companys
current and future direct and indirect wholly-owned domestic
subsidiaries. USPI, which issued the Notes, does not have
independent assets or operations. USPIs
18
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
investees in the United Kingdom are not guarantors of the
obligation. USPIs investees in the United States in which
USPI owns less than 100% are not guarantors of the obligation.
The financial positions and results of operations (below, in
thousands) of the respective guarantors are based upon the
guarantor relationship at the end of the period presented.
Consolidation adjustments include purchase accounting entries
for investments in which the Companys ownership percentage
in non-participating investees is not high enough to permit the
application of pushdown accounting.
Condensed
Consolidating Balance Sheets:
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
As of March 31, 2011
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
ASSETS
|
||||||||||||||||
Current assets:
|
||||||||||||||||
Cash and cash equivalents
|
$ | 36,947 | $ | 7,621 | $ | | $ | 44,568 | ||||||||
Accounts receivable, net
|
| 46,860 | | 46,860 | ||||||||||||
Other receivables
|
37,433 | 44,400 | (56,015 | ) | 25,818 | |||||||||||
Inventories of supplies
|
787 | 8,053 | | 8,840 | ||||||||||||
Prepaids and other current assets
|
34,818 | 2,659 | | 37,477 | ||||||||||||
Total current assets
|
109,985 | 109,593 | (56,015 | ) | 163,563 | |||||||||||
Property and equipment, net
|
19,364 | 179,803 | 71 | 199,238 | ||||||||||||
Investments in unconsolidated affiliates
|
1,019,996 | | (628,200 | ) | 391,796 | |||||||||||
Goodwill and intangible assets, net
|
904,056 | 352,200 | 340,700 | 1,596,956 | ||||||||||||
Other assets
|
90,603 | 526 | (68,780 | ) | 22,349 | |||||||||||
Total assets
|
$ | 2,144,004 | $ | 642,122 | $ | (412,224 | ) | $ | 2,373,902 | |||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities:
|
||||||||||||||||
Accounts payable
|
$ | 1,806 | $ | 19,496 | $ | | $ | 21,302 | ||||||||
Accrued expenses and other
|
232,936 | 37,164 | (54,240 | ) | 215,860 | |||||||||||
Current portion of long-term debt
|
5,589 | 20,503 | (1,569 | ) | 24,523 | |||||||||||
Total current liabilities
|
240,331 | 77,163 | (55,809 | ) | 261,685 | |||||||||||
Long-term debt, less current portion
|
940,727 | 82,291 | (2,502 | ) | 1,020,516 | |||||||||||
Other long-term liabilities
|
151,578 | 9,673 | (462 | ) | 160,789 | |||||||||||
Parents equity
|
811,368 | 448,846 | (448,846 | ) | 811,368 | |||||||||||
Noncontrolling interests
|
| 24,149 | 95,395 | 119,544 | ||||||||||||
Total liabilities and equity
|
$ | 2,144,004 | $ | 642,122 | $ | (412,224 | ) | $ | 2,373,902 | |||||||
19
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
As of December 31, 2010
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
ASSETS
|
||||||||||||||||
Current assets:
|
||||||||||||||||
Cash and cash equivalents
|
$ | 60,186 | $ | 67 | $ | | $ | 60,253 | ||||||||
Accounts receivable, net
|
| 50,082 | | 50,082 | ||||||||||||
Other receivables
|
27,313 | 45,146 | (57,217 | ) | 15,242 | |||||||||||
Inventories of supplies
|
685 | 8,506 | | 9,191 | ||||||||||||
Prepaids and other current assets
|
27,477 | 2,166 | | 29,643 | ||||||||||||
Total current assets
|
115,661 | 105,967 | (57,217 | ) | 164,411 | |||||||||||
Property and equipment, net
|
24,343 | 177,803 | 114 | 202,260 | ||||||||||||
Investments in unconsolidated affiliates
|
1,010,592 | | (617,031 | ) | 393,561 | |||||||||||
Goodwill and intangible assets, net
|
904,108 | 342,777 | 340,991 | 1,587,876 | ||||||||||||
Other assets
|
91,151 | 2,602 | (69,122 | ) | 24,631 | |||||||||||
Total assets
|
$ | 2,145,855 | $ | 629,149 | $ | (402,265 | ) | $ | 2,372,739 | |||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities:
|
||||||||||||||||
Accounts payable
|
$ | 1,684 | $ | 21,804 | $ | | $ | 23,488 | ||||||||
Accrued expenses and other
|
236,835 | 37,868 | (55,917 | ) | 218,786 | |||||||||||
Current portion of long-term debt
|
4,932 | 19,751 | (2,297 | ) | 22,386 | |||||||||||
Total current liabilities
|
243,451 | 79,423 | (58,214 | ) | 264,660 | |||||||||||
Long-term debt, less current portion
|
966,999 | 82,732 | (2,291 | ) | 1,047,440 | |||||||||||
Other long-term liabilities
|
148,648 | 9,692 | (520 | ) | 157,820 | |||||||||||
Parents equity
|
786,757 | 432,261 | (432,261 | ) | 786,757 | |||||||||||
Noncontrolling interests
|
| 25,041 | 91,021 | 116,062 | ||||||||||||
Total liabilities and equity
|
$ | 2,145,855 | $ | 629,149 | $ | (402,265 | ) | $ | 2,372,739 | |||||||
Condensed
Consolidating Statements of Income:
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
For the Three Months Ended March 31, 2011
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
Revenues
|
$ | 25,646 | $ | 127,153 | $ | (5,709 | ) | $ | 147,090 | |||||||
Equity in earnings of unconsolidated affiliates
|
34,695 | 774 | (17,537 | ) | 17,932 | |||||||||||
Operating expenses, excluding depreciation and amortization
|
18,564 | 84,193 | (4,019 | ) | 98,738 | |||||||||||
Depreciation and amortization
|
1,740 | 5,544 | 44 | 7,328 | ||||||||||||
Operating income
|
40,037 | 38,190 | (19,271 | ) | 58,956 | |||||||||||
Interest expense, net
|
(15,351 | ) | (1,683 | ) | | (17,034 | ) | |||||||||
Other income (expense), net
|
70 | 2 | | 72 | ||||||||||||
Income from continuing operations before income taxes
|
24,756 | 36,509 | (19,271 | ) | 41,994 | |||||||||||
Income tax expense
|
(8,342 | ) | (1,526 | ) | | (9,868 | ) | |||||||||
Income from continuing operations
|
16,414 | 34,983 | (19,271 | ) | 32,126 | |||||||||||
Loss from discontinued operations, net of tax
|
(693 | ) | (17 | ) | 17 | (693 | ) | |||||||||
Net income
|
15,721 | 34,966 | (19,254 | ) | 31,433 | |||||||||||
Less: Net income attributable to noncontrolling interests
|
| (3,315 | ) | (12,397 | ) | (15,712 | ) | |||||||||
Net income attributable to Parent
|
$ | 15,721 | $ | 31,651 | $ | (31,651 | ) | $ | 15,721 | |||||||
20
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
For the Three Months Ended March 31, 2010
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
Revenues
|
$ | 22,702 | $ | 120,307 | $ | (5,138 | ) | $ | 137,871 | |||||||
Equity in earnings of unconsolidated affiliates
|
28,400 | 582 | (14,694 | ) | 14,288 | |||||||||||
Operating expenses, excluding depreciation and amortization
|
16,441 | 83,970 | (5,919 | ) | 94,492 | |||||||||||
Depreciation and amortization
|
1,792 | 5,456 | 55 | 7,303 | ||||||||||||
Operating income
|
32,869 | 31,463 | (13,968 | ) | 50,364 | |||||||||||
Interest expense, net
|
(14,990 | ) | (2,492 | ) | (128 | ) | (17,610 | ) | ||||||||
Other income (expense), net
|
314 | 21 | | 335 | ||||||||||||
Income from continuing operations before income taxes
|
18,193 | 28,992 | (14,096 | ) | 33,089 | |||||||||||
Income tax expense
|
(6,386 | ) | (1,261 | ) | | (7,647 | ) | |||||||||
Income from continuing operations
|
11,807 | 27,731 | (14,096 | ) | 25,442 | |||||||||||
Earnings from discontinued operations, net of tax
|
204 | 132 | (132 | ) | 204 | |||||||||||
Net income
|
12,011 | 27,863 | (14,228 | ) | 25,646 | |||||||||||
Less: Net income attributable to noncontrolling interests
|
| (2,195 | ) | (11,440 | ) | (13,635 | ) | |||||||||
Net income attributable to Parent
|
$ | 12,011 | $ | 25,668 | $ | (25,668 | ) | $ | 12,011 | |||||||
Condensed
Consolidating Statements of Cash Flows:
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
For the Three Months Ended March 31, 2011
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
Cash flows from operating activities:
|
||||||||||||||||
Net income
|
$ | 15,721 | $ | 34,966 | $ | (19,254 | ) | $ | 31,433 | |||||||
Loss (earnings) on discontinued operations
|
693 | 17 | (17 | ) | 693 | |||||||||||
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
881 | 1,628 | 6,922 | 9,431 | ||||||||||||
Net cash provided by operating activities
|
17,295 | 36,611 | (12,349 | ) | 41,557 | |||||||||||
Cash flows from investing activities:
|
||||||||||||||||
Purchases of property and equipment, net
|
| (7,047 | ) | | (7,047 | ) | ||||||||||
Purchases and sales of new businesses and equity interests, net
|
(3,409 | ) | (1,124 | ) | | (4,533 | ) | |||||||||
Other items, net
|
(4,245 | ) | 3,305 | (530 | ) | (1,470 | ) | |||||||||
Net cash used in investing activities
|
(7,654 | ) | (4,866 | ) | (530 | ) | (13,050 | ) | ||||||||
