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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

 

¨	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: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE		20-1150104
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE		37067
(Address of principal executive offices)		(Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨    NO  x

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		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  ¨    NO  x

As of May 15, 2015, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 

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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures about Market Risk			51
Item 4. Controls and Procedures			52
PART II. OTHER INFORMATION			52
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			53
Item 6. Exhibits			53
Signatures			54

 

 

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PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

		March 31, 2015				September 30, 2014
		(Unaudited )				(Restated)
ASSETS
Current assets
Cash and cash equivalents		$	326,580			$	341,180
Accounts receivable, net			331,635				305,654
Inventories			58,333				57,632
Deferred income taxes			667				1,987
Prepaid expenses and other current assets			258,670				216,563
Assets held for sale			—				50,151
Total current assets			975,885				973,167
Property and equipment, net			838,733				826,478
Goodwill			817,933				814,498
Other intangible assets, net			21,691				23,331
Other assets, net			60,472				62,362
Total assets		$	2,714,714			$	2,699,836
LIABILITIES AND EQUITY
Current liabilities
Accounts payable		$	111,527			$	128,359
Salaries and benefits payable			73,013				71,121
Accrued interest payable			28,791				28,820
Medical claims payable			97,213				79,449
Other accrued expenses and current liabilities			91,679				73,491
Current portion of long-term debt, capital leases and other obligations			12,033				12,690
Liabilities held for sale			—				9,171
Total current liabilities			414,256				403,101
Long-term debt, capital leases and other obligations			1,835,809				1,841,110
Deferred income taxes			108,553				100,499
Other long-term liabilities			116,184				117,289
Non-controlling interests with redemption rights			108,060				108,156
Equity
Member’s equity			123,441				120,005
Non-controlling interests			8,411				9,676
Total equity			131,852				129,681
Total liabilities and equity		$	2,714,714			$	2,699,836

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Revenues
Acute care revenue before provision for bad debts		$	551,590			$	544,203			$	1,105,506			$	1,082,077
Less: Provision for bad debts			(80,726	)			(89,416	)			(170,078	)			(183,119	)
Acute care revenue			470,864				454,787				935,428				898,958
Premium and service revenues			225,963				172,995				430,937				324,714
Total revenue			696,827				627,782				1,366,365				1,223,672
Costs and expenses
Salaries and benefits (includes stock-based compensation of $1,841, $3,493, $3,706 and $4,354, respectively)			237,268				228,742				468,199				443,008
Supplies			80,140				75,520				160,191				152,312
Medical claims			176,059				144,991				352,031				270,811
Rentals and leases			19,088				17,793				37,797				36,246
Other operating expenses			113,746				100,691				226,967				201,248
Medicare and Medicaid EHR incentives			(2,235	)			(3,075	)			(5,650	)			(6,353	)
Interest expense, net			31,854				32,887				64,217				66,031
Depreciation and amortization			21,555				21,504				44,186				47,226
Management fees			1,250				1,250				2,500				2,500
Total costs and expenses			678,725				620,303				1,350,438				1,213,029
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes			18,102				7,479				15,927				10,643
Gain (loss) on disposal of assets, net			394				(476	)			(454	)			766
Earnings from continuing operations before income taxes			18,496				7,003				15,473				11,409
Income tax expense			9,747				3,772				7,093				6,249
Net earnings from continuing operations			8,749				3,231				8,380				5,160
Earnings (loss) from discontinued operations, net of income taxes			(1,806	)			(6,648	)			(3,306	)			413
Net earnings (loss)			6,943				(3,417	)			5,074				5,573
Net earnings attributable to non-controlling interests			(2,763	)			(2,616	)			(5,050	)			(6,404	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	4,180			$	(6,033	)		$	24			$	(831	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Net earnings (loss)		$	6,943			$	(3,417	)		$	5,074			$	5,573
Other comprehensive income
Change in fair value of highly effective interest rate hedges			339				554				745				978
Other comprehensive income before income taxes			339				554				745				978
Change in income tax expense			(124	)			(206	)			(273	)			(363	)
Other comprehensive income, net of income taxes			215				348				472				615
Comprehensive income (loss)			7,158				(3,069	)			5,546				6,188
Net earnings attributable to non-controlling interests			(2,763	)			(2,616	)			(5,050	)			(6,404	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	4,395			$	(5,685	)		$	496			$	(216	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

		Non-controlling Interests with Redemption Rights						Member’s Equity				Non- controlling Interests				Total Equity
Balance at October 1, 2014 (Restated)		$	108,156					$	120,005			$	9,676				129,681
Net earnings (loss)			5,061						24				(11	)			13
Distributions to non-controlling interests			(4,438	)					—				—				—
Repurchase of non-controlling interests			(423	)					659				(1,254	)			(595	)
Stock-based compensation			—						3,706				—				3,706
Other comprehensive income			—						472				—				472
Other			(1,721	)					—				—				—
Adjustment to redemption value of non-controlling interests with redemption rights			1,425						(1,425	)			—				(1,425	)
Balance at March 31, 2015		$	108,060					$	123,441			$	8,411			$	131,852

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

		Six Months Ended March 31,
		2015				2014
Cash flows from operating activities
Net earnings		$	5,074			$	5,573
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			44,186				47,226
Amortization of loan costs			3,942				3,706
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			(1,248	)
Change in physician minimum revenue guarantees			1,871				1,196
Stock-based compensation			3,706				4,354
Deferred income taxes			7,967				5,322
Loss (gain) on disposal of assets, net			454				(766	)
Loss (earnings) from discontinued operations, net			3,306				(413	)
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			(27,323	)			(20,631	)
Inventories, prepaid expenses and other current assets			(42,615	)			(44,205	)
Accounts payable, other accrued expenses and other accrued liabilities			18,623				(3,004	)
Income taxes and other transaction costs payable related to sale-leaseback of real estate			—				(22,270	)
Net cash provided by (used in) operating activities — continuing operations			17,943				(25,160	)
Net cash used in operating activities — discontinued operations			(755	)			(7,794	)
Net cash provided by (used in) operating activities			17,188				(32,954	)
Cash flows from investing activities
Purchases of property and equipment			(56,281	)			(39,363	)
Cash received (paid) for acquisitions, net			37,464				(1,038	)
Cash paid in sale-leaseback of real estate			—				(3,025	)
Proceeds from sale of assets			337				1,505
Change in other assets, net			(797	)			(934	)
Net cash used in investing activities — continuing operations			(19,277	)			(42,855	)
Net cash used in investing activities— discontinued operations			(341	)			(2,410	)
Net cash used in investing activities			(19,618	)			(45,265	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other obligations			(6,708	)			(6,759	)
Distributions to non-controlling interests			(4,438	)			(11,046	)
Cash paid for the repurchase of non-controlling interests			(1,018	)			(405	)
Net cash used in financing activities — continuing operations			(12,164	)			(18,210	)
Net cash used in financing activities — discontinued operations			(6	)			(92	)
Net cash used in financing activities			(12,170	)			(18,302	)
Change in cash and cash equivalents			(14,600	)			(96,521	)
Cash and cash equivalents at beginning of period			341,180				438,131
Cash and cash equivalents at end of period		$	326,580			$	341,610
Supplemental disclosure of cash flow information:
Cash paid for interest		$	61,991			$	62,360
Cash paid for income taxes, net		$	12,366			$	35,265

See accompanying notes.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements as of and for the quarters and six months ended March 31, 2015 and 2014, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS provides high quality affordable healthcare services primarily in higher growth markets. At March 31, 2015, the Company owned or leased 15 acute care hospital facilities and one behavioral health hospital facility, with a total of 3,604 licensed beds, several outpatient service facilities and 144 physician clinics.

IASIS’ continuing operations are in various regions including:

 

•

Salt Lake City, Utah;

 

•

Phoenix, Arizona;

 

•

five cities in Texas, including Houston and San Antonio; and

 

•

West Monroe, Louisiana.

The Company also owns and operates Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), a managed care organization and insurer that delivers healthcare services to more than 374,000 members through multiple health plans, accountable care networks and managed care solutions. The Plan is headquartered in Phoenix, Arizona, with offices in Tampa, Florida and Salt Lake City, Utah.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2014, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 15, 2015.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in most instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

Reclassifications

As a result of discontinued operations, certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on the Company’s total assets or total liabilities and equity.

 

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General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs (excluding stock-based compensation costs), which were $12.9 million and $16.1 million for the quarters ended March 31, 2015 and 2014, respectively, and $27.5 million and $28.3 million for the six months ended March 31, 2015 and 2014, respectively.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in U.S. Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

As discussed in Note 3, cash generated from certain asset dispositions may be subject to prepayment requirements under our senior credit agreement and indenture.

Stock-Based Compensation

Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IAS, grants stock options for a fixed number of common shares and restricted stock units (“RSUs”) to its employees. The Company accounts for these stock-based incentive awards under the measurement and recognition provisions of Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation (“ASC 718”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options and RSUs, to be measured based on the grant-date fair value of the awards, with the resulting expense recognized in the income statement. In accordance with the provisions of ASC 718, the Company uses the Black-Scholes-Merton valuation model in determining the fair value of its share-based payments. Compensation cost for time-vested options and RSUs will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while compensation cost for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest, medical claims payable, and other accrued expenses and current liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital leases and other long-term financing obligations also approximate their carrying value as they bear interest at current market rates.

The carrying value and fair value of the Company’s senior secured term loan facility and its 8.375% senior notes due 2019 (the “Senior Notes”) as of March 31, 2015 and September 30, 2014, were as follows (in thousands):

 

		Carrying Amount								Fair Value
		March 31, 2015				September 30, 2014				March 31, 2015				September 30, 2014
Senior secured term loan facility		$	982,146			$	986,815			$	988,715			$	987,589
Senior Notes			846,763				846,479				890,270				893,563

The estimated fair value of the Company’s senior secured term loan facility and its Senior Notes were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.

The Company determines the fair value of its interest rate hedges in a manner consistent with that used by market participants in pricing hedging instruments, which includes using a discounted cash flow analysis based upon the terms of the agreements, the impact of the forward LIBOR curve and an evaluation of credit risk. Given the use of observable market assumptions and the consideration of credit risk, the Company has categorized the valuation of its interest rate hedges as Level 2.

 

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Discontinued Operations

The following table provides the components of discontinued operations (in thousands):

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Acute care revenue less provision for bad debts		$	6,691			$	11,486			$	29,863			$	22,874
Earnings (loss) before income taxes			(4,717	)			(10,297	)			(6,873	)			1,053
Income tax benefit (expense) from discontinued operations			2,911				3,599				3,567				(640	)
Earnings (loss) from discontinued operations, net of income tax		$	(1,806	)		$	(6,648	)		$	(3,306	)		$	413

Effective October 1, 2013, the Company completed the sale of its Florida operations which primarily included three hospitals in the Tampa-St. Petersburg area and all related physician operations. Accordingly, the operating results and cash flows of the Florida operations are reported as discontinued operations for all periods presented. The aggregate proceeds from the sale were $144.8 million, which resulted in a gain on the sale of assets totaling $22.2 million during the quarter ended December 31, 2013. This gain was included in discontinued operations for the quarter ended December 31, 2013.

On September 26, 2014, the Company approved and committed to a plan to dispose of its Nevada operations, which included one hospital in the Las Vegas area and all related physician operations. Accordingly, the operating results and cash flows of the Nevada operations are reported as discontinued operations for all periods presented. The sale of the Company’s Nevada operations closed January 22, 2015. A loss totaling $7.9 million related to the fair value of long-lived assets was recognized on the sale of the Company’s Nevada operations, of which $7.5 million was recognized in the fourth quarter of September 30, 2014. Proceeds received from the sale were $41.8 million, and are subject to a final working capital settlement at a future date.