Cash flows from financing activities:
|
||||||||||||||||
Long-term borrowings, net
|
(26,316 | ) | 115 | 770 | (25,431 | ) | ||||||||||
Purchases and sales of noncontrolling interests, net
|
468 | | | 468 | ||||||||||||
Distributions to noncontrolling interests
|
| (27,866 | ) | 12,349 | (15,517 | ) | ||||||||||
Decrease in cash held on behalf of noncontrolling interest
holders and other
|
(7,032 | ) | 3,545 | (240 | ) | (3,727 | ) | |||||||||
Net cash provided by (used in) financing activities
|
(32,880 | ) | (24,206 | ) | 12,879 | (44,207 | ) | |||||||||
Effect of exchange rate changes on cash
|
| 15 | | 15 | ||||||||||||
Net increase (decrease) in cash
|
(23,239 | ) | 7,554 | | (15,685 | ) | ||||||||||
Cash at the beginning of the period
|
60,186 | 67 | | 60,253 | ||||||||||||
Cash at the end of the period
|
$ | 36,947 | $ | 7,621 | $ | | $ | 44,568 | ||||||||
21
Table of Contents
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited) (Continued)
Non-Participating |
Consolidation |
Consolidated |
||||||||||||||
For the Three Months Ended March 31, 2010
|
Guarantors | Investees | Adjustments | Total | ||||||||||||
Cash flows from operating activities:
|
||||||||||||||||
Net income
|
$ | 12,011 | $ | 27,863 | $ | (14,228 | ) | $ | 25,646 | |||||||
Loss (earnings) on discontinued operations
|
(204 | ) | 132 | (132 | ) | (204 | ) | |||||||||
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
4,818 | 6,322 | 2,042 | 13,182 | ||||||||||||
Net cash provided by operating activities
|
16,625 | 34,317 | (12,318 | ) | 38,624 | |||||||||||
Cash flows from investing activities:
|
||||||||||||||||
Purchases of property and equipment, net
|
(715 | ) | (7,433 | ) | | (8,148 | ) | |||||||||
Purchases and sales of new businesses and equity interests, net
|
653 | | | 653 | ||||||||||||
Other items, net
|
(452 | ) | 948 | (1,538 | ) | (1,042 | ) | |||||||||
Net cash used in investing activities
|
(514 | ) | (6,485 | ) | (1,538 | ) | (8,537 | ) | ||||||||
Cash flows from financing activities:
|
||||||||||||||||
Long-term borrowings, net
|
(6,316 | ) | (1,725 | ) | 221 | (7,820 | ) | |||||||||
Purchases and sales of noncontrolling interests, net
|
598 | 53 | | 651 | ||||||||||||
Distributions to noncontrolling interests
|
| (26,382 | ) | 12,318 | (14,064 | ) | ||||||||||
Increase in cash held on behalf of noncontrolling interest
holders and other
|
(5,975 | ) | (369 | ) | 1,317 | (5,027 | ) | |||||||||
Net cash provided by (used in) financing activities
|
(11,693 | ) | (28,423 | ) | 13,856 | (26,260 | ) | |||||||||
Net cash provided by discontinued operations
|
| 159 | | 159 | ||||||||||||
Effect of exchange rate changes on cash
|
| (85 | ) | | (85 | ) | ||||||||||
Net increase (decrease) in cash
|
4,418 | (517 | ) | | 3,901 | |||||||||||
Cash at the beginning of the period
|
27,430 | 7,460 | | 34,890 | ||||||||||||
Cash at the end of the period
|
$ | 31,848 | $ | 6,943 | $ | | $ | 38,791 | ||||||||
22
Table of Contents
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the
Companys unaudited Consolidated Financial Statements and
the notes thereto included in Item 1 of this Quarterly
Report on
Form 10-Q.
Forward-Looking
Statements
Certain statements contained in this Quarterly Report on
Form 10-Q,
including, without limitation, statements containing the words
believes, anticipates,
expects, continues, will,
may, should, estimates,
intends, plans and similar expressions,
and statements regarding the Companys business strategy
and plans, constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are based on
managements current expectations and involve known and
unknown risks, uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the
Companys actual results, performance or achievements to be
materially different from those expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: our significant indebtedness; general economic
and business conditions, including without limitation the
condition of the financial markets, both nationally and
internationally; foreign currency fluctuations; demographic
changes; changes in, or the failure to comply with, laws and
governmental regulations; the ability to enter into or renew
managed care provider arrangements on acceptable terms; changes
in Medicare, Medicaid and other government funded payments or
reimbursement in the United States (U.S.) and the United Kingdom
(U.K.); the efforts of insurers, healthcare providers and others
to contain healthcare costs; the impact of federal healthcare
reform; liability and other claims asserted against us; the
highly competitive nature of healthcare; changes in business
strategy or development plans of healthcare systems with which
we partner; the ability to attract and retain qualified
physicians and personnel, including nurses and other health care
professionals and other personnel; the availability of suitable
acquisition and development opportunities and the length of time
it takes to complete acquisitions and developments; our ability
to integrate new and acquired businesses with our existing
operations; the availability and terms of capital to fund the
expansion of our business, including the acquisition and
development of additional facilities and certain additional
factors, risks and uncertainties discussed in this Quarter
Report on
Form 10-Q.
We disclaim any obligation and make no promise to update any
such factors or forward-looking statements or to publicly
announce the results of any revisions to any such factors or
forward-looking statements, whether as a result of changes in
underlying factors, to reflect new information as a result of
the occurrence of events or developments or otherwise. Given
these uncertainties, investors and prospective investors are
cautioned not to rely on such forward-looking statements.
Overview
We operate ambulatory surgery centers and surgical hospitals in
the United States and the United Kingdom. As of March 31,
2011, we operated 191 facilities, consisting of 186 in the
United States and five in the United Kingdom. All 186 of our
U.S. facilities include local physician owners, and 134 of
these facilities are also partially owned by various
not-for-profit
healthcare systems (hospital partners). In addition to
facilitating the joint ownership of the majority of our existing
facilities, our agreements with these healthcare systems provide
a framework for the construction or acquisition of additional
facilities in the future. All five facilities we are currently
developing include a hospital partner. We opened our newest
facility, a surgery center in the Nashville, Tennessee area, in
April 2011.
Our U.S. facilities, consisting of ambulatory surgery
centers and surgical hospitals, specialize in non-emergency
surgical cases. Due in part to advancements in medical
technology, the volume and complexity of surgical cases
performed in an outpatient setting has steadily increased over
the past two decades. Our facilities earn a fee from patients,
insurance companies, or other payors in exchange for providing
the facility and related services a surgeon requires in order to
perform a surgical case. In addition, we earn a monthly fee from
each facility we operate in exchange for managing its
operations. All but five of our facilities are located in the
U.S., where we have focused increasingly on adding facilities
with hospital partners, which we believe improves the long-term
profitability and potential of our facilities.
23
Table of Contents
In the United Kingdom we operate and own three hospitals, an
oncology clinic and a diagnostic and surgery center, which
supplement the services provided by the government-sponsored
healthcare system. Our patients choose to receive care at
private facilities primarily because of the long wait to receive
diagnostic procedures or elective surgery at
government-sponsored facilities and pay us either from personal
funds or through private insurance, which is offered by some
employers as a benefit to their employees. Since acquiring our
first two facilities in London in 2000, we have expanded
selectively by acquiring a third facility and increasing the
capacity and services offered at each facility, including the
construction of an oncology clinic near the campus of one of our
hospitals and other expansion projects. In January 2011, we
acquired an equity interest in a diagnostic and surgery center
located in Edinburgh, Scotland.
Our growth and success depends on our ability to continue to
grow volumes at our existing facilities, to successfully open
new facilities we develop, to successfully integrate acquired
facilities into our operations, and to maintain productive
relationships with our physician and hospital partners. We
believe we will have significant opportunities to operate more
facilities in the future in existing and new markets and that
many of these will include hospital partners.
Due in large part to our partnerships with physician and
hospital partners, we do not consolidate 133 of the 191
facilities in which we have ownership interests. To help analyze
our results of operations, we disclose an operating measure we
refer to as systemwide revenue growth, which includes both
consolidated and unconsolidated facilities. While revenues of
our unconsolidated facilities are not recorded as revenues by
USPI, we believe the information is important in understanding
USPIs financial performance because these revenues are the
basis for calculating the Companys management services
revenues and, together with the expenses of our unconsolidated
facilities, are the basis for USPIs equity in earnings of
unconsolidated affiliates. In addition, USPI discloses growth
rates and operating margins (both consolidated and
unconsolidated) for the facilities that were operational in both
the current and prior year periods, a group the Company refers
to as same store facilities.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results
of operations and liquidity and capital resources are based on
our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP). The preparation of
consolidated financial statements under GAAP requires our
management to make certain estimates and assumptions that impact
the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the
consolidated financial statements. These estimates and
assumptions also impact the reported amount of net earnings
during any period. Estimates are based on information available
as of the date financial statements are prepared. Accordingly,
actual results could differ from those estimates. Critical
accounting policies and estimates are defined as those that are
both most important to the portrayal of our financial condition
and operating results and that require managements most
subjective judgments. Our critical accounting policies and
estimates include our policies and estimates regarding
consolidation, revenue recognition, income taxes and intangible
assets.
Our determination of whether to consolidate an entity in which
we hold an investment, account for it under the equity method,
or carry it at cost has a significant impact on our consolidated
financial statements because of the typical business model under
which we operate, particularly in the United States, where the
majority of the facilities we operate are partially owned by
not-for-profit
hospital systems, physicians, and other parties. These quarterly
consolidated financial statements have been prepared using the
same consolidation policy as that used in our latest audited
consolidated financial statements.
We also consider our accounting policy regarding intangible
assets to be a critical accounting policy given the significance
of intangible assets as compared to the total assets of the
Company. There have been no significant changes in our
application of GAAP to intangible assets since the preparation
of our latest audited consolidated financial statements.
Our revenue recognition and accounts receivable policy and our
method of accounting for income taxes involve significant
judgments and estimates. There have been no significant changes
in assumptions, estimates, and judgments in the preparation of
these quarterly consolidated financial statements from the
assumptions, estimates, and judgments used in the preparation of
our latest audited consolidated financial statements.
24
Table of Contents
Equity
Investments and Development Projects
While a part of our development strategy involves acquiring
existing surgical facilities, we also regularly engage in the
purchase and sale of equity interests with respect to facilities
we are constructing or already operate. When those transactions
involve our investments in unconsolidated affiliates but do not
involve a change of control, the cash flow impact is classified
within investing activities. During the three months ended
March 31, 2011, these transactions resulted in a net cash
outflow of approximately $6.0 million, which is summarized
below:
Effective Date
|
Facility Location | Amount | ||||
Investments
|
||||||
January 2011
|
Dallas, Texas(1) | $ | 1.3 million | |||
January 2011
|
Rancho Mirage, California(2) | 0.5 million | ||||
January 2011
|
Edinburgh, Scotland(3) | 1.1 million | ||||
March 2011
|
Plano, Texas(4) | 1.9 million | ||||
March 2011
|
Oklahoma City, Oklahoma(5) | 1.2 million | ||||
Total
|
$ | 6.0 million | ||||
(1) | Represents additional capital we contributed to a joint venture with one of our not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. We already were providing management services to the facility. The remainder of this facility is owned by local physicians. | |
(2) | Acquisition of additional equity interest in a surgical facility in which we already held an investment. This facility is jointly owned with physicians and continues to be accounted for under the equity method. | |
(3) | Acquisition of a 50% noncontrolling interest in diagnostic and surgery facility in which we had no previous involvement. | |
(4) | Represents additional capital we contributed to a joint venture with one of our not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. The remainder of this facility is owned by local physicians. We also acquired the right to manage this facility. | |
(5) | Represents additional capital we contributed to a facility in which we hold an equity interest. |
We control and therefore consolidate the results of 58 of our
191 facilities. Similar to our investments in unconsolidated
affiliates, we regularly engage in the purchase and sale of
equity interests in our consolidated subsidiaries that do not
result in a change of control. These transactions are accounted
for as equity transactions, as they are undertaken among us, our
consolidated subsidiaries, and noncontrolling interests. During
the three months ended March 31, 2011, we purchased and
sold equity interests in various consolidated subsidiaries in
the amounts of $0.2 million and $0.7 million,
respectively. The difference between our carrying amount and the
proceeds received or paid in each transaction is recorded as an
adjustment to our additional paid-in capital. These transactions
resulted in a $2.3 million decrease to our additional
paid-in capital during the three months ended March 31,
2011.
Sources
of Revenue
Revenues primarily include the following:
| net patient service revenues of the facilities that we consolidate for financial reporting purposes, which are typically those facilities in which we have ownership interests of greater than 50% or otherwise maintain effective control. | |
| management and contract service revenues, consisting of the fees that we earn from managing the facilities that we do not consolidate for financial reporting purposes and the fees we earn from providing certain consulting and administrative services to physicians and hospitals. Our consolidated revenues and expenses do not include the management fees we earn from operating the facilities that we consolidate for financial reporting purposes as those fees are charged to subsidiaries and thus eliminate in consolidation. |
25
Table of Contents
The following table summarizes our revenues by type and as a
percentage of total revenue for the periods presented:
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net patient service revenues
|
87 | % | 87 | % | ||||
Management and contract service revenues
|
12 | 11 | ||||||
Other revenues
|
1 | 2 | ||||||
Total revenues
|
100 | % | 100 | % | ||||
Net patient service revenues consist of the revenues earned by
facilities we consolidate for financial reporting purposes. As a
percent of our total revenues, these revenues remained constant
at 87% of our total revenues for the three months ended
March 31, 2011.
Our management and contract service revenues are earned from the
following types of activities (in thousands):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Management of surgical facilities
|
$ | 14,785 | $ | 12,550 | ||||
Contract services provided to other healthcare providers
|
2,491 | 2,579 | ||||||
Total management and contract service revenues
|
$ | 17,276 | $ | 15,129 | ||||
The following table summarizes our revenues by operating segment:
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
United States
|
81 | % | 81 | % | ||||
United Kingdom
|
19 | 19 | ||||||
Total
|
100 | % | 100 | % | ||||
The proportion of our total revenues derived from U.K.
operations as stated in U.S. dollars remained constant at
19% for the three months ended March 31, 2011 and 2010.