Recent Accounting Pronouncements

Recently Issued

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). Among other provisions and in addition to expanded disclosures, ASU 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-08 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period. The provisions of ASU 2014-08 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The Company has not yet adopted ASU 2014-08.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.

In February 2015, the FASB issued ASU 2015-2, “Consolidation” (“ASU 2015-2”). ASU 2015-2 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB ASC. The provisions of ASU 2015-2 are effective for annual periods beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2015-2 will have on its financial position, results of operation, cash flows and financial disclosures.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company has not yet adopted ASU 2015-03.

1A. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

The Company has restated its consolidated financial statements for the fiscal year ended September 30, 2014. The determination to restate its consolidated financial statements for the fiscal year ended September 30, 2014 occurred after Company management, through an internal review of the program settlement process as described below identified certain errors made by a former managed care division finance employee. Subject to restatement were the Company’s consolidated balance sheet as of September 30, 2014, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for the fiscal year ended September 30, 2014, and affected footnotes. This restatement corrected errors for the fiscal year ended September 30, 2014 in the accounting for estimated program settlement amounts (the “program settlements”) for one of the Company’s managed Medicaid plans, and corrected certain other errors determined to be immaterial individually and in the aggregate to the consolidated financial statements.

Estimates of future program settlements are calculated and recorded based on projected and known premium revenue, medical claims and member eligibility. The program settlement reconciliation process typically occurs in the 18 months post-plan year, when actual (rather than projected) medical claims and member eligibility information is fully available and a net settlement amount is either due to or from the state. During the fiscal year ended September 30, 2014, the Company’s revenue and receivables associated with these program settlements were overstated. These errors did not involve any cash payments, as actual program settlements are not paid until the end of the reconciliation process.

The impact of the correction of errors on the affected line items of the Company’s consolidated balance sheet as of September 30, 2014 is set forth below (in thousands):

Consolidated Balance Sheet

as of September 30, 2014

 

		As Previously Reported				Adjustments				As Restated
Deferred income taxes, current assets		$	2,523			$	(536	)		$	1,987
Prepaid expenses and other current assets			235,155				(18,592	)			216,563
Total current assets			992,295				(19,128	)			973,167
Total assets			2,718,964				(19,128	)			2,699,836
Accounts payable			127,953				406				128,359
Other accrued expenses and current liabilities			73,497				(4	)			73,491
Total current liabilities			402,701				400				403,101
Deferred income taxes, noncurrent liabilities			100,868				(369	)			100,499
Member’s equity			139,164				(19,159	)			120,005
Total equity			148,840				(19,159	)			129,681
Total liabilities and equity			2,718,964				(19,128	)			2,699,836

2. REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue and Accounts Receivable

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs (Medicare, Medicaid and TRICARE), managed care health plans, including Medicare and Medicaid managed health plans,

 

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commercial insurance companies and employers under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts, as well as co-insurance and deductible balances due from insured patients, to reflect its self-pay accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before its provision for bad debts are summarized as follows:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Medicare			20.5	%			20.9	%			19.8	%			20.2	%
Managed Medicare			10.1				10.2				10.1				10.2
Medicaid and managed Medicaid			12.8				12.9				12.7				12.3
Managed care and other			41.3				39.0				41.9				39.7
Self-pay			15.3				17.0				15.5				17.6
Total			100.0	%			100.0	%			100.0	%			100.0	%

Allowance For Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines; therefore, charity care accounts are deducted from gross revenue and are not included in the provision for bad debts.

The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of related collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a regular basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

 

•

Cash collections as a percentage of net patient revenue less bad debts;

 

•

Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

 

•

Revenue and volume trends by payor, particularly the self-pay components;

 

•

Trending of days revenue in accounts receivable;

 

•

Various allowance coverage statistics; and

 

•

Historical write-off and collection experience using a hindsight or look-back approach.

The Company performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of the process for estimating the allowance for doubtful accounts.

At March 31, 2015 and September 30, 2014, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $263.7 million and $264.6 million, respectively. At March 31, 2015 and September 30, 2014, the Company’s allowance for doubtful accounts was $200.2 million and $207.4 million, respectively.

 

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Premium and Service Revenues

Health Choice is the Company’s managed care organization and insurer that serves health plan enrollees in Arizona and Utah. The Plan derives most of its revenue through a contract in Arizona with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program.

Effective October 1, 2013, Health Choice entered into a contract with AHCCCS with an initial term of three years, and two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

Health Choice also provides coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) provider pursuant to a contract with the Centers for Medicare and Medicaid Services (“CMS”). The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Health Choice’s contract with CMS has been extended through December 31, 2015.

In Arizona and surrounding states, the Plan subcontracts with hospitals, physicians and other medical providers to provide services to its Medicaid and Medicare enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, regardless of the actual costs incurred to provide these services.

The Plan’s contracts require the arrangement of healthcare services for enrolled patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim, depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period.

On March 10, 2014, Health Choice entered into a contract with a large national insurer to serve as a management services organization (“MSO”) to Medicaid enrollees in two separate geographic areas in the state of Florida. Under this contract, which covers 93,700 Medicaid enrollees, Health Choice receives an administrative fee based upon the number of members served.

The sources of Health Choice’s premium and service revenues by major product line are summarized as follow:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Medicaid and Medicaid MSO			84.6	%			87.2	%			85.0	%			88.1	%
MAPD SNP			13.4				12.4				13.7				11.7
Other			2.0				0.4				1.3				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%

 

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3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt, capital leases and other obligations consists of the following (in thousands):

 

		March 31, 2015				September 30, 2014
Senior secured term loan facility		$	982,146			$	986,815
Senior Notes			846,763				846,479
Capital leases and other obligations			18,933				20,506
			1,847,842				1,853,800
Less current maturities			12,033				12,690
		$	1,835,809			$	1,841,110

As of March 31, 2015 and September 30, 2014, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $2.3 million and $2.6 million, respectively, which is net of accumulated amortization of $2.9 million and $2.5 million, respectively. The Senior Notes balance reflects an OID of $3.1 million and $3.5 million, respectively, which is net of accumulated amortization of $3.0 million and $2.6 million, respectively.

As of March 31, 2015 and September 30, 2014, capital leases and other obligations includes a financing obligation totaling $10.1 million and $10.4 million, respectively, resulting from the Company’s sale-leaseback transactions.

$1.325 Billion Senior Secured Credit Facilities

The Company is party to a senior credit agreement (the “Amended and Restated Credit Agreement”) for which IAS and certain of the Company’s subsidiaries serve as guarantors. The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility maturing in May 2018 and (2) a $300.0 million senior secured revolving credit facility maturing in May 2016, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date, February 20, 2013, of a repricing amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require installment payments prior to maturity.

Borrowings under the senior secured term loan facility (giving effect to a repricing amendment) bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at the Company’s option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the Credit Facility Guarantors, (2) mortgage liens on all of the Company’s material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The

 

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Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”), issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries.

On October 31, 2014, the Issuers completed an asset purchase offer for up to $210.0 million aggregate principal amount of the outstanding Senior Notes. The Issuers were required to make the offer to purchase under the terms of the Indenture governing the Senior Notes using excess proceeds from certain asset dispositions. The offer to purchase was made at 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, to but excluding the redemption date. Holders validly tendered $0.1 million in aggregate principal amount of the Senior Notes, all of which were accepted by the Issuers. The Company made payment to settle all validly tendered Senior Notes on November 6, 2014. At March 31, 2015, the outstanding principal balance of the Senior Notes was $849.9 million.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes, in whole or in part, at any time on or after May 15, 2015, at a price equal to 104.188% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date. Each subsequent year the redemption price declines 2.093 percentage points until 2017, and thereafter, at which point the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

4. INTEREST RATE SWAPS

In August 2011, the Company executed forward starting interest rate swaps with Citibank N.A. and Barclays Bank PLC, as counterparties, with notional amounts totaling $350.0 million, with each agreement effective March 28, 2013 and expiring between September 30, 2014 and September 30, 2016. On September 30, 2014, interest rate swaps with notional amounts totaling $50.0 million at a rate of 1.6% expired under the terms of the related agreement. Under the remaining agreements, the Company is required to make quarterly fixed rate payments at annual rates ranging from 1.9% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to the Company based on the three-month LIBOR rate, each subject to a floor of 1.25%. The Company completed an assessment of these cash flow hedges during the quarters and six months ended March 31, 2015 and 2014, and determined that these hedges were highly effective. Accordingly, no gain or loss related to these hedges has been reflected in the accompanying condensed consolidated statements of operations, and the change in fair value has been included in accumulated other comprehensive loss as a component of member’s equity. The outstanding interest rate swaps at March 31, 2015 are as follows:

 

		Total Notional Amounts
Effective Dates		(in thousands)
Effective from March 28, 2013 to September 30, 2015		$	100,000
Effective from March 28, 2013 to September 30, 2016			200,000

 

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The fair value of the Company’s interest rate hedges at March 31, 2015 and September 30, 2014, reflect liability balances of $3.1 million and $3.9 million, respectively, and are included in other long-term liabilities in the accompanying condensed consolidated balance sheets. The fair value of the Company’s interest rate hedges reflects a liability because the effect of the forward LIBOR curve on future interest payments results in less interest due to the Company under the variable rate component included in the interest rate hedging agreements, as compared to the amount due the Company’s counterparties under the fixed interest rate component.

5. GOODWILL

The following table presents the changes in the carrying amount of goodwill (in thousands):

 

		Acute Care				Health Choice				Total
Balance at September 30, 2014		$	808,741			$	5,757			$	814,498
Adjustments related to acquisitions			3,435				—				3,435
Balance at March 31, 2015		$	812,176			$	5,757			$	817,933

6. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):

 

		March 31, 2015				September 30, 2014
Fair value of interest rate hedges		$	(3,150	)		$	(3,895	)
Income tax benefit			1,278				1,551
Accumulated other comprehensive loss		$	(1,872	)		$	(2,344	)

7. INCOME TAXES

For the quarter ended March 31, 2015, the Company recorded income tax expense of $9.7 million, resulting in an effective tax rate of 52.7%, compared to $3.8 million, for an effective tax rate of 53.9% in the prior year quarter. For the six months ended March 31, 2015, the Company recorded income tax expense of $7.1 million, for an effective tax rate of 45.8%, compared to $6.2 million, for an effective tax rate of 54.8% in the prior year period. The decrease in rate is primarily attributable to the following: (1) a decrease in compensation deduction limitations applicable to certain health insurers, which were recorded in the prior year period but to which the Company is no longer subject in the current or prior year after final regulations issued during September 2014, and (2) the increase in net earnings from continuing operations, which reduced the rate impact of state income taxes including the Texas margins tax. These decreases were partially offset by the following increases to the rate: (1) the HIF imposed by the Health Reform Law beginning in 2014, which is treated as a nondeductible excise tax, and (2) the lower ratio of net earnings from non-controlling interests to net earnings from continuing operations, as compared to the prior year period.