26
Table of Contents
Results
of Operations
The following table summarizes certain consolidated statement of
income items expressed as a percentage of revenues for the
periods indicated:
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
USPI
|
2011 | 2010 | ||||||
Total revenues
|
100.0 | % | 100.0 | % | ||||
Equity in earnings of unconsolidated affiliates
|
12.2 | 10.3 | ||||||
Operating expenses, excluding depreciation and amortization
|
(67.1 | ) | (68.5 | ) | ||||
Depreciation and amortization
|
(5.0 | ) | (5.3 | ) | ||||
Operating income
|
40.1 | 36.5 | ||||||
Interest and other expense, net
|
(11.5 | ) | (12.5 | ) | ||||
Income from continuing operations before income taxes
|
28.6 | 24.0 | ||||||
Income tax expense
|
(6.7 | ) | (5.6 | ) | ||||
Income from continuing operations
|
21.9 | 18.4 | ||||||
Earnings (loss) from discontinued operations, net of tax
|
(0.5 | ) | 0.2 | |||||
Net income
|
21.4 | 18.6 | ||||||
Less: Net income attributable to the noncontrolling interests
|
(10.7 | ) | (9.9 | ) | ||||
Net income attributable to USPIs common stockholder
|
10.7 | % | 8.7 | % | ||||
Our business model of partnering with
not-for-profit
hospitals and physicians results in our accounting for 133 of
our surgical facilities under the equity method rather than
consolidating their results. The following table reflects the
summarized results of the unconsolidated facilities that we
account for under the equity method of accounting (amounts are
expressed as a percentage of unconsolidated affiliates
revenues, and reflect 100% of the investees results on an
aggregated basis):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
USPIs Unconsolidated Affiliates
|
2011 | 2010 | ||||||
Revenues
|
100.0 | % | 100.0 | % | ||||
Operating expenses, excluding depreciation and amortization
|
(71.2 | ) | (71.7 | ) | ||||
Depreciation and amortization
|
(4.5 | ) | (4.4 | ) | ||||
Operating income
|
24.3 | 23.9 | ||||||
Interest expense, net
|
(2.1 | ) | (2.1 | ) | ||||
Other, net
|
| (0.2 | ) | |||||
Income before income taxes
|
22.2 | 21.6 | ||||||
Income tax expense
|
(0.6 | ) | (0.6 | ) | ||||
Net income
|
21.6 | % | 21.0 | % | ||||
Executive
Summary
Our strategy continues to include growing the profits of our
existing facilities, developing new facilities with hospital
partners, and adding other facilities through acquisition. Our
operating results in the first quarter of 2011 reflect 8% same
store facility revenue growth compared to the first quarter of
2010, and our overall business also grew as a result of our
operating 22 more facilities in 2011, largely as a result of
acquisitions made during the second half of 2010. These growth
drivers resulted in a 17% increase in operating income compared
to the first quarter of 2010. During the first quarter of 2011,
we acquired an equity method investment in a diagnostic and
surgery center
27
Table of Contents
in Edinburgh, Scotland and an equity interest in a surgical
facility in the Dallas/Fort Worth area with a local
hospital partner. We opened our newest facility, a surgical
center in the Nashville, Tennessee area in April 2011, also
jointed owned with a local hospital partner and physicians.
While the effect was less pronounced than in recent quarters,
USPIs revenue growth of 7% still was significantly less
than our systemwide revenue growth of 14%, primarily due to our
continuing to add more equity method facilities as compared to
consolidated facilities. Our systemwide revenues include all
facilities that we operate; USPIs revenues only include
consolidated facilities, which represent less than one-third of
our facilities. Accounting for more of our facilities under the
equity method is a direct result of deploying our primary
U.S. business strategy of jointly owning our facilities
with prominent local physicians and often a hospital partner. In
carrying out this strategy during the period from
January 1, 2010 to March 31, 2011, our number of
equity method facilities increased from 109 to 133 while our
consolidated facility count decreased from 60 to 58, largely
driven by our acquisition and disposal activity.
Our net earnings from a facility, whether consolidated or equity
method, are driven by the same factors: the facilitys
underlying profits and revenues and our ownership percentage.
Accordingly, to assess USPIs overall operating results we
often utilize systemwide and same store measures, which include
all facilities. These measures were positive in the first
quarter of 2011, with same store revenues increasing 8% (largely
corresponding to USPIs revenue growth of 7%) and
systemwide revenues increasing 14%, a product of same store
growth and a net increase of 22 facilities since the beginning
of 2010. Facility operating margins also improved compared to
the first quarter of 2010. Overall, these operational factors,
together with acquisition activities, resulted in USPIs
operating income margin increasing to 40.1% for the first
quarter of 2011 compared to 36.5% in the first quarter of 2010.
Our
Business and Key Measures
We operate surgical facilities in partnership with local
physicians and, in the majority of facilities, a
not-for-profit
health system partner. We hold an ownership interest in each
facility, each being operated through a separate legal entity
owned by us, the health systems and physicians. We operate each
facility on a
day-to-day
basis through a management services contract. Our sources of
earnings from each facility consist of:
| our share of each facilitys net income, which is computed by multiplying the facilitys net income times the percentage of each facilitys equity interests owned by us. | |
| management services revenues, computed as a percentage of each facilitys net revenues (often net of bad debt expense); and |
Our role as an owner and
day-to-day
manager provides us with significant influence over the
operations of each facility. In a growing majority of our
facilities (currently 133 of our 191 facilities), this influence
does not represent control of the facility, so we account for
our investment in the facility under the equity method, i.e., as
an unconsolidated affiliate. We control the remaining 58 of our
facilities and account for these investments as consolidated
subsidiaries.
Our net earnings from a facility are the same under either
method, but the classification of those earnings differs. For
consolidated subsidiaries, our financial statements reflect 100%
of the revenues and expenses of the subsidiaries, after the
elimination of intercompany amounts. The net profit attributable
to owners other than us is classified within net income
attributable to noncontrolling interests.
For unconsolidated affiliates, our consolidated statements of
income reflect our earnings in only two line items:
| equity in earnings of unconsolidated affiliates: our share of the net income of each facility, which is based on the facilities net income and the percentage of the facilitys outstanding equity interests owned by us; and | |
| management and administrative services revenues: income we earn in exchange for managing the day-to-day operations of each facility, usually quantified as a percentage of each facilitys net revenues less bad debt expense. |
28
Table of Contents
In summary, USPIs operating income is driven by the
performance of all facilities we operate and by our ownership
interest in those facilities, but USPIs individual revenue
and expense line items only contain consolidated businesses,
which represent less than one-third of our facilities. This
translates to trends in operating income that often do not
correspond with changes in revenues and expenses. The divergence
in these relationships is particularly significant when our
strategy is heavily weighted to unconsolidated affiliates, as it
has been in recent years. Accordingly, we review several types
of information in order to monitor and analyze USPIs
results of operations, including:
| The results of operations of USPIs unconsolidated affiliates | |
| USPIs average ownership share in the facilities we operate; and | |
| Facility operating indicators, such as systemwide revenue growth, same store revenue growth, and same store operating margins |
29
Table of Contents
Our
Consolidated and Unconsolidated Results
The following table shows USPIs results of operations and
the results of operations of USPIs unconsolidated
affiliates (in thousands).
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | Variance to Prior Year | ||||||||||||||||||||||
USPI as |
USPI as |
USPI as |
||||||||||||||||||||||
Reported |
Reported |
Reported |
||||||||||||||||||||||
Under |
Unconsolidated |
Under |
Unconsolidated |
Under |
Unconsolidated |
|||||||||||||||||||
GAAP | Affiliates | GAAP | Affiliates | GAAP | Affiliates | |||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Net patient service revenues
|
$ | 127,666 | $ | 345,692 | $ | 120,448 | $ | 293,292 | $ | 7,218 | $ | 52,400 | ||||||||||||
Management and contract service revenues
|
17,276 | | 15,129 | | 2,147 | | ||||||||||||||||||
Other income
|
2,148 | 2,123 | 2,294 | 1,408 | (146 | ) | 715 | |||||||||||||||||
Total revenues
|
147,090 | 347,815 | 137,871 | 294,700 | 9,219 | 53,115 | ||||||||||||||||||
Equity in earnings of unconsolidated affiliates
|
17,932 | | 14,288 | | 3,644 | | ||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||
Salaries, benefits, and other employee costs
|
39,461 | 84,895 | 37,263 | 72,221 | 2,198 | 12,674 | ||||||||||||||||||
Medical services and supplies
|
24,418 | 79,802 | 24,426 | 69,211 | (8 | ) | 10,591 | |||||||||||||||||
Other operating expenses
|
23,832 | 76,024 | 22,056 | 63,507 | 1,776 | 12,517 | ||||||||||||||||||
General and administrative expenses
|
9,780 | | 8,549 | | 1,231 | | ||||||||||||||||||
Provision for doubtful accounts
|
1,746 | 7,448 | 1,882 | 6,403 | (136 | ) | 1,045 | |||||||||||||||||
Net (gain) loss on deconsolidations, disposals and impairments
|
(499 | ) | (412 | ) | 316 | (40 | ) | (815 | ) | (372 | ) | |||||||||||||
Depreciation and amortization
|
7,328 | 15,478 | 7,303 | 12,979 | 25 | 2,499 | ||||||||||||||||||
Total operating expenses
|
106,066 | 263,235 | 101,795 | 224,281 | 4,271 | 38,954 | ||||||||||||||||||
Operating income
|
58,956 | 84,580 | 50,364 | 70,419 | 8,592 | 14,161 | ||||||||||||||||||
Interest income
|
171 | 99 | 364 | 101 | (193 | ) | (2 | ) | ||||||||||||||||
Interest expense
|
(17,205 | ) | (7,399 | ) | (17,974 | ) | (6,224 | ) | 769 | (1,175 | ) | |||||||||||||
Other
|
72 | (13 | ) | 335 | (488 | ) | (263 | ) | 475 | |||||||||||||||
Total other expense, net
|
(16,962 | ) | (7,313 | ) | (17,275 | ) | (6,611 | ) | 313 | (702 | ) | |||||||||||||
Income before income taxes
|
41,994 | 77,267 | 33,089 | 63,808 | 8,905 | 13,459 | ||||||||||||||||||
Income tax expense
|
(9,868 | ) | (2,115 | ) | (7,647 | ) | (1,813 | ) | (2,221 | ) | (302 | ) | ||||||||||||
Income from continuing operations
|
32,126 | 75,152 | 25,442 | 61,995 | 6,684 | 13,157 | ||||||||||||||||||
Discontinued operations, net of tax
|
(693 | ) | | 204 | | (897 | ) | | ||||||||||||||||
Net income
|
31,433 | $ | 75,152 | 25,646 | $ | 61,995 | 5,787 | $ | 13,157 | |||||||||||||||
Less: Net income attributable to noncontrolling interests
|
(15,712 | ) | (13,635 | ) | (2,077 | ) | ||||||||||||||||||
Net income attributable to USPIs common stockholder
|
$ | 15,721 | $ | 12,011 | $ | 3,710 | ||||||||||||||||||
USPIs equity in earnings of unconsolidated affiliates
|
$ | 17,932 | $ | 14,288 | $ | 3,644 |
30
Table of Contents
The following table provides other information regarding our
unconsolidated affiliates (in thousands):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Long-term debt
|
$ | 376,867 | $ | 295,048 | ||||
USPIs imputed weighted average ownership percentage based
on affiliates pre-tax income(1)
|
23.2 | % | 22.4 | % | ||||
USPIs imputed weighted average ownership percentage based
on affiliates debt(2)
|
23.5 | % | 24.8 | % | ||||
Unconsolidated facilities operated at period end
|
133 | 110 |
(1) | Our weighted average percentage ownership in our unconsolidated affiliates is calculated as USPIs equity in earnings of unconsolidated affiliates divided by the total net income of unconsolidated affiliates for each respective period. This is a non-GAAP measure but management believes it provides further useful information about USPIs involvement in equity method investments. | |
(2) | Our weighted average percentage ownership in our unconsolidated affiliates is calculated as the total debt of each unconsolidated affiliate, multiplied by the percentage ownership USPI held in the affiliate as of the end of each respective period, divided by the total debt of all of the unconsolidated affiliates as of the end of each respective period. This is a non-GAAP measure but management believes it provides further useful information about USPIs involvement in equity method investments. |
As shown above, USPIs revenues for the three months ended
March 31, 2011 increased $9.2 million, or 7% compared
to the prior year period, and the revenues of USPIs
unconsolidated affiliates increased $53.1 million, or 18%.
These variances are analyzed more extensively below under
Revenues, but in general they reflect the fact that
we are conducting more of our operations through unconsolidated
affiliates. Revenues of unconsolidated affiliates, as compared
to March 31, 2010, increased by $21.1 million due to
acquisitions and $28.0 million due to stronger case growth
and higher net revenue per case. As our average ownership level
in our unconsolidated affiliates also increased from the prior
year period, the affiliates increase in net income, once
allocated to USPI and the affiliates other investors, led
to USPIs equity in earnings of unconsolidated affiliates
increasing by $3.6 million, or 26%.
Our
Ownership Interests in the Facilities We Operate
Our earnings are predominantly driven by our investments in the
facilities we operate, so we focus on those businesses
growth rates together with the percentage ownership interest we
hold in them to help us understand our results of operations.
Our average ownership interest in the U.S. surgical
facilities we operate is as follows:
Three Months |
Three Months |
|||||||||||
Ended |
Year Ended |
Ended |
||||||||||
March 31, |
December 31, |
March 31, |
||||||||||
2011 | 2010 | 2010 | ||||||||||
Unconsolidated facilities(1)
|
23.2 | % | 21.7 | % | 22.4 | % | ||||||
Consolidated facilities(2)
|
46.6 | % | 46.7 | % | 44.9 | % | ||||||
Total(3)
|
29.7 | % | 28.2 | % | 28.7 | % |
(1) | Computed for unconsolidated facilities by dividing (a) our total equity in earnings of unconsolidated affiliates by (b) the aggregate net income of U.S. surgical facilities we account for under the equity method. | |
(2) | Computed for consolidated facilities by dividing (a) the aggregate net income of U.S. surgical facilities we operate less our total noncontrolling interests in income of consolidated subsidiaries by (b) the aggregate net income of our consolidated U.S. surgical facilities. | |
(3) | Computed in total by dividing our share of the facilities net income, defined as the sum of (a) in footnotes (1) and (2), by the aggregate net income of our U.S. surgical facilities, defined as the sum of (b) in footnotes (1) and (2). |
31
Table of Contents
Our average ownership interest for each group of facilities is
determined by many factors, including the ownership levels we
negotiate in our acquisition and development activities, the
relative performance of facilities in which we own percentages
higher or lower than average, and other factors. As described
earlier, our increased focus on partnering our facilities with
not-for-profit
health systems in addition to physicians generally leads to our
accounting for more facilities under the equity method
(unconsolidated) as reflected in our number of
U.S. unconsolidated facilities increasing by 23 from
January 1, 2010 to March 31, 2011, while our number of
consolidated facilities decreased by two. We generally have a
lower ownership percentage in an equity method facility as
compared to a consolidated facility.
Revenues
As described above, USPIs reported revenues increased 7%
during the first quarter of 2011 as compared to the prior year
first quarter, and the revenues of USPIs unconsolidated
affiliates increased 18%. The table below quantifies several
significant items impacting year over year change (in thousands).
Three Months Ended |
||||||||
March 31, 2011 | ||||||||
USPI as |
||||||||
Reported Under |
Unconsolidated |
|||||||
GAAP | Affiliates | |||||||
Total revenues, three months ended March 31, 2010
|
$ | 137,871 | $ | 294,700 | ||||
Add: revenue from acquired facilities
|
3,716 | 21,086 | ||||||
Less: revenue of deconsolidated facilities
|
(3,058 | ) | 3,058 | |||||
Impact of exchange rate
|
638 | | ||||||
Adjusted base period
|
139,167 | 318,844 | ||||||
Increase from operations
|
5,358 | 28,000 | ||||||
Other
|
2,565 | 971 | ||||||
Total revenues, three months ended March 31, 2011
|
$ | 147,090 | $ | 347,815 | ||||
As shown above, the most significant sources of revenue growth
were from operational growth. For unconsolidated affiliates,
acquisitions were also a significant source of revenue growth.
Facility
Growth
As described above, our systemwide revenues grew 14% in the
three months ended March 31, 2011 compared to the
corresponding prior year period. This growth is comprised of an
8% increase in the net revenues of our same store facilities,
which are those facilities we operated in both periods, and
revenues of newly acquired facilities.
Same store growth was driven most heavily by an increase in the
average complexity of our cases, which resulted in higher
average revenues per case, and also by a 2% increase in the
number of cases performed at our U.S. facilities. Our U.K.
facilities admissions decreased due largely to fewer referrals
from the National Health Service (NHS), but the overall impact
on revenues was more than offset by a shift to higher-paying
cases.
32
Table of Contents
The following table summarizes our same store facility revenue
year-over-year
increases (decreases), as compared to the three months ended
March 31, 2010:
Three Months |
||||
Ended |
||||
March 31, 2011 | ||||
United States facilities:
|
||||
Net revenue
|
8 | % | ||
Surgical cases
|
2 | % | ||
Net revenue per case(1)
|
6 | % | ||
United Kingdom facilities:
|
||||
Adjusted admissions
|
(4 | )% | ||
Net revenue using actual exchange rates
|
6 | % | ||
Net revenue using constant exchange rates(2)
|
4 | % | ||
All same store facilities:
|
||||
Net revenue using actual exchange rates
|
8 | % |
(1) | Our overall domestic same store growth in net revenue per case for the first quarter of 2011 was favorably impacted by the 9% growth at our thirteen same store surgical hospitals, which on average perform more complex cases and thus earn a higher average net revenue per case than ambulatory surgery centers. The net revenue per case growth at our ambulatory surgery centers was 3% during the first quarter of 2011. | |
(2) | Calculated using 2011 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant currency translation rate more accurately reflects the trend of the business. |
Joint
Ventures With
Not-For-Profit
Hospitals
The addition of new facilities continues to be more heavily
weighted to U.S. surgical facilities with a hospital
partner, both as we initiate joint venture agreements with new
systems and as we add facilities to our existing arrangements.