8. COMMITMENTS AND CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, including supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

 

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Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At March 31, 2015 and September 30, 2014, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $66.9 million and $66.5 million, respectively, with the current portion totaling $13.3 million during both respective periods.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of March 31, 2015, the Company has provided performance guaranties in the form of a letter of credit totaling $57.5 million for the benefit of AHCCCS and a demand note totaling $12.0 million for the benefit of CMS to support its obligations under the Health Choice contracts to provide and pay for the healthcare services. The amount of these performance guaranties are generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

        In November 2010, the U.S. Department of Justice (“DOJ”) sent a letter to IAS requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by the Company’s hospitals in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) between January 1, 2003 and November 30, 2010. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. The Company subsequently learned that the DOJ was conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and was seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, IAS entered into the tolling agreement with the DOJ and, subsequently, the DOJ provided the Company with a list of 194 procedures between October 1, 2003 and November 30, 2010, involving ICDs at 14 of its hospitals which are the subject of further medical necessity review by the DOJ. The Company’s outside counsel has submitted to the DOJ summary justifications and supporting evidence relating to the medical claims at seven of the Company’s hospitals. The Company is cooperating fully with the government and, to date, the DOJ has not asserted any claim against its hospitals. On August 31, 2012 the DOJ issued a nationwide proposed framework for resolving the DOJ’s review of the ICD claims. The Company continues to review the claims applying the resolution model proposed by the DOJ. The Company believes that at least 131 of these procedure claims were properly documented and comply with the Medicare coverage criteria and billed appropriately. The Company continues to provide support for the remaining 63 of these cases that could have some likelihood of enforcement by the DOJ. If the Company is unable to place these claims in a non-enforcement or lesser enforcement category, the government may require repayment, which could impose a multiplier. Given the case-specific nature of the claims and the DOJ’s discretion to compromise claims, the Company is unable at this time to estimate any potential repayment obligation related to this matter. The tolling agreement extends through July 31, 2015.

The Company has settled with CMS all matters related to its voluntary self-disclosure with respect to non-compliance by certain of its affiliated hospitals, owned in part with physicians, with respect to an aspect of the Stark Law’s “whole hospital” exception. Apart from payment that is immaterial to the Company, which has been made, the settlement entered into with respect to this matter does not place restrictions or conditions on the operations of the applicable hospitals.

 

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9. SEGMENT INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

 

		For the Quarter Ended March 31, 2015
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	551,590			$	—			$	—			$	551,590
Less: Provision for bad debts			(80,726	)			—				—				(80,726	)
Acute care revenue			470,864				—				—				470,864
Premium and service revenues			—				225,963				—				225,963
Revenue between segments			3,894				—				(3,894	)			—
Total revenue			474,758				225,963				(3,894	)			696,827
Salaries and benefits (excludes stock-based compensation)			221,051				14,376				—				235,427
Supplies			79,993				147				—				80,140
Medical claims			—				179,953				(3,894	)			176,059
Rentals and leases			18,391				697				—				19,088
Other operating expenses			96,680				17,066				—				113,746
Medicare and Medicaid EHR incentives			(2,235	)			—				—				(2,235	)
Adjusted EBITDA(1)			60,878				13,724				—				74,602
Interest expense, net			31,854				—				—				31,854
Depreciation and amortization			20,481				1,074				—				21,555
Stock-based compensation			1,841				—				—				1,841
Management fees			1,250				—				—				1,250
Earnings from continuing operations before gain on disposal of assets and income taxes			5,452				12,650				—				18,102
Gain on disposal of assets, net			394				—				—				394
Earnings from continuing operations before income taxes		$	5,846			$	12,650			$	—			$	18,496

 

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		For the Quarter Ended March 31, 2014
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	544,203			$	—			$	—			$	544,203
Less: Provision for bad debts			(89,416	)			—				—				(89,416	)
Acute care revenue			454,787				—				—				454,787
Premium and service revenues			—				172,995				—				172,995
Revenue between segments			3,069				—				(3,069	)			—
Total revenue			457,856				172,995				(3,069	)			627,782
Salaries and benefits (excludes stock-based compensation)			217,559				7,690				—				225,249
Supplies			75,476				44				—				75,520
Medical claims			—				148,060				(3,069	)			144,991
Rentals and leases			17,439				354				—				17,793
Other operating expenses			92,893				7,798				—				100,691
Medicare and Medicaid EHR incentives			(3,075	)			—				—				(3,075	)
Adjusted EBITDA(1)			57,564				9,049				—				66,613
Interest expense, net			32,887				—				—				32,887
Depreciation and amortization			20,456				1,048				—				21,504
Stock-based compensation			3,493				—				—				3,493
Management fees			1,250				—				—				1,250
Earnings (loss) from continuing operations before loss on disposal of assets and income taxes			(522	)			8,001				—				7,479
Loss on disposal of assets, net			(476	)			—				—				(476	)
Earnings (loss) from continuing operations before income taxes		$	(998	)		$	8,001			$	—			$	7,003

 

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		For the Six Months Ended March 31, 2015
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,105,506			$	—			$	—			$	1,105,506
Less: Provision for bad debts			(170,078	)			—				—				(170,078	)
Acute care revenue			935,428				—				—				935,428
Premium and service revenues			—				430,937				—				430,937
Revenue between segments			7,836				—				(7,836	)			—
Total revenue			943,264				430,937				(7,836	)			1,366,365
Salaries and benefits (excludes stock-based compensation)			437,460				27,033				—				464,493
Supplies			159,889				302				—				160,191
Medical claims			—				359,867				(7,836	)			352,031
Rentals and leases			36,357				1,440				—				37,797
Other operating expenses			196,938				30,029				—				226,967
Medicare and Medicaid EHR incentives			(5,650	)			—				—				(5,650	)
Adjusted EBITDA(1)			118,270				12,266				—				130,536
Interest expense, net			64,217				—				—				64,217
Depreciation and amortization			42,084				2,102				—				44,186
Stock-based compensation			3,706				—				—				3,706
Management fees			2,500				—				—				2,500
Earnings from continuing operations before loss on disposal of assets and income taxes			5,763				10,164				—				15,927
Loss on disposal of assets, net			(454	)			—				—				(454	)
Earnings from continuing operations before income taxes		$	5,309			$	10,164			$	—			$	15,473
Segment assets		$	2,327,624			$	387,090							$	2,714,714
Capital expenditures		$	54,639			$	1,642							$	56,281
Goodwill		$	812,176			$	5,757							$	817,933

 

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		For the Six Months Ended March 31, 2014
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,082,077			$	—			$	—			$	1,082,077
Less: Provision for bad debts			(183,119	)			—				—				(183,119	)
Acute care revenue			898,958				—				—				898,958
Premium and service revenues			—				324,714				—				324,714
Revenue between segments			5,277				—				(5,277	)			—
Total revenue			904,235				324,714				(5,277	)			1,223,672
Salaries and benefits (excludes stock-based compensation)			423,923				14,731				—				438,654
Supplies			152,209				103				—				152,312
Medical claims			—				276,088				(5,277	)			270,811
Rentals and leases			35,529				717				—				36,246
Other operating expenses			185,864				15,384				—				201,248
Medicare and Medicaid EHR incentives			(6,353	)			—				—				(6,353	)
Adjusted EBITDA(1)			113,063				17,691				—				130,754
Interest expense, net			66,031				—				—				66,031
Depreciation and amortization			45,121				2,105				—				47,226
Stock-based compensation			4,354				—				—				4,354
Management fees			2,500				—				—				2,500
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(4,943	)			15,586				—				10,643
Gain on disposal of assets, net			766				—				—				766
Earnings (loss) from continuing operations before income taxes		$	(4,177	)		$	15,586			$	—			$	11,409
Segment assets		$	2,340,919			$	330,577							$	2,671,496
Capital expenditures		$	38,872			$	491							$	39,363
Goodwill		$	809,828			$	5,757							$	815,585

 

(1)

Adjusted EBITDA represents net earnings from continuing operations before net interest expense, income tax expense, depreciation and amortization, stock-based compensation, net gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s Senior Secured Credit Facilities and may not be comparable to similarly titled measures of other companies.

 

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10. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s 100% owned existing domestic subsidiaries, other than non-guarantor subsidiaries, which include Health Choice and the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized condensed consolidating balance sheets at March 31, 2015 and September 30, 2014, condensed consolidating statements of operations for the quarters and six months ended March 31, 2015 and 2014, condensed consolidating statements of comprehensive income (loss) for the quarters and six months ended March 31, 2015 and 2014, and condensed consolidating statements of cash flows for the six months ended March 31, 2015 and 2014, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

March 31, 2015 (unaudited)

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	302,762			$	23,818			$	—			$	326,580
Accounts receivable, net			—				67,036				264,599				—				331,635
Inventories			—				14,542				43,791				—				58,333
Deferred income taxes			667				—				—				—				667
Prepaid expenses and other current assets			—				83,949				174,721				—				258,670
Total current assets			667				468,289				506,929				—				975,885
Property and equipment, net			—				252,035				586,698				—				838,733
Intercompany			—				(146,885	)			146,885				—				—
Net investment in and advances to subsidiaries			2,064,721				—				—				(2,064,721	)			—
Goodwill			7,407				62,946				747,580				—				817,933
Other intangible assets, net			—				8,191				13,500				—				21,691
Other assets, net			19,875				25,207				15,390				—				60,472
Total assets		$	2,092,670			$	669,783			$	2,016,982			$	(2,064,721	)		$	2,714,714
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	39,610			$	71,917			$	—			$	111,527
Salaries and benefits payable			—				32,361				40,652				—				73,013
Accrued interest payable			28,791				(3,223	)			3,223				—				28,791
Medical claims payable			—				—				97,213				—				97,213
Other accrued expenses and current liabilities			—				54,450				37,229				—				91,679
Current portion of long-term debt, capital leases and other obligations			10,071				1,962				22,617				(22,617	)			12,033
Total current liabilities			38,862				125,160				272,851				(22,617	)			414,256
Long-term debt, capital leases and other obligations			1,818,999				16,810				623,258				(623,258	)			1,835,809
Deferred income taxes			108,553				—				—				—				108,553
Other long-term liabilities			2,815				112,784				585				—				116,184
Total liabilities			1,969,229				254,754				896,694				(645,875	)			2,474,802
Non-controlling interests with redemption rights			—				108,060				—				—				108,060
Equity
Member’s equity			123,441				298,558				1,120,288				(1,418,846	)			123,441
Non-controlling interests			—				8,411				—				—				8,411
Total equity			123,441				306,969				1,120,288				(1,418,846	)			131,852
Total liabilities and equity		$	2,092,670			$	669,783			$	2,016,982			$	(2,064,721	)		$	2,714,714

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet (Restated)

September 30, 2014

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	325,555			$	15,625			$	—			$	341,180
Accounts receivable, net			—				66,165				239,489				—				305,654
Inventories			—				13,925				43,707				—				57,632
Deferred income taxes			1,987				—				—				—				1,987
Prepaid expenses and other current assets			—				53,297				163,266				—				216,563
Assets held for sale			—				50,151				—				—				50,151
Total current assets			1,987				509,093				462,087				—				973,167
Property and equipment, net			—				232,421				594,057				—				826,478
Intercompany			—				(93,232	)			93,232				—				—
Net investment in and advances to subsidiaries			2,053,712				—				—				(2,053,712	)			—
Goodwill			7,407				62,947				744,144				—				814,498
Other intangible assets, net			—				8,331				15,000				—				23,331
Other assets, net			23,067				23,055				16,240				—				62,362
Total assets		$	2,086,173			$	742,615			$	1,924,760			$	(2,053,712	)		$	2,699,836
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	47,843			$	80,516			$	—			$	128,359
Salaries and benefits payable			—				32,164				38,957				—				71,121
Accrued interest payable			28,820				(3,223	)			3,223				—				28,820
Medical claims payable			—				—				79,449				—				79,449
Other accrued expenses and current liabilities			—				47,905				25,586				—				73,491
Current portion of long-term debt, capital leases and other obligations			10,071				2,619				23,176				(23,176	)			12,690
Liabilities held for sale			—				9,171				—				—				9,171
Total current liabilities			38,891				136,479				250,907				(23,176	)			403,101
Long-term debt, capital leases and other obligations			1,823,545				17,565				521,216				(521,216	)			1,841,110
Deferred income taxes			100,499				—				—				—				100,499
Other long-term liabilities			3,233				113,466				590				—				117,289
Total liabilities			1,966,168				267,510				772,713				(544,392	)			2,461,999
Non-controlling interests with redemption rights			—				108,156				—				—				108,156
Equity
Member’s equity			120,005				357,273				1,152,047				(1,509,320	)			120,005
Non-controlling interests			—				9,676				—				—				9,676
Total equity			120,005				366,949				1,152,047				(1,509,320	)			129,681
Total liabilities and equity		$	2,086,173			$	742,615			$	1,924,760			$	(2,053,712	)		$	2,699,836

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2015 (unaudited)

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	127,899			$	427,585			$	(3,894	)		$	551,590
Less: Provision for bad debts			—				(8,722	)			(72,004	)			—				(80,726	)
Acute care revenue			—				119,177				355,581				(3,894	)			470,864
Premium and service revenues			—				—				225,963				—				225,963
Total revenue			—				119,177				581,544				(3,894	)			696,827
Costs and expenses
Salaries and benefits			1,841				80,138				155,289				—				237,268
Supplies			—				18,788				61,352				—				80,140
Medical claims			—				—				179,953				(3,894	)			176,059
Rentals and leases			—				6,163				12,925				—				19,088
Other operating expenses			—				21,752				91,994				—				113,746
Medicare and Medicaid EHR incentives			—				(1,284	)			(951	)			—				(2,235	)
Interest expense, net			31,854				—				11,973				(11,973	)			31,854
Depreciation and amortization			—				6,522				15,033				—				21,555
Management fees			1,250				(8,981	)			8,981				—				1,250
Equity in earnings of affiliates			(33,989	)			—				—				33,989				—
Total costs and expenses			956				123,098				536,549				18,122				678,725
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(956	)			(3,921	)			44,995				(22,016	)			18,102
Gain on disposal of assets, net			—				247				147				—				394
Earnings (loss) from continuing operations before income taxes			(956	)			(3,674	)			45,142				(22,016	)			18,496
Income tax expense			9,747				—				—				—				9,747
Net earnings (loss) from continuing operations			(10,703	)			(3,674	)			45,142				(22,016	)			8,749
Earnings (loss) from discontinued operations, net of income taxes			2,910				(4,716	)			—				—				(1,806	)
Net earnings (loss)			(7,793	)			(8,390	)			45,142				(22,016	)			6,943
Net earnings attributable to non-controlling interests			—				(2,763	)			—				—				(2,763	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(7,793	)		$	(11,153	)		$	45,142			$	(22,016	)		$	4,180

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2014 (unaudited)

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	127,504			$	419,768			$	(3,069	)		$	544,203
Less: Provision for bad debts			—				(15,700	)			(73,716	)			—				(89,416	)
Acute care revenue			—				111,804				346,052				(3,069	)			454,787
Premium and service revenues			—				—				172,995				—				172,995
Total revenue			—				111,804				519,047				(3,069	)			627,782
Costs and expenses
Salaries and benefits			3,493				81,103				144,146				—				228,742
Supplies			—				18,399				57,121				—				75,520
Medical claims			—				—				148,060				(3,069	)			144,991
Rentals and leases			—				5,636				12,157				—				17,793
Other operating expenses			—				18,509				82,182				—				100,691
Medicare and Medicaid EHR incentives			—				(1,871	)			(1,204	)			—				(3,075	)
Interest expense, net			32,887				—				12,339				(12,339	)			32,887
Depreciation and amortization			—				7,270				14,234				—				21,504
Management fees			1,250				(8,791	)			8,791				—				1,250
Equity in earnings of affiliates			(19,431	)			—				—				19,431				—
Total costs and expenses			18,199				120,255				477,826				4,023				620,303
Earnings (loss) from continuing operations before loss on disposal of assets and income taxes			(18,199	)			(8,451	)			41,221				(7,092	)			7,479
Loss on disposal of assets, net			—				(234	)			(242	)			—				(476	)
Earnings (loss) from continuing operations before income taxes			(18,199	)			(8,685	)			40,979				(7,092	)			7,003
Income tax expense			3,772				—				—				—				3,772
Net earnings (loss) from continuing operations			(21,971	)			(8,685	)			40,979				(7,092	)			3,231
Earnings (loss) from discontinued operations, net of income taxes			3,599				(10,247	)			—				—				(6,648	)
Net earnings (loss)			(18,372	)			(18,932	)			40,979				(7,092	)			(3,417	)
Net earnings attributable to non-controlling interests			—				(2,616	)			—				—				(2,616	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(18,372	)		$	(21,548	)		$	40,979			$	(7,092	)		$	(6,033	)

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Six Months Ended March 31, 2015 (unaudited)

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	254,757			$	858,585			$	(7,836	)		$	1,105,506
Less: Provision for bad debts			—				(24,128	)			(145,950	)			—				(170,078	)
Acute care revenue			—				230,629				712,635				(7,836	)			935,428
Premium and service revenues			—				—				430,937				—				430,937
Total revenue			—				230,629				1,143,572				(7,836	)			1,366,365
Costs and expenses
Salaries and benefits			3,706				159,074				305,419				—				468,199
Supplies			—				37,811				122,380				—				160,191
Medical claims			—				—				359,867				(7,836	)			352,031
Rentals and leases			—				12,336				25,461				—				37,797
Other operating expenses			—				39,339				187,628				—				226,967
Medicare and Medicaid EHR incentives			—				(1,464	)			(4,186	)			—				(5,650	)
Interest expense, net			64,217				—				24,222				(24,222	)			64,217
Depreciation and amortization			—				14,413				29,773				—				44,186
Management fees			2,500				(17,947	)			17,947				—				2,500
Equity in earnings of affiliates			(49,751	)			—				—				49,751				—
Total costs and expenses			20,672				243,562				1,068,511				17,693				1,350,438
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(20,672	)			(12,933	)			75,061				(25,529	)			15,927
Gain (loss) on disposal of assets, net			—				(526	)			72				—				(454	)
Earnings (loss) from continuing operations before income taxes			(20,672	)			(13,459	)			75,133				(25,529	)			15,473
Income tax expense			7,093				—				—				—				7,093
Net earnings (loss) from continuing operations			(27,765	)			(13,459	)			75,133				(25,529	)			8,380
Earnings (loss) from discontinued operations, net of income taxes			3,567				(6,873	)			—				—				(3,306	)
Net earnings (loss)			(24,198	)			(20,332	)			75,133				(25,529	)			5,074
Net earnings attributable to non-controlling interests			—				(5,050	)			—				—				(5,050	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(24,198	)		$	(25,382	)		$	75,133			$	(25,529	)		$	24

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Six Months Ended March 31, 2014 (unaudited)

(in thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	255,802			$	831,552			$	(5,277	)		$	1,082,077
Less: Provision for bad debts			—				(37,150	)			(145,969	)			—				(183,119	)
Acute care revenue			—				218,652				685,583				(5,277	)			898,958
Premium and service revenues			—				—				324,714				—				324,714
Total revenue			—				218,652				1,010,297				(5,277	)			1,223,672
Costs and expenses
Salaries and benefits			4,354				156,628				282,026				—				443,008
Supplies			—				36,773				115,539				—				152,312
Medical claims			—				—				276,088				(5,277	)			270,811
Rentals and leases			—				11,795				24,451				—				36,246
Other operating expenses			—				38,530				162,718				—				201,248
Medicare and Medicaid EHR incentives			—				(1,888	)			(4,465	)			—				(6,353	)
Interest expense, net			66,031				—				24,584				(24,584	)			66,031
Depreciation and amortization			—				18,858				28,368				—				47,226
Management fees			2,500				(17,229	)			17,229				—				2,500
Equity in earnings of affiliates			(54,359	)			—				—				54,359				—
Total costs and expenses			18,526				243,467				926,538				24,498				1,213,029
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(18,526	)			(24,815	)			83,759				(29,775	)			10,643
Gain (loss) on disposal of assets, net			—				978				(212	)			—				766
Earnings (loss) from continuing operations before income taxes			(18,526	)			(23,837	)			83,547				(29,775	)			11,409
Income tax expense			6,249				—				—				—				6,249
Net earnings (loss) from continuing operations			(24,775	)			(23,837	)			83,547				(29,775	)			5,160
Earnings (loss) from discontinued operations, net of income taxes			(640	)			1,053				—				—				413
Net earnings (loss)			(25,415	)			(22,784	)			83,547				(29,775	)			5,573
Net earnings attributable to non-controlling interests			—				(6,404	)			—				—				(6,404	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(25,415	)		$	(29,188	)		$	83,547			$	(29,775	)		$	(831	)

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended March 31, 2015 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(7,793	)		$	(8,390	)		$	45,142			$	(22,016	)		$	6,943
Other comprehensive income
Change in fair value of highly effective interest rate hedges			339				—				—				—				339
Other comprehensive income before income taxes			339				—				—				—				339
Change in income tax expense			(124	)			—				—				—				(124	)
Other comprehensive income, net of income taxes			215				—				—				—				215
Comprehensive income (loss)			7,578				(8,390	)			45,142				(22,016	)			7,158
Net earnings attributable to non-controlling interests			—				(2,763	)			—				—				(2,763	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	7,578			$	(11,153	)		$	45,142			$	(22,016	)		$	4,395

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended March 31, 2014 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(18,372	)		$	(18,932	)		$	40,979			$	(7,092	)		$	(3,417	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			554				—				—				—				554
Other comprehensive income before income taxes			554				—				—				—				554
Change in income tax expense			(206	)			—				—				—				(206	)
Other comprehensive income, net of income taxes			348				—				—				—				348
Comprehensive income (loss)			(18,024	)			(18,932	)			40,979				(7,092	)			(3,069	)
Net earnings attributable to non-controlling interests			—				(2,616	)			—				—				(2,616	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(18,024	)		$	(21,548	)		$	40,979			$	(7,092	)		$	(5,685	)

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Six Months Ended March 31, 2015 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(24,198	)		$	(20,332	)		$	75,133			$	(25,529	)		$	5,074
Other comprehensive income
Change in fair value of highly effective interest rate hedges			745				—				—				—				745
Other comprehensive income before income taxes			745				—				—				—				745
Change in income tax expense			(273	)			—				—				—				(273	)
Other comprehensive income, net of income taxes			472				—				—				—				472
Comprehensive income (loss)			(23,726	)			(20,332	)			75,133				(25,529	)			5,546
Net earnings attributable to non-controlling interests			—				(5,050	)			—				—				(5,050	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(23,726	)		$	(25,382	)		$	75,133			$	(25,529	)		$	496

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Six Months Ended March 31, 2014 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(25,415	)		$	(22,784	)		$	83,547			$	(29,775	)		$	5,573
Other comprehensive income
Change in fair value of highly effective interest rate hedges			978				—				—				—				978
Other comprehensive income before income taxes			978				—				—				—				978
Change in income tax expense			(363	)			—				—				—				(363	)
Other comprehensive income, net of income taxes			615				—				—				—				615
Comprehensive income (loss)			(24,800	)			(22,784	)			83,547				(29,775	)			6,188
Net earnings attributable to non-controlling interests			—				(6,404	)			—				—				(6,404	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(24,800	)		$	(29,188	)		$	83,547			$	(29,775	)		$	(216	)