Facilities have been added to hospital joint ventures through
construction of new facilities (de novos), acquisitions of
facilities and through our contribution of our equity interests
in existing facilities into a hospital joint venture structure,
effectively creating three-way joint ventures by sharing our
ownership in these facilities with a hospital partner while
leaving the existing physician ownership intact.
Consistent with this strategy, our net overall number of
facilities increased by 22 from March 31, 2010 to
March 31, 2011, while the net increase in facilities
partnered with
not-for-profit
hospitals and local physicians increased by 23. All of our
facilities under construction at March 31, 2011 involve a
hospital partner. We continue to explore affiliating more
facilities with hospital partners, especially for facilities in
markets where we already operate other facilities with a
hospital partner but also by reaching agreements with new
partners. The following table summarizes the facilities we
operated as of March 31, 2011 and 2010:
March 31, |
March 31, |
|||||||
2011 | 2010 | |||||||
United States facilities(1):
|
||||||||
With a hospital partner
|
134 | 111 | ||||||
Without a hospital partner
|
52 | 54 | ||||||
Total U.S. facilities
|
186 | 165 | ||||||
United Kingdom facilities
|
5 | 4 | ||||||
Total facilities operated
|
191 | 169 | ||||||
Change from March 31, 2010:
|
||||||||
De novo (newly constructed)
|
1 | |||||||
Acquisition
|
27 | |||||||
Disposals/Mergers(2)
|
(6 | ) | ||||||
Total increase in number of facilities
|
22 | |||||||
(1) | At March 31, 2011, physicians own a portion of all of these facilities. | |
(2) | During 2010, we merged three of our Dallas-area surgery centers into one location. We also sold our ownership interests in a facility in Orlando, Florida; Templeton, California; and Houston, Texas. |
33
Table of Contents
Facility
Operating Margins
Same store U.S. facility operating margins increased
130 basis points for the period from March 31, 2010 to
March 31, 2011. The increase was due to higher case
volumes, more complex cases, and improvement in the management
of operating expenses. Continuing a trend we have experienced in
recent years, the
year-over-year
change in the operating margins of facilities partnered with a
not-for-profit
healthcare system was more favorable than the change experienced
by the facilities that do not have a hospital partner. The
facilities partnered with a health system are, on average,
younger than our other facilities. Younger facilities
margins grow more rapidly on average than more mature
facilities, which generally have higher margins but with less
growth. The pattern of our acquisition and development activity
can also affect this relationship over time.
Our U.K. facilities, which comprise five of our 191 facilities
at March 31, 2011, experienced a decrease in overall
facility margins in the three months ended March 31, 2011
as compared to the prior year period, largely due to the
reduction in NHS business described above.
The following table summarizes the
year-over-year
changes in our same store facility operating margins (see
footnote 1 below):
Three Months |
||||||||
Ended |
Increase |
|||||||
March 31, 2011 | (Decrease) | |||||||
United States facilities:
|
||||||||
With a hospital partner
|
24.7 | % | 150 bps | |||||
Without a hospital partner
|
31.8 | % | 50 bps | |||||
Total U.S. facilities
|
26.0 | % | 130 bps | |||||
United Kingdom facilities(2)
|
23.5 | % | (190) bps |
(1) | Operating margin is calculated as operating income divided by total revenues. This table aggregates all of the same store facilities we operate using 100% of their results. This does not represent the overall margin for USPIs operations in either the U.S. or the U.K. because we have a variety of ownership levels in the facilities we operate, and facilities open for less than a year are excluded from same store calculations. | |
(2) | Calculated using 2011 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant currency translation rate more accurately reflects the trend of the business. In addition, the $1.0 million unfavorable impact of a payment of value-added tax during the first quarter of 2010 has been excluded from U.K. same facility operating margins. |
Three
Months Ended March 31, 2011 Compared to Three Months Ended
March 31, 2010
As discussed more fully in Revenues, our
consolidated revenues increased by $9.2 million, or 6.7%,
to $147.1 million for the three months ended March 31,
2011 from $137.9 million for the three months ended
March 31, 2010. A large portion of the increase,
approximately $5.4 million, was driven by operations
resulting from stronger case growth and higher net revenue per
case. Acquisition and other factors increased consolidated
revenues by $6.3 million, which was offset by a decrease in
consolidated revenues of $3.1 million. The decrease in
consolidated revenues was the result of our selling a portion of
our interest in three facilities, which caused us to
deconsolidate those facilities. Our consolidated revenues were
also favorably impacted by a weaker U.S. dollar as compared
to the British pound, which increased revenues by approximately
$0.6 million.
Equity in earnings of unconsolidated affiliates increased by
$3.6 million, or 25.5% to $17.9 million for the three
months ended March 31, 2011 from $14.3 million for the
three months ended March 31, 2010. This increase in equity
in earnings was driven by same store growth ($1.8 million)
and acquisitions of additional facilities we account for under
the equity method ($1.8 million). The number of facilities
we account for under the equity method increased by 23 from
March 31, 2010 to March 31, 2011.
Operating expenses, excluding depreciation and amortization,
increased by $4.2 million, or 4.5%, to $98.7 million
for the three months ended March 31, 2011 from
$94.5 million for the three months ended March 31,
2010. These expenses grew more slowly than the 6.7% increase in
revenues due in part to leveraging expenses over
34
Table of Contents
increased revenues but also due to a $1.0 million expense
accrued in March 2010 due to the British tax authority reversing
its position on a value-added tax refund awarded to our U.K.
subsidiary in the second quarter of 2009.
Operating income increased $8.6 million, or 17.1%, to
$59.0 million for the three months ended March 31,
2011 from $50.4 million for the three months ended
March 31, 2010, primarily as a result of higher case
volumes, an increase in net revenue per case and better
operating expense management. Operating income, as a percentage
of revenues, increased to 40.1% for the three months ended
March 31, 2011 from 36.5% for the three months ended
March 31, 2010, as a result of the reasons noted above.
Interest expense, net of interest income, decreased
$0.6 million to $17.0 million for the three months
ended March 31, 2011 as compared to $17.6 million for
the three months ended March 31, 2010. The first quarter of
2010 was unfavorably impacted by $0.8 million related to
the value-added tax expense described above.
Provision for income taxes was $9.9 million for the three
months ended March 31, 2011 compared to $7.6 million
for the three months ended March 31, 2010. Our effective
tax rates (based on pretax earnings attributable to USPIs
stockholder) were 38% and 39% for the three months ended
March 31, 2011 and 2010, respectively.
Liquidity
and Capital Resources
Cash
Flows
During the three months ended March 31, 2011, we generated
$41.6 million of cash flows from operating activities as
compared to $38.6 million during the three months ended
March 31, 2010. Cash flows from operating activities
increased $2.9 million, or 7.6%, from the prior year
period, primarily as a result of our growth in earnings being
partially offset by increased federal tax payments. Our federal
tax payments in the first quarter of 2010 were lower due to our
still having significant net operating loss carryforwards to
apply.
During the three months ended March 31, 2011, our net cash
used in investing activities was $13.1 million, consisting
of $4.5 million for net purchases of new businesses and
equity interests, $5.0 million for the purchase of
marketable securities, and $7.0 million used for purchases
of property and equipment. Approximately $2.2 million of
property and equipment purchases were related to ongoing
development projects, including expanding existing facilities
and the remaining $4.8 million represented purchases of
equipment at existing facilities. Net cash used in financing
activities for the three months ended March 31, 2011
totaled $44.2 million and resulted primarily from repaying
the $25.0 million that was outstanding at December 31,
2010 on our revolving line of credit, distributions to
noncontrolling interests of $15.5 million and a net
decrease in cash held on behalf of noncontrolling interests of
$3.7 million.
Cash and cash equivalents were $44.6 million at
March 31, 2011 as compared to $60.3 million at
December 31, 2010, and the net working capital deficit was
$98.1 million at March 31, 2011 as compared to
$100.2 million at December 31, 2010. The overall
negative working capital position at March 31, 2011 and
December 31, 2010 is primarily the result of
$112.5 million and $116.1 million due to affiliates,
respectively, associated with our practice of holding our
unconsolidated facilities cash until these amounts are
distributed to our partners, typically on a monthly or quarterly
basis. As discussed below, we have sufficient availability under
our credit facility, together with our operating cash flows, to
service our obligations.