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended March 31, 2015 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(24,198	)		$	(20,332	)		$	75,133			$	(25,529	)		$	5,074
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				14,413				29,773				—				44,186
Amortization of loan costs			3,942				—				—				—				3,942
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			—				—				—				(1,248	)
Change in physician minimum revenue guarantees			—				103				1,768				—				1,871
Stock-based compensation			3,706				—				—				—				3,706
Deferred income taxes			7,967				—				—				—				7,967
Loss (gain) on disposal of assets, net			—				526				(72	)			—				454
Loss (earnings) from discontinued operations, net			(3,567	)			6,873				—				—				3,306
Equity in earnings of affiliates			(49,751	)			—				—				49,751				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				(2,752	)			(24,571	)			—				(27,323	)
Inventories, prepaid expenses and other current assets			—				(31,342	)			(11,273	)			—				(42,615	)
Accounts payable, other accrued expenses and other accrued liabilities			(1,108	)			1,984				17,747				—				18,623
Net cash provided by (used in) operating activities — continuing operations			(64,257	)			(30,527	)			88,505				24,222				17,943
Net cash used in operating activities — discontinued operations			—				(755	)			—				—				(755	)
Net cash provided by (used in) operating activities			(64,257	)			(31,282	)			88,505				24,222				17,188
Cash flows from investing activities
Purchases of property and equipment			—				(35,810	)			(20,471	)			—				(56,281	)
Cash received (paid) for acquisitions, net			—				41,364				(3,900	)			—				37,464
Proceeds from sale of assets			—				256				81				—				337
Change in other assets, net			—				(1,662	)			865				—				(797	)
Net cash provided by (used in) investing activities — continuing operations			—				4,148				(23,425	)			—				(19,277	)
Net cash used in investing activities — discontinued operations			—				(341	)			—				—				(341	)
Net cash provided by (used in) investing activities			—				3,807				(23,425	)			—				(19,618	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other obligations			(5,135	)			(311	)			(1,262	)			—				(6,708	)
Distributions to non-controlling interests			—				(4,438	)			—				—				(4,438	)
Cash paid for the repurchase of non-controlling interests			—				(558	)			(460	)			—				(1,018	)
Change in intercompany balances with affiliates, net			69,392				9,995				(55,165	)			(24,222	)			—
Net cash provided by (used in) financing activities — continuing operations			64,257				4,688				(56,887	)			(24,222	)			(12,164	)
Net cash used in financing activities — discontinued operations			—				(6	)			—				—				(6	)
Net cash provided by (used in) financing activities			64,257				4,682				(56,887	)			(24,222	)			(12,170	)
Change in cash and cash equivalents			—				(22,793	)			8,193				—				(14,600	)
Cash and cash equivalents at beginning of period			—				325,555				15,625				—				341,180
Cash and cash equivalents at end of period		$	—			$	302,762			$	23,818			$	—			$	326,580

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended March 31, 2014 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(25,415	)		$	(22,784	)		$	83,547			$	(29,775	)		$	5,573
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				18,858				28,368				—				47,226
Amortization of loan costs			3,706				—				—				—				3,706
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			—				—				—				(1,248	)
Change in physician minimum revenue guarantees			—				90				1,106				—				1,196
Stock-based compensation			4,354				—				—				—				4,354
Deferred income taxes			5,322				—				—				—				5,322
Loss (gain) on disposal of assets, net			—				(978	)			212				—				(766	)
Loss (earnings) from discontinued operations, net			640				(1,053	)			—				—				(413	)
Equity in earnings of affiliates			(54,359	)			—				—				54,359				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				(13,570	)			(7,061	)			—				(20,631	)
Inventories, prepaid expenses and other current assets			—				(13,335	)			(30,870	)			—				(44,205	)
Accounts payable, other accrued expenses and other accrued liabilities			(1,012	)			(1,773	)			(219	)			—				(3,004	)
Income taxes and other transaction costs payable related to sale-leaseback of real estate			(18,901	)			(1,048	)			(2,321	)			—				(22,270	)
Net cash provided by (used in) operating activities — continuing operations			(86,913	)			(35,593	)			72,762				24,584				(25,160	)
Net cash used in operating activities — discontinued operations			—				(7,794	)			—				—				(7,794	)
Net cash provided by (used in) operating activities			(86,913	)			(43,387	)			72,762				24,584				(32,954	)
Cash flows from investing activities
Purchases of property and equipment			—				(21,535	)			(17,828	)			—				(39,363	)
Cash paid for acquisitions, net			—				(1,038	)			—				—				(1,038	)
Cash paid in sale-leaseback of real estate			—				(2,724	)			(301	)			—				(3,025	)
Proceeds from sale of assets			—				1,494				11				—				1,505
Change in other assets, net			—				(1,235	)			301				—				(934	)
Net cash used in investing activities — continuing operations			—				(25,038	)			(17,817	)			—				(42,855	)
Net cash used in investing activities — discontinued operations			—				(2,410	)			—				—				(2,410	)
Net cash used in investing activities			—				(27,448	)			(17,817	)			—				(45,265	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other obligations			(5,035	)			(304	)			(1,420	)			—				(6,759	)
Distributions to non-controlling interests			—				(11,046	)			—				—				(11,046	)
Cash paid for the repurchase of non-controlling interest			—				(405	)			—				—				(405	)
Change in intercompany balances with affiliates, net			91,948				(15,026	)			(52,338	)			(24,584	)			—
Net cash provided by (used in) financing activities — continuing operations			86,913				(26,781	)			(53,758	)			(24,584	)			(18,210	)
Net cash used in financing activities — discontinued operations			—				(92	)			—				—				(92	)
Net cash provided by (used in) financing activities			86,913				(26,873	)			(53,758	)			(24,584	)			(18,302	)
Change in cash and cash equivalents			—				(97,708	)			1,187				—				(96,521	)
Cash and cash equivalents at beginning of period			—				430,047				8,084				—				438,131
Cash and cash equivalents at end of period		$	—			$	332,339			$	9,271			$	—			$	341,610

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the quarters and six months ended March 31, 2015 and 2014, have been derived from our unaudited condensed consolidated financial statements. References herein to “we,” “our” and “us” are to IASIS Healthcare LLC and its subsidiaries. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD-LOOKING STATEMENTS

Some of the statements we make in this report are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties, among others discussed in this report, are detailed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014 and as amended and restated in Item 1A. “Risk Factors” detailed in our quarterly report on Form 10-Q/A for the quarter ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC).

While we believe our assumptions are reasonable, it is very difficult to predict the impact of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. These factors include, but are not limited to:

 

•

the effects of changes in governmental healthcare programs, principally Medicare, Medicaid and other federal healthcare programs, including limitations or reductions of levels of payments that our hospitals receive under such programs;

 

•

the effects related to implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), the possible enactment of additional federal or state healthcare reforms and possible amendments, changes or court challenges to such laws and other federal, state or local laws or regulations affecting the healthcare industry;

 

•

our Health Choice managed care business’ ability to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

 

•

the effects of a shift in volume or payor mix from commercial managed-care payors to self-pay and Medicaid;

 

•

increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts;

 

•

a reduction in or withholding of government-sponsored supplemental payments to our hospitals;

 

•

the effects of any inability to retain and negotiate reasonable contracts with managed care plans or if insured patients switch from traditional commercial insurance plans to exchange plans;

 

•

industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

 

•

possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental reimbursement programs or waiver programs, that may impact reimbursement to healthcare providers and insurers;

 

•

controls imposed by Medicare and third-party payors to reduce admissions and length of stay;

 

•

competition to attract and retain quality physicians, nurses, technicians and other personnel;

 

•

the generally competitive nature of the healthcare industry;

 

•

the possibility of health pandemics and the related impacts on our operations and financial results;

 

•

a failure of our information systems or breach of our cyber-security protections;

 

•

the costs and operational challenges associated with information technology and medical equipment upgrades;

 

•

challenges associated with the implementation of electronic health records and coding systems;

 

•

compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to patient privacy and physician-owned hospitals;

 

•

reliance upon services provided by third-party vendors;

 

•

the effects of local or national economic downturns on our business lines;

 

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•

risks associated with our acquisition and development strategy, including liabilities assumed in acquisitions of facilities and physician practices and our need to effectively integrate acquired companies into our existing operations;

 

•

increased lease rates and amended lease terms at certain of our facilities in connection with sale-leaseback transactions;

 

•

the effectiveness of our reinvestment of proceeds from sale-leaseback transactions and asset dispositions;

 

•

timely completion of under-construction facilities;

 

•

risks associated with environmental, health and safety laws;

 

•

risks associated with labor laws;

 

•

potential adverse accounting impacts associated with goodwill carrying value;

 

•

our dependence upon the services of key executive management personnel;

 

•

risks related to our indebtedness and capital structure; and

 

•

other risk factors described in Item 1A. “Risk Factors”.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Form 10-Q speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

EXECUTIVE OVERVIEW

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis, in attractive markets to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our company is comprised of our acute care operations, which, as of March 31, 2015, included 15 acute care hospitals, one behavioral hospital and multiple other access points, including 144 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and our diversified and growing risk platform, Health Choice.

Acute Care Operations

As of March 31, 2015, we owned or leased 15 acute care hospital facilities and one behavioral health hospital facility with a total of 3,604 licensed beds, several outpatient service facilities and 144 physician clinics.

We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans to develop quality and outcome driven, cost-efficient and innovative reimbursement models. Our major acute care geographic markets include Salt Lake City, Utah; Phoenix, Arizona; five cities in Texas, including Houston, San Antonio and Odessa; and West Monroe, Louisiana.

Since our Company was founded in 1998, we believe we have developed a reputation for operating hospitals that deliver high quality care in our markets at rates that are often more affordable than many other hospitals in our markets with larger local market share than us. Our corporate and divisional infrastructure allows us to leverage savings in information technology services, revenue cycle, hospital supplies, and labor force costs.

Managed Care Operations

Health Choice, headquartered in Phoenix, Arizona, began providing managed Medicaid services under contract with the Arizona Health Care Cost Containment System (“AHCCCS”) in 1990, making it one of the nation’s first Medicaid managed care plans. Under our ownership beginning in 1999, Health Choice has evolved into a managed care organization and insurer that, while growing its core managed Medicaid business, has expanded to serve certain Medicare Advantage and Exchange members and is utilizing its population health management expertise to offer management and administrative services to other payors through its management services organization (“MSO”). In collaboration with our hospitals and affiliated physicians in certain of our markets, Health Choice also manages accountable care networks.

 

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Health Choice represents one of our company’s key strategic assets, which we believe provides the Company with the ability to engage in innovative value-based purchasing initiatives and opportunities. Its leadership team has considerable experience in population health management, physician relations and network development. We believe Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are seeking to bring Health Choice’s expertise and technology to bear as part of the accountable care networks we offer to other health plans.

As of March 31, 2015, Health Choice’s related entities delivered healthcare services to 374,300 members through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These members include 226,000 managed Medicaid members served primarily through Health Choice’s core health plan business in Arizona, 9,400 members participating in Health Choice’s Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”), 93,700 members of a large national insurer’s Florida managed Medicaid plan for whom Health Choice serves as a MSO, and 45,200 member lives managed through Health Choice’s accountable care networks and members of Health Choice’s Utah Managed Medicaid and Arizona health insurance exchange plans.

Our business consists of the two operating segments previously discussed: (1) our acute care segment comprised of our hospitals, outpatient service facilities and physician clinics and (2) our managed care operations, consisting of Health Choice and its various related service lines. The financial information for our reportable operating segments is presented in Footnote 9 (Segment Information) to our unaudited, consolidated financial statements included under “Item 1.—Financial Statements” of this Report.

Recent Developments

Health Choice integrated behavioral health joint venture. On December 18, 2014, Health Choice and its joint venture partner, the Northern Arizona Regional Behavioral Health Authority (“NARBHA”) won a competitive bid to begin operating an integrated acute and behavioral health plan in Northern Arizona in our 2016 fiscal year. The joint venture, Health Choice Integrated Care LLC, is expected to provide standalone behavioral health benefits for approximately 225,000 plan members in Northern Arizona, and acute and behavioral care on an integrated basis for approximately 6,000 members who are seriously mentally ill. Health Choice owns 52% of the joint venture and NARBHA owns 48% of the joint venture.