Debt
We intend to fund our ongoing capital and working capital
requirements through a combination of cash flows from operations
and borrowings under our $85.0 million revolving credit
facility. We believe that funds generated by operations and
funds available under the revolving credit facility will be
sufficient to meet working capital requirements over at least
the next 12 months. However, in the future, we may have to
incur additional debt or issue additional debt or equity
securities from time to time. We may be unable to obtain
sufficient financing on satisfactory terms or at all.
35
Table of Contents
Senior
secured credit facility
The senior secured credit facility (credit facility) provides
for borrowings of up to $615.0 million (with a
$150.0 million accordion feature described below),
consisting of (1) an $85.0 million revolving credit
facility with a maturity of six years, including a
$20.0 million letter of credit
sub-facility,
and a $20.0 million swing-line loan
sub-facility;
and (2) a $530.0 million term loan facility (including
a $100.0 million delayed draw facility) with a maturity of
seven years. We have utilized the availability under the
$530.0 million term loan facility and are making scheduled
quarterly principal payments. The term loans require principal
payments in the amount of $4.3 million per annum in equal
quarterly installments and $0.2 million per quarter with
respect to the delayed draw facility, with the remaining balance
maturing in 2014. No principal payments are required on the
revolving credit facility until its maturity in 2013.
We may request additional tranches of term loans or additional
commitments to the revolving credit facility in an aggregate
amount not exceeding $150.0 million, subject to certain
conditions. Interest rates on the credit facility are based on
LIBOR plus a margin of 2.00% to 2.25%. Additionally, we
currently pay quarterly commitment fees of 0.50% per annum on
the daily-unused commitment of the revolving credit facility. We
also currently pay a quarterly participation fee of 2.13% per
annum related to outstanding letters of credit. At
March 31, 2011, we had $507.1 million of debt
outstanding under the credit facility at a weighted average
interest rate of approximately 3.6%. At March 31, 2011, we
had $83.4 million available for borrowing under the
revolving credit facility, representing the facilitys
$85.0 million capacity, net of $1.6 million of
outstanding letters of credit.
The credit facility is guaranteed by USPI Holdings, Inc. and its
current and future direct and indirect wholly-owned domestic
subsidiaries, subject to certain exceptions, and borrowings
under the credit facility are secured by a first priority
security interest in all real and personal property of these
subsidiaries, as well as a first priority pledge of our capital
stock, the capital stock of each of our wholly owned domestic
subsidiaries and 65% of the capital stock of certain of our
wholly-owned foreign subsidiaries. Additionally, the credit
facility contains various restrictive covenants, including
financial covenants that limit our ability and the ability of
our subsidiaries to borrow money or guarantee other
indebtedness, grant liens, make investments, sell assets, pay
dividends, enter into sale-leaseback transactions or issue and
sell capital stock. We believe we were in compliance with these
covenants as of March 31, 2011.
Senior
subordinated notes
Also in connection with the merger, we issued
$240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes (together, the Notes), all due in
2017. Interest on the Notes is payable on May 1 and November 1
of each year, which commenced on November 1, 2007. All
interest payments on the senior subordinated notes are payable
in cash. The initial interest payment on the toggle notes was
payable in cash. For any interest period after November 1,
2007 through November 1, 2012, we may pay interest on the
toggle notes (i) in cash, (ii) by increasing the
principal amount of the outstanding toggle notes or by issuing
payment-in-kind
notes (PIK Interest) or (iii) by paying interest on half
the principal amount of the toggle notes in cash and half in PIK
Interest. PIK Interest is paid at 10% and cash interest is paid
at
91/4%
per annum. To date, we have paid all interest payments in cash.
At March 31, 2011, we had $437.5 million of Notes
outstanding. The Notes are unsecured senior subordinated
obligations of our company; however, the Notes are guaranteed by
all of our current and future direct and indirect wholly-owned
domestic subsidiaries. Additionally, the Notes contain various
restrictive covenants, including financial covenants that limit
our ability and the ability of our subsidiaries to borrow money
or guarantee other indebtedness, grant liens, make investments,
sell assets, pay dividends, enter into sale-leaseback
transactions or issue and sell capital stock. We believe we were
in compliance with these covenants as of March 31, 2011.
United
Kingdom borrowings
In April 2007, we entered into an amended and restated credit
agreement, which covered our existing overdraft facility and
term loan facility (Term Loan A). This agreement provides a
total overdraft facility of £2.0 million, and an
additional Term Loan B facility of £10 million, which
was drawn in April 2007. In March 2008, we further amended our
U.K. Agreement to provide for a £2.0 million Term Loan
C facility. We borrowed the entire £2.0 million in
March 2008 to acquire property adjacent to one of our hospitals
in London. In June 2009, we renewed our overdraft facility.
Under the renewal, we must pay a commitment fee of 0.5% per
annum on the unused
36
Table of Contents
portion of the overdraft facility each quarter. Excluding
availability on the overdraft facility, no additional borrowings
can be made under the Term Loan A, B or C facilities. At
March 31, 2011, we had approximately
£33.4 million ($53.5 million) outstanding under
the U.K. credit facility at a weighted average interest rate of
approximately 2.4%.
Interest on the borrowings is based on a three-month or
six-month LIBOR, or other rate as the bank may agree, plus a
margin of 1.25% to 1.50%. Quarterly principal payments are
required on the Term Loan A, which began in June 2007, and
approximate $4.8 million in the first and second year,
$6.4 million in the third and fourth year;
$8.0 million in the fifth year, with the remainder due in
the sixth year after the April 2007 closing. The Term Loan B
does not require any principal payments prior to maturity and
matures in 2013. The Term Loan C requires quarterly principal
payments of approximately £0.1 million
($0.2 million), which began in June 2008 and continue
through its maturity date of February 2013 when the final
payment of £0.5 million ($0.8 million) is due.
The borrowings are guaranteed by certain of our subsidiaries in
the United Kingdom with a security interest in various assets,
and a pledge of the capital stock of the U.K. borrowers and the
capital stock of certain guarantor subsidiaries. The Agreement
contains various restrictive covenants, including financial
covenants that limit our ability and the ability of certain U.K.
subsidiaries to borrow money or guarantee other indebtedness,
grant liens on our assets, make investments, use assets as
security in other transactions, pay dividends, enter into leases
or sell assets or capital stock. We believe we were in
compliance with these covenants as of March 31, 2011.
We also have the ability to borrow under a capital asset finance
facility in the U.K. of up to £2.5 million
($4.0 million). We borrowed against the facility in June
2010 and November 2010 and have £1.4 million
($2.2 million) outstanding at March 31, 2011. The
terms of the borrowings require monthly principal and interest
payments over 48 months. We have pledged capital assets as
collateral against these borrowings.
Contractual
Cash Obligations
Our contractual cash obligations as of March 31, 2011 are
summarized as follows:
Payments Due by Period | ||||||||||||||||||||
Within |
Years |
Years |
Beyond |
|||||||||||||||||
Contractual Cash Obligations
|
Total | 1 Year | 2 and 3 | 4 and 5 | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long term debt obligations:
|
||||||||||||||||||||
Senior secured credit facility(1)
|
$ | 507,129 | $ | 5,265 | $ | 10,530 | $ | 491,334 | $ | | ||||||||||
Senior subordinated notes, due 2017(1)
|
240,000 | | | | 240,000 | |||||||||||||||
Senior subordinated toggle notes, due 2017(1)
|
197,515 | | | | 197,515 | |||||||||||||||
U.K. credit facility(1)
|
53,545 | 11,697 | 41,848 | | | |||||||||||||||
Other debt at operating subsidiaries(1)
|
23,248 | 4,584 | 8,694 | 3,663 | 6,307 | |||||||||||||||
Interest on long-term debt obligations(2)
|
306,253 | 60,294 | 118,308 | 80,675 | 46,976 | |||||||||||||||
Capitalized lease obligations(3)
|
40,099 | 5,952 | 9,269 | 5,835 | 19,043 | |||||||||||||||
Operating lease obligations
|
68,883 | 13,653 | 21,205 | 13,370 | 20,655 | |||||||||||||||
Total contractual cash obligations
|
$ | 1,436,672 | $ | 101,445 | $ | 209,854 | $ | 594,877 | $ | 530,496 | ||||||||||
(1) | Scheduled principal payments. | |
(2) | Represents interest due on long-term debt obligations. For variable rate debt, the interest rate is calculated using the March 31, 2011 rates applicable to each debt instrument and also gives effect to the interest rate swaps designated in a cash flow hedging relationship against portions of the U.K. credit facility and the senior secured credit facility in the U.S. | |
(3) | Includes principal and interest. |
37
Table of Contents
Debt
at Operating Subsidiaries
Our operating subsidiaries, many of which have noncontrolling
investors who share in the cash flow of these entities, have
debt consisting primarily of capitalized lease obligations. This
debt is generally non-recourse to USPI, the parent company, and
is generally secured by the assets of those operating entities.