New hospital construction in Lehi, Utah. We are building a new expandable inpatient and outpatient health campus in fast-growing Lehi, Utah, called Mountain Point Medical Center, as a provider-based campus of Jordan Valley Medical Center. The hospital will provide a full range of services including inpatient intensive care, obstetrics and surgical services. The hospital also will provide cardiology services, which includes a cardiac catheterization lab. Additional outpatient services will include emergency, imaging, lab and outpatient surgery. The hospital has been designed to serve the growing transition to outpatient-related services and is being constructed with the capability to expand depending on community need and demand for services in the Lehi area. A medical office building is being constructed immediately adjacent to, and connected with, the hospital to be occupied by primary care and multi-specialty physician groups practicing in the area. This new hospital, anticipated to cost in excess of $80.0 million, will serve eight cities in Northern Utah County and is in the fastest growing area within the state of Utah. This project is anticipated to be completed and open for business in the summer of 2015.

Sale of North Vista Hospital. Effective January 22, 2015, we closed a transaction for the sale of our Nevada operations, which primarily included North Vista Hospital, a 177-bed general acute care facility located in Las Vegas, Nevada. We intend to use proceeds from the sale in a variety of strategic initiatives aimed at growth in existing markets and expansion into new markets.

Revenue and Volume Trends

Total revenue for the quarter ended March 31, 2015, increased 11.0% to $696.8 million, compared to $627.8 million in the same prior year quarter. Total revenue for the six months ended March 31, 2015, increased 11.7% to $1.37 billion, compared to $1.22 billion in the same prior year quarter. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium and service revenues. Acute care revenue contributed $16.1 million to the increase in total revenue for the quarter ended March 31, 2015, compared to the same prior year quarter, while premium and service revenues of our risk platform contributed $53.0 million to the increase in total revenue compared to the same prior year period. Acute care revenue contributed $36.5 million to the increase in total revenue for the six months ended March 31, 2015, compared to the same prior year period, while premium and service revenues of our risk platform contributed $106.2 million to the increase in total revenue compared to the same prior year period.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations.

 

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Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for doubtful accounts. Other revenue includes medical office building rental income and other miscellaneous revenue.

Admissions increased 1.0% and 2.0% for the quarter and six months ended March 31, 2015, respectively, compared to the same prior year periods. Adjusted admissions increased 4.1% for both the quarter and six months ended March 31, 2015, compared to the same prior year periods. For the quarter ended March 31, 2015, our volume was positively impacted by a 7.5% increase in emergency room visits and a 1.7% increase in outpatient surgeries, offset by a 2.9% decline in inpatient surgeries, all compared to the prior year quarter. For the six months ended March 31, 2015, our volume was positively impacted by a 7.4% increase in emergency room visits and a 0.3% increase in outpatient surgeries, offset by a 2.1% decline in inpatient surgeries, all compared to the same prior year period.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debt:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Medicare			28.5	%			28.6	%			27.2	%			27.8	%
Managed Medicare			15.4				15.5				15.1				15.2
Medicaid and managed Medicaid			20.9				20.6				21.5				20.4
Managed care and other			29.9				29.2				30.8				30.2
Self-pay			5.3				6.1				5.4				6.4
Total			100.0	%			100.0	%			100.0	%			100.0	%

The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Medicare			20.5	%			20.9	%			19.8	%			20.2	%
Managed Medicare			10.1				10.2				10.1				10.2
Medicaid and managed Medicaid			12.8				12.9				12.7				12.3
Managed care and other			41.3				39.0				41.9				39.7
Self-pay			15.3				17.0				15.5				17.6
Total			100.0	%			100.0	%			100.0	%			100.0	%

As noted in the above tables, our gross and net patient revenue by payor is experiencing a shift from self-pay to Medicaid and managed Medicaid and to managed care payors. The shift to Medicaid and managed Medicaid is primarily a result of Arizona’s expansion of its Medicaid program under the Health Reform Law, which became effective January 1, 2014. Additionally, we have benefited individuals enrolling in health insurance exchanges (“Exchanges”) in our markets, as well as from improvements in employment and other economic factors in the markets we serve.

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, decreased 0.4% for the quarter ended March 31, 2015 and increased 0.2% for the six months ended March 31, 2015, both compared to the same prior year periods.

See “Item 1 — Business — Sources of Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, filed with the SEC on May 15, 2015, for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by the Centers for Medicare and Medicaid Services (“CMS”) that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also discussed in such Annual Report on Form 10-K/A.

 

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Premium and Service Revenues

Premium and service revenues generated by Health Choice, our managed care operations, represented 32.4% and 31.5% of our total revenue for the quarter and six months ended March 31, 2015, respectively, compared to 27.6% and 26.5% in the same prior year periods.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Health Choice also contracts with CMS to provide coverage as a MAPD SNP. This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

One notable provision of the Health Reform Law is the annual health insurer fee (“HIF”) that applies to most health plans, including commercial health plans and Medicaid managed care plans like Health Choice. While characterized as a “fee” in the text of the Health Reform Law, the intent of Congress was to impose a broad based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government-funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. Arizona has agreed to reimburse all of the managed Medicaid plans, for the economic impact of this fee. In addition to the reimbursement of the fee, the state of Arizona has agreed to reimburse insurers for the impact resulting from these fees being treated as non-deductible for income tax purposes. For the quarter and six months ended March 31, 2015, we recognized expense for the HIF totaling $3.9 million and $5.9 million, respectively, which was offset by expected reimbursement from the state of Arizona of $4.7 million and $7.6 million, respectively.

Other Industry Items Impacting Our Company

The following section discusses updates to recent trends included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

The Impact of Health Reform

We believe that the Health Reform Law, which expands healthcare coverage through the growth of Exchanges, private sector coverage and expanded Medicaid coverage will, over time, reduce the level of uncompensated care we provide to uninsured individuals. The reductions in the growth in Medicare payments and the decreases in disproportionate share hospital (“DSH”) payments, however, will adversely affect our government reimbursement, which is offset by the benefits realized from expanded healthcare coverage under the Health Reform Law. Because of the many variables, including the law’s complexity, continued delays or exceptions to employer mandates, possible amendments or changes, court challenges to the law, uncertainty regarding the success of Exchanges in enrolling uninsured individuals and possible reductions in funding by Congress and future reductions in Medicare and Medicaid reimbursement, the long-term effect of the Health Reform Law on our company, including how individuals and businesses will respond to the new choices and obligations, is not yet fully known. For example, the Supreme Court of the United States (“SCOTUS”) has heard arguments in a case known as King v. Burwell during its March 2015 judicial session. The plaintiffs are challenging the extension of premium subsidies to health insurance policies purchased through federally operated Exchanges, arguing that subsidies must be limited to state-operated Exchanges. If decided in favor of the plaintiffs, this case could make it more difficult for uninsured individuals in states that do not operate an Exchange to purchase coverage and otherwise significantly affect implementation of the Health Reform law, in a manner that may result in less than projected numbers of newly insured individuals. We cannot predict the impact on our Company of these continuing developments with respect to the Health Reform Law.

State Medicaid Budgets

Over recent years, the states in which we operate experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. In previous years, the states in which we operate responded to these budget concerns by decreasing funding

 

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for Medicaid and other healthcare programs, or by making structural changes that resulted in a reduction in hospital reimbursement and by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs for the quarters and six months ended March 31, 2015 and 2014, respectively, was $18.1 million and $33.6 million, respectively, compared to $18.0 million and $36.0 million in the prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination will be controlled primarily by government-owned public hospitals that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at THHSC to administer the programs, has resulted in a delay in related reimbursements. As of March 31, 2015 and September 30, 2014, we had $83.3 million and $90.2 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $34.3 million and $34.9 million, respectively, of amounts due under Texas Medicaid DSH. Since September 30, 2014, we have received $51.7 million related to the 2014 receivables for Texas supplemental reimbursement programs.

On October 1, 2014, the THHSC issued a notice to certain hospitals participating in the Texas waiver program. These hospitals operate in the surrounding areas of Dallas, Tarrant, Nueces and Travis counties (including the cities of Dallas/Fort Worth, Corpus Christi and Austin). According to the notice, a review conducted by CMS identified some of these affiliation agreements it believed may be inconsistent with the waiver. As a result of these findings, CMS temporarily deferred the federal portion of the Medicaid payments associated with these affiliations. CMS lifted the deferral on January 7, 2015, but has not yet made a final determination regarding the acceptability of the affiliations. None of our hospitals were included in the programs reviewed by CMS. We cannot assure you that CMS, THHSC and other similar agencies will not in the future audit or delay our programs in a manner that reduces the amount or slows the timing of our receipt of such funding.

The THHSC has adopted rules to change the Texas Medicaid DSH methodology for the state’s fiscal year 2014 and 2015. Texas has appropriated $160.0 million for fiscal year 2014 and $140.0 million for fiscal year 2015 to stabilize and improve the Texas Medicaid DSH program, including providing rate adjustments to recognize improvements in quality of patient care, the most appropriate use of care, and patient outcomes. During the quarter and six months ended March 31, 2015, we recognized $8.6 million and $17.1 million, respectively, in Texas Medicaid DSH revenue, compared to $7.5 million and $15.0 million in the same prior year periods.

Arizona

Beginning in July 2011, in an effort to control its budgeted expenditures and balance its budget, the state of Arizona implemented a plan to reduce its eligible Medicaid beneficiaries, particularly childless adults. Following implementation of this plan by the state of Arizona, Health Choice experienced a significant decline through the end of our fiscal year 2013 in its enrollees, premium revenue and related earnings.

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that had previously been eliminated. The expansion of the state’s Medicaid program under the Health Reform Law could potentially result in the addition of approximately 350,000 people to its Medicaid rolls. Primarily as a result of the Medicaid expansion, enrollment under Health Choice’s Medicaid product line increased 15.4% for the quarter ended March 31, 2015, compared to the same prior year quarter. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment effective January 1, 2014, to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and six months ended March 31, 2015, we incurred $2.3 million and $4.3 million, respectively, in provider assessments compared to $1.3 million in both of the prior year periods.

 

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Further, while the Arizona legislature approved an expansion of Medicaid in 2013 which became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. The suit was dismissed by the trial court, based on a finding that the plaintiffs did not have standing to sue; however, on December 31, 2014, the Arizona Supreme Court ruled that the plaintiffs in the case had standing to sue, and the case is now moving forward in the trial court. If the legality of the provider fee used to help fund Arizona’s Medicaid expansion is successfully challenged in court, this may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals and adversely affecting our operations in Arizona.

Arizona’s Medicaid expansion in 2014, and Health Choice’s related increase in enrolled members and premium revenue, followed a period of several years during which AHCCCS tightened Medicaid eligibility standards in Arizona and decreased capitation rates paid to managed Medicaid contractors, reflecting state government budgetary pressures and a struggling state economy. If additional Medicaid program changes are implemented in the future in Arizona or other states in which we operate, our premium revenue and earnings could be significantly impacted.

Uncompensated Care

While the amount of uncompensated care, including discounts to the uninsured, bad debts and charity care, we deliver to the communities we serve continues to remain high in comparison to historical levels, we have experienced a decrease during the quarter and six months ended March 31, 2015. During the quarter and six months ended March 31, 2015, our uncompensated care as a percentage of acute care revenue was 19.5% and 20.5%, respectively, compared to 21.2% and 22.4% in the same prior year periods. During the quarter ended March 31, 2015, our self-pay admissions represented 5.9% of our total admissions, compared to 7.1% in the same prior year quarter. During the six months ended March 31, 2015, our self-pay admissions represented 6.0% of our total admissions, compared to 7.6% in the same prior year period. We believe the improvement in our uncompensated care as a percentage of acute care revenue and our self-pay admissions mix can be attributed primarily to the impact of Medicaid expansion in the state of Arizona, as well as improvements in employment and other economic factors in our markets, which has resulted in lower self-pay volume and revenue for the quarter and six months ended March 31, 2015, compared to the same prior year periods.

We anticipate uninsured volumes will continue to decline in the near future as the impact of the Health Reform Law is fully realized. However, if we were to experience growth in uninsured volume and revenue, our uncompensated care may increase and our results of operations would be adversely affected.

The percentages of our insured and uninsured net hospital receivables are summarized as follows ⁽¹⁾:

 

		March 31, 2015				September 30, 2014
Insured receivables			80.6	%			81.0	%
Uninsured receivables			19.4	%			19.0	%
Total			100.0	%			100.0	%

The percentages of hospital net receivables in summarized aging categories are as follows ⁽¹⁾:

 

		March 31, 2015				September 30, 2014
0 to 90 days			64.9	%			63.2	%
91 to 180 days			18.9	%			18.0	%
Over 180 days			16.2	%			18.8	%
Total			100.0	%			100.0	%

 

(1)	Excludes hospital receivables related to our discontinued Florida and Nevada operations.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2014.

Stock-based compensation. We account for stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. Our stock-based compensation plans include programs for stock options and RSU awards.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term, which is calculated as the average of the time-to-vesting and the contractual life of the awards.

Expected volatility—Since we are currently privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded peer companies over a period equal to the expected term of the awards. When selecting comparable publicly traded peer companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the award.

Expected dividend—No recurring dividends have been authorized and we do not expect to pay cash dividends in the foreseeable future. Therefore, we used an expected dividend yield of zero.

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. These assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.

 

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SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Acute care operations (1)
Number of acute care hospital facilities at end of period			15				15				15				15
Licensed beds at end of period (2)			3,604				3,601				3,604				3,601
Average length of stay (days) (3)			5.1				5.1				5.1				5.0
Occupancy rates (4)			51.3	%			50.7	%			50.4	%			49.0	%
Admissions (5)			25,814				25,550				51,682				50,646
Adjusted admissions (6)			47,601				45,722				95,508				91,760
Patient days (7)			131,347				129,835				261,190				254,110
Adjusted patient days (6)			242,204				232,342				482,679				460,396
Surgeries			15,771				15,752				32,582				32,755
Emergency room visits			109,605				101,979				215,945				201,018
Net patient revenue per adjusted admission (8)		$	9,974			$	10,014			$	9,876			$	9,854
Managed care operations
Health plan lives (9)			247,400				206,600				247,400				206,600
MSO lives (10)			93,700				—				93,700				—
Accountable care network lives (11)			33,200				8,700				33,200				8,700
Total lives			374,300				215,300				374,300				215,300
Medical loss ratio (12)			83.9	%			85.6	%			87.4	%			85.0	%

 

(1)	Excludes the impact of our Nevada operations, which are reflected in discontinued operations.

(2)	Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.

(3)	Represents the average number of days that a patient stayed in our hospitals.

(4)	Calculated by dividing the average daily number of inpatients by the weighted-average number of beds in service.

(5)	Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.

(6)	Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions (or adjusted patient days) by multiplying admissions (or patient days) by gross patient revenue and then dividing that number by gross inpatient revenue.

(7)	Represents the number of days our beds were occupied by inpatients over the period.

(8)	Includes the impact of the provision for bad debts as a component of revenue.

(9)

Represents total lives enrolled across all health plan product lines. Includes dual-eligible lives, which are members eligible for Medicare and Medicaid benefits, under Health Choice’s contract with CMS to provide coverage as a MAPD SNP totaling 9,400 and 7,100 as of March 31, 2015 and 2014, respectively.

(10)	Represents lives enrolled in Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and “Panhandle” regions of Florida.

(11)	Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks.

(12)	Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

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RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, the results of our consolidated operations expressed in dollar terms and as a percentage of total revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended March 31, 2015								Quarter Ended March 31, 2014								Six Months Ended March 31, 2015								Six Months Ended March 31, 2014
($ in thousands):		Amount				Percentage				Amount				Percentage				Amount				Percentage				Amount				Percentage
Revenues
Acute care revenue before provision for bad debts		$	551,590							$	544,203							$	1,105,506							$	1,082,077
Less: Provision for bad debts			(80,726	)							(89,416	)							(170,078	)							(183,119	)
Acute care revenue			470,864				67.6	%			454,787				72.4	%			935,428				68.5	%			898,958				73.5	%
Premium and service revenues			225,963				32.4	%			172,995				27.6	%			430,937				31.5	%			324,714				26.5	%
Total revenue			696,827				100.0	%			627,782				100.0	%			1,366,365				100.0	%			1,223,672				100.0	%
Costs and expenses
Salaries and benefits			237,268				34.0	%			228,742				36.5	%			468,199				34.3	%			443,008				36.2	%
Supplies			80,140				11.5	%			75,520				12.0	%			160,191				11.7	%			152,312				12.4	%
Medical claims			176,059				25.3	%			144,991				23.1	%			352,031				25.8	%			270,811				22.1	%
Rentals and leases			19,088				2.7	%			17,793				2.8	%			37,797				2.8	%			36,246				3.0	%
Other operating expenses			113,746				16.3	%			100,691				16.0	%			226,967				16.6	%			201,248				16.4	%
Medicare and Medicaid EHR incentives			(2,235	)			(0.3	%)			(3,075	)			(0.5	%)			(5,650	)			(0.4	%)			(6,353	)			(0.5	%)
Interest expense, net			31,854				4.6	%			32,887				5.2	%			64,217				4.7	%			66,031				5.4	%
Depreciation and amortization			21,555				3.1	%			21,504				3.5	%			44,186				3.2	%			47,226				3.9	%
Management fees			1,250				0.2	%			1,250				0.2	%			2,500				0.2	%			2,500				0.2	%
Total costs and expenses			678,725				97.4	%			620,303				98.8	%			1,350,438				98.8	%			1,213,029				99.1	%
Earnings from continuing operations before gain (loss) on disposal of assets and income taxes			18,102				2.6	%			7,479				1.2	%			15,927				1.2	%			10,643				0.9	%
Gain (loss) on disposal of assets, net			394				0.1	%			(476	)			(0.1	%)			(454	)			(0.0	%)			766				0.1	%
Earnings from continuing operations before income taxes			18,496				2.7	%			7,003				1.1	%			15,473				1.1	%			11,409				1.0	%
Income tax expense			9,747				1.4	%			3,772				0.6	%			7,093				0.5	%			6,249				0.5	%
Net earnings from continuing operations			8,749				1.3	%			3,231				0.5	%			8,380				0.6	%			5,160				0.5	%
Earnings (loss) from discontinued operations, net of income taxes			(1,806	)			(0.3	%)			(6,648	)			(1.0	%)			(3,306	)			(0.2	%)			413				0.0	%
Net earnings (loss)			6,943				1.0	%			(3,417	)			(0.5	%)			5,074				0.4	%			5,573				0.5	%
Net earnings attributable to non-controlling interests			(2,763	)			(0.4	%)			(2,616	)			(0.4	%)			(5,050	)			(0.4	%)			(6,404	)			(0.6	%)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	4,180				0.6	%		$	(6,033	)			(1.0	%)		$	24				0.0	%		$	(831	)			(0.1	%)

 

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Acute Care Operations

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of total acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended March 31, 2015								Quarter Ended March 31, 2014								Six Months Ended March 31, 2015								Six Months Ended March 31, 2014
($ in thousands):		Amount				Percentage				Amount				Percentage				Amount				Percentage				Amount				Percentage
Acute care revenue
Acute care revenue before provision for bad debts		$	551,590							$	544,203							$	1,105,506							$	1,082,077
Less: Provision for bad debts			(80,726	)							(89,416	)							(170,078	)							(183,119	)
Acute care revenue			470,864				99.2	%			454,787				99.3	%			935,428				99.2	%			898,958				99.4	%
Revenue between segments (1)			3,894				0.8	%			3,069				0.7	%			7,836				0.8	%			5,277				0.6	%
Total acute care revenue			474,758				100.0	%			457,856				100.0	%			943,264				100.0	%			904,235				100.0	%
Costs and expenses
Salaries and benefits			222,892				46.9	%			221,052				48.3	%			441,166				46.8	%			428,277				47.4	%
Supplies			79,993				16.8	%			75,476				16.5	%			159,889				17.0	%			152,209				16.8	%
Rentals and leases			18,391				3.9	%			17,439				3.8	%			36,357				3.9	%			35,529				3.9	%
Other operating expenses			96,680				20.4	%			92,893				20.3	%			196,938				20.9	%			185,864				20.6	%
Medicare and Medicaid EHR incentives			(2,235	)			(0.5	%)			(3,075	)			(0.7	%)			(5,650	)			(0.6	%)			(6,353	)			(0.7	%)
Interest expense, net			31,854				6.7	%			32,887				7.2	%			64,217				6.8	%			66,031				7.3	%
Depreciation and amortization			20,481				4.3	%			20,456				4.5	%			42,084				4.5	%			45,121				5.0	%
Management fees			1,250				0.3	%			1,250				0.2	%			2,500				0.3	%			2,500				03.3	%
Total costs and expenses			469,306				98.9	%			458,378				100.1	%			937,501				99.4	%			909,178				100.6	%
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			5,452				1.1	%			(522	)			(0.1	%)			5,763				0.6	%			(4,943	)			(0.6	%)
Gain (loss) on disposal of assets, net			394				0.1	%			(476	)			(0.1	%)			(454	)			(0.0	%)			766				0.1	%
Earnings (loss) from continuing operations before income taxes		$	5,846				1.2	%		$	(998	)			(0.2	%)		$	5,309				0.6	%		$	(4,177	)			(0.5	%)

 

(1)	Revenue between segments is eliminated in our consolidated results.

Quarters Ended March 31, 2015 and 2014

Total acute care revenue — Total acute care revenue for the quarter ended March 31, 2015, was $474.8 million, an increase of $16.9 million or 3.7% compared to $457.9 million in the same prior year quarter. The increase in total acute care revenue during the quarter ended March 31, 2015, is comprised primarily of an increase in adjusted admissions of 4.1% and a decrease in net patient revenue per adjusted admission of 0.4%, both compared to the same prior year quarter.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the quarters ended March 31, 2015 and 2014, of $0.3 million and $2.2 million, respectively.

Salaries and benefits — Salaries and benefits expense for the quarter ended March 31, 2015, was $222.9 million, or 46.9% of total acute care revenue, compared to $221.1 million, or 48.3% of total acute care revenue in the same prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 46.6% for the quarter ended March 31, 2015, compared to 47.5% in the same prior year quarter. The improvement in our salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, is the result of the implementation of labor cost reduction initiatives, including a reduction in contract labor utilization.

Supplies — Supplies expense for the quarter ended March 31, 2015, was $80.0 million, or 16.8% of total acute care revenue, compared to $75.5 million, or 16.5% of total acute care revenue in the same prior year quarter.

Other operating expenses — Other operating expenses for the quarter ended March 31, 2015, were $96.7 million, or 20.4% of total acute care revenue, compared to $92.9 million, or 20.3% of total acute care revenue in the same prior year quarter.

 

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Six Months Ended March 31, 2015 and 2014

Total acute care revenue — Total acute care revenue for the six months ended March 31, 2015, was $943.3 million, an increase of $39.0 million or 4.3% compared to $904.2 million in the same prior year period. The increase in total acute care revenue is comprised primarily of an increase in adjusted admissions of 4.1% and an increase in net patient revenue per adjusted admission of 0.2%.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue of $2.1 million and $4.2 million for the six months ended March 31, 2015 and 2014, respectively.

Salaries and benefits — Salaries and benefits expense for the six months ended March 31, 2015, was $441.2 million, or 46.8% of total acute care revenue, compared to $428.3 million, or 47.4% of total acute care revenue in the same prior year period. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 46.4% for the six months ended March 31, 2015, compared to 46.9% in the same prior year period. The improvement in our salaries and benefits expense as a percentage of total acute care revenue, excluding the impact of stock-based compensation, is the result of the implementation of labor cost reduction initiatives, including a reduction in contract labor utilization.

Supplies — Supplies expense for the six months ended March 31, 2015, was $159.9 million, or 17.0% of total acute care revenue, compared to $152.5 million, or 16.8% of total acute care revenue in the same prior year period.

Other operating expenses — Other operating expenses for the six months ended March 31, 2015, were $196.9 million, or 20.9% of total acute care revenue, compared to $185.9 million, or 20.6% of total acute care revenue in the same prior year period.

 

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Managed Care Operations

The following table and discussion sets forth, for the periods presented, the results of our managed care operations expressed in dollar terms and as a percentage of premium and service revenues. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended March 31, 2015								Quarter Ended March 31, 2014								Six Months Ended March 31, 2015								Six Months Ended March 31, 2014
($ in thousands):		Amount				Percentage				Amount				Percentage				Amount				Percentage				Amount				Percentage
Premium and service revenues
Premium revenue		$	219,119							$	172,995							$	419,206							$	324,714
Service revenue			6,844								—								11,731								—
Premium and service revenues			225,963				100.0	%			172,995				100.0	%			430,937				100.0	%			324,714				100.0	%
Costs and expenses
Salaries and benefits			14,376				6.4	%			7,690				4.5	%			27,033				6.3	%			14,731				4.5	%
Supplies			147				0.1	%			44				0.0	%			302				0.1	%			103				0.0	%
Medical claims (1)			179,952				79.6	%			148,060				85.6	%			359,867				83.5	%			276,088				85.0	%
Other operating expenses			17,066				7.6	%			7,798				4.5	%			30,029				7.0	%			15,384				4.8	%
Rentals and leases			697				0.3	%			354				0.2	%			1,440				0.3	%			717				0.2	%
Depreciation and amortization			1,074				0.5	%			1,048				0.6	%			2,102				0.5	%			2,105				0.7	%
Total costs and expenses			213,312				94.4	%			164,994				95.4	%			420,773				97.6	%			309,128				95.2	%
Earnings before income taxes		$	12,651				5.6	%		$	8,001				4.6	%		$	10,164				2.4	%		$	15,586				4.8	%

 

(1)	Medical claims paid to our hospitals of $3.9 million and $3.1 million for the quarters ended March 31, 2015 and 2014, respectively, and $7.8 million and $5.3 million for the six months ended March 31, 2015 and 2014, respectively, are eliminated in our consolidated results.

Quarters Ended March 31, 2015 and 2014

Premium and service revenues — Premium and service revenues were $226.0 million for the quarter ended March 31, 2015, an increase of $53.0 million or 30.6%, compared to $173.0 million in the same prior year quarter. The increase in premium and service revenues is driven by growth in all of our managed care product lines, including our MSO subsidiary, which started operations on June 1, 2014. For the quarter ended March 31, 2015, total lives served across all product lines increased 73.8% compared to the same prior year quarter. For the quarter ended March 31, 2015, enrollment in our Medicare and Medicaid health plan product lines increased 32.0% and 16.8%, respectively, compared to the same prior year quarter. Premium revenue for our managed Medicaid product line continues to be favorably impacted by the state of Arizona’s expansion of the Medicaid program in connection with the Health Reform Law. Premium revenue on a per member per month basis for our health plan products increased 2.7% compared to the same prior year quarter. We also recognized $4.7 million of revenue during the quarter ended March 31, 2015, related to the HIF assessed in connection with the Health Reform Law.

Salaries and benefits — Salaries and benefits expense for the quarter ended March 31, 2015, was $14.4 million, or 6.4% of premium and service revenues, compared to $7.7 million, or 4.5% of premium and service revenues in the same prior year quarter. Salaries and benefits expense in the quarter ended March 31, 2015, compared to the same prior year quarter has been impacted by new employees associated with our new MSO subsidiary that began operations on June 1, 2014.

Medical claims — Prior to eliminations, medical claims expense was $180.0 million for the quarter ended March 31, 2015, compared to $148.1 million in the same prior year quarter. Medical claims expense as a percentage of premium revenue (“medical loss ratio” or “MLR”) related to our health plan products, excluding the impact of HIF and service related revenues, was 83.9% for the quarter ended March 31, 2015, compared to 85.6% in the same prior year quarter. The MLR for the quarter ended March 31, 2015, has benefited from reduced medical costs resulting from the effective care management of childless adult members, who were newly enrolled effective January 1, 2014 as a result of the recent expansion of the Medicaid program in Arizona. This newly enrolled population typically experiences more frequent medical utilization and higher acuity levels prior to effective management of their care. As a result of effective care management, the MLR for the Arizona Medicaid plan has declined 530 basis points (“bps”) compared to the same prior year quarter.

 

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Other operating expenses — Other operating expenses for the quarter ended March 31, 2015, were $17.1 million, or 7.6% of premium and service revenues, compared to $7.8 million, or 4.5% of premium and service revenues in the same prior year quarter. Other operating expenses for the quarter ended March 31, 2015, included the impact of $3.9 million in HIF-related expenses and a $1.1 million increase in business development costs compared to the same prior year quarter.

Six Months Ended March 31, 2015 and 2014

Premium revenue — Premium and service revenues were $430.9 million for the six months ended March 31, 2015, an increase of $106.2 million or 32.7%, compared to $324.7 million in the same prior year period. The increase in premium and service revenues is driven by growth in all of our managed care product lines, including our MSO subsidiary, which started operations on June 1, 2014. For the six months ended March 31, 2015, total lives served across all product lines increased 73.8% compared to the same prior year period. For the six months ended March 31, 2015, enrollment in our Medicare and Medicaid product lines increased 32.0% and 16.8%, respectively, compared to the same prior year period. Premium revenue for our Medicaid product line continues to be favorably impacted by the expansion of the Medicaid program in connection with the Health Reform Law. Premium revenue on a per member per month basis for our health plan products increased 5.2% compared to the same prior year period. We also recognized $7.6 million of revenue related to the HIF assessed in connection with the Health Reform Law.

Salaries and benefits — Salaries and benefits expense for the six months ended March 31, 2015, was $27.0 million, or 6.3% of premium and service revenues, compared to $14.7 million, or 4.5% of premium and service revenues in the same prior year period. Salaries and benefits in the six months ended March 31, 2015, compared to the same prior year period has been impacted by new employees associated with our new MSO subsidiary that began operations on June 1, 2014.

Medical claims — Prior to eliminations, medical claims expense was $359.9 million for the six months ended March 31, 2015, compared to $276.1 million in the same prior year period. Medical claims expense as a percentage of premium revenue or MLR related to our health plan products, excluding the impact of HIF and service related revenues, was 87.4% for the six months ended March 31, 2015, compared to 85.0% in the same prior year period. Since the January 1, 2014 effective date of Medicaid expansion, enrollment in our Arizona Medicaid plan has grown approximately 23.1%, which has created a shift in the mix of lives, including an increase in newly enrolled childless adult members, which typically experiences more frequent medical utilization and higher acuity levels prior to effective management of their care. Despite the increased MLR for the six months ended March 31, 2015, we have experienced reductions in medical costs resulting from the effective care management of the childless adult members newly enrolled during fiscal 2014. The MLR for this population has declined 810 bps during the six months ended March 31, 2015, compared to the period beginning January 1, 2014 through September 30, 2014 (the period most effected by the growth of newly enrolled childless adults and the related increase in medical utilization). As a result of the effective management of care for this population of childless adults, the MLR for the Arizona Medicaid plan declined 480 bps in the six months ended March 31, 2015, compared to the MLR for the period from January 1, 2014 through September 30, 2014.

Other operating expenses — Other operating expenses for the six months ended March 31, 2015, were $30.0 million, or 7.0% of premium and service revenues, compared to $15.4 million, or 4.8% of premium and service revenues in the same prior year period. Other operating expenses for the six months ended March 31, 2015, included the impact of $5.9 million in HIF-related expenses and a $1.7 million increase in business development costs compared to the same prior year period.

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Six Months Ended March 31, 2015 and 2014

Our cash flows are summarized as follows (in thousands):

 

		Six Months Ended March 31,
		2015				2014
Cash flows from operating activities		$	17,188			$	(32,954	)
Cash flows from investing activities		$	(19,618	)		$	(45,265	)
Cash flows from financing activities		$	(12,170	)		$	(18,302	)

 

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Operating Activities

Cash flows provided by operating activities were $17.2 million for the six months ended March 31, 2015, compared to cash flows used in operating activities of $33.0 million in the same prior year period. The prior year cash flows from operating activities were impacted by the payment of $22.3 million in income taxes, transaction fees and other costs associated with the sale-leaseback of certain real estate, along with delays in certain Texas and Arizona supplemental reimbursement. During the first six months of fiscal 2015, we have collected $51.7 million in receivables related to the Texas Medicaid supplemental reimbursement programs.

At March 31, 2015, we had $561.6 million in net working capital, compared to $529.1 million at September 30, 2014, both excluding assets and liabilities held for sale. Net accounts receivable increased $26.0 million to $331.6 million at March 31, 2015, from $305.7 million at September 30, 2014. Our days revenue in accounts receivable at March 31, 2015, were 56, compared to 54 at September 30, 2014 and 56 at March 31, 2014.

Investing Activities

Cash flows used in investing activities were $19.6 million for the six months ended March 31, 2015, compared to $45.3 million in the same prior year period. Purchases of property and equipment were $56.3 million, including $18.8 million related to the construction of a new greenfield hospital in Lehi, Utah, for the six months ended March 31, 2015, compared to $39.4 million in the same prior year period. Also included in the first six months of fiscal 2015 are $41.8 million in proceeds received from the sale of our Nevada operations.

Financing Activities

Cash flows used in financing activities were $12.2 million for the six months ended March 31, 2015, compared to $18.3 million in the same prior year period. The six months ended March 31, 2014, included distributions to non-controlling interest holders of $6.4 million associated with the sale-leaseback of certain hospital real estate.

Capital Resources

As of March 31, 2015, we had the following debt arrangements:

 

•

up to $1.325 billion senior secured credit facilities; and

 

•

$849.9 million in 8.375% senior notes due 2019.

At March 31, 2015, amounts outstanding under our senior secured credit facilities consisted of $984.4 million in term loans. In addition, we had $82.7 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.6% for both the quarters ended March 31, 2015 and 2014.

$1.325 Billion Senior Secured Credit Facilities

We are a party to a senior credit agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for senior secured financing of up to $1.325 billion consisting of (1) a $1.025 billion senior secured term loan facility maturing in May 2018 and (2) a $300.0 million senior secured revolving credit facility maturing in May 2016, of which up to $150.0 million may be utilized for the issuance of letters of credit (together, the “Senior Secured Credit Facilities”). Principal under the senior secured term loan facility is due in consecutive equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date, February 20, 2013, of a repricing amendment, with the remaining balance due upon maturity of the senior secured term loan facility. The senior secured revolving credit facility does not require principal installment payments prior to