The total amount of these obligations, which was approximately
$45.3 million at March 31, 2011, is included in our
consolidated balance sheet because the borrower or obligated
entity meets the requirements for consolidated financial
reporting. Our average percentage ownership, weighted based on
the individual subsidiarys amount of debt and capitalized
lease obligations, of these consolidated subsidiaries was 45% at
March 31, 2011. Similar to our consolidated facilities, our
unconsolidated facilities have debts, including capitalized
lease obligations, that are generally non-recourse to USPI. With
respect to our unconsolidated facilities, these debts are not
included in our consolidated financial statements. At
March 31, 2011, the total debt on the balance sheets of our
unconsolidated affiliates was approximately $376.9 million.
Our average percentage ownership, weighted based on the
individual affiliates amount of debt, of these
unconsolidated affiliates was 24% at March 31, 2011. USPI
or one of its wholly owned subsidiaries had collectively
guaranteed $32.6 million of the $376.9 million in
total debt of our unconsolidated affiliates as of March 31,
2011. In addition, our unconsolidated affiliates have
obligations under operating leases, of which USPI or a wholly
owned subsidiary had guaranteed $12.6 million as of
March 31, 2011. Of the total $45.2 million of
guarantees related to unconsolidated affiliates, approximately
$8.4 million represents guarantees of obligations of three
facilities which have been sold. We have full recourse to the
buyers with respect to the $8.4 million related to the sold
facilities. Some of the facilities we are currently developing
will be accounted for under the equity method. As these
facilities become operational, they will have debt and lease
obligations.
In connection with our acquisition of equity interests in a
surgery center in 2007, we had the option to purchase additional
ownership in the facility during a specified time period in the
purchase agreement. If we did not exercise the purchase option,
we were required to pay an option termination fee, which was
equal to the lesser of an EBITDA calculation, as specified in
the purchase agreement, or $2.5 million. We elected to
purchase only a portion of the ownership as stated in the
agreement and therefore paid a $1.5 million termination fee
in 2009. The parties agreed to another purchase option that can
be exercised at any time during the 60 day period following
September 30, 2011 or the remaining $1.0 million
option termination fee would be required to be paid.
In addition, our U.K. subsidiary has begun expanding our
Parkside hospital, already our largest facility. Located outside
London in the Wimbledon area, this facilitys expansion is
expected to cost approximately £11.5 million
($18.5 million). The expansion of the outpatient clinic was
completed in August 2010 and the refurbishment of a portion of
the hospital is expected to be completed by the second quarter
of 2011. A £17.0 million ($27.3 million)
refurbishment and extension program has also begun at our Holly
House hospital and is due to be completed by late 2012. This
expansion will provide three new operating rooms, an endoscopy
suite, ten additional patient rooms, an eight bed day unit and
six additional physician offices.
Related
Party Transactions
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in the Company, in the amount of
$0.5 million for the three months ended March 31, 2011
and 2010. Such amounts accrue at an annual rate of
$2.0 million. We pay $1.0 million in cash per year
with the unpaid balance due and payable upon a change in
control. At March 31, 2011, we had approximately
$4.0 million accrued related to such management fee, which
is included in other long-term liabilities in the accompanying
consolidated balance sheet.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows due to
adverse changes in interest rates and other relevant market
risks. Our primary market risk is a change in interest rates
associated with variable-rate borrowings. Historically, we have
not held or issued derivative financial instruments other than
the use of
variable-to-fixed
interest rate swaps for portions of our borrowings under credit
facilities with commercial lenders as required by credit
agreements. We do not use derivative instruments for
38
Table of Contents
speculative purposes. The interest rate swaps serve to stabilize
our cash flow and expense but ultimately may cost more or less
in interest than if we had carried all of our debt at a variable
rate over the swap term.
As further discussed in Note 6 to the accompanying
consolidated financial statements, in order to manage interest
rate risk related to a portion of our variable-rate U.K. debt,
on February 29, 2008, we entered into an interest rate swap
agreement for a notional amount of £20.0 million
($32.1 million). The interest rate swap required us to pay
4.99% and we received interest at a variable rate of three-month
GBP-LIBOR. The interest rate swap matured in March 2011.
We entered into a new interest swap effective March 31,
2011 for a notional amount of £18.0 million
($28.9 million). The interest rate swap requires us to pay
1.45% and to receive interest at a variable rate of three-month
GBP-LIBOR (currently 0.8%), and is reset quarterly. No
collateral is required under the interest rate swap agreement.
The swap matures in June 2012.
Additionally, effective July 24, 2008, in order to manage
interest rate risk related to a portion of our variable-rate
U.S. Term Loan B, we entered into an interest rate swap
agreement for a notional amount of $200.0 million. The
interest rate swap requires us to pay 3.6525% and to receive
interest at a variable rate of three-month USD-LIBOR (0.3% at
March 31, 2011), which is paid and reset on a quarterly
basis. The interest rate swap expires in July 2011. No
collateral is required under the interest rate swap agreement.
As of March 31, 2011, the rate under our swap agreement was
unfavorable compared to the market.
At March 31, 2011, the fair value of U.S. interest
rate swap was a current liability of approximately
$2.1 million. The estimated fair value of the interest rate
swap was determined using a present value model of the
contractual payments. Inputs to the model were based on
prevailing LIBOR market data and incorporate credit data that
measure nonperformance risk. The estimated fair value represents
the theoretical exit cost we would have to pay to transfer the
obligation to a market participant with similar credit risk. The
new U.K. swap had a fair value of zero at inception on
March 31, 2011.
Our financing arrangements with many commercial lenders are
based on the spread over Prime or LIBOR. At March 31, 2011,
$689.7 million of our outstanding debt was in fixed rate
instruments and the remaining $331.1 million was in
variable rate instruments. Accordingly, a hypothetical
100 basis point increase in market interest rates would
result in additional annual expense of approximately
$3.3 million.
Our United Kingdom revenues are a significant portion of our
total revenues. We are exposed to risks associated with
operating internationally, including foreign currency exchange
risk and taxes and regulatory changes. Our United Kingdom
facilities operate in a natural hedge to a large extent because
both expenses and revenues are denominated in the local
currency. Additionally, our borrowings in the United Kingdom are
currently denominated in the local currency. Historically, the
cash generated from our operations in the United Kingdom has
been utilized within that country to finance development and
acquisition activity as well as for repayment of debt
denominated in the local currency. Accordingly, we have not
generally utilized financial instruments to hedge our foreign
currency exchange risk.
ITEM 4. | Controls and Procedures |
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined by applicable SEC
rules) as of the end of the period covered by this Quarterly
Report on
Form 10-Q.
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of
such period, the Companys disclosure controls and
procedures are effective in bringing to their attention on a
timely basis material information relating to the Company
(including its consolidated subsidiaries) required to be
included in the Companys periodic filings with the SEC.
There have been no significant changes in the Companys
internal controls over financial reporting (as defined by
applicable SEC rules) that occurred during the Companys
fiscal quarter ended March 31, 2011 that have materially
affected or are reasonably likely to materially affect the
Companys internal controls over financial reporting.
39
Table of Contents
PART II
OTHER INFORMATION
ITEM 1. | Legal Proceedings |
From time to time the Company may be named as a party to legal
claims and proceedings in the ordinary course of business. The
Companys management is not aware of any claims or
proceedings that might have a material adverse impact on the
Company.
ITEM 6. | Exhibits |
3 | .1 | Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
3 | .2 | Amended and Restated Bylaws (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
4 | .1 | Indenture governing 87/8% Senior Subordinated Notes due 2017 and 91/4%/10% Senior Subordinated Toggle Notes due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
4 | .2 | Form of 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
31 | .1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1* | Certification of Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |
40
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
United Surgical Partners International, Inc.
By: |
/s/ Mark
A. Kopser
|
Mark A. Kopser
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 3, 2011
By: |
/s/ J.
Anthony Martin
|
J. Anthony Martin
Vice President, Corporate Controller,
and Chief Accounting Officer
(Principal Accounting Officer)
41
Table of Contents
Exhibit Index
3 | .1 | Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
3 | .2 | Amended and Restated Bylaws (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
4 | .1 | Indenture governing 87/8% Senior Subordinated Notes due 2017 and 91/4%/10% Senior Subordinated Toggle Notes due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
4 | .2 | Form of 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Companys Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference) | ||
31 | .1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1* | Certification of Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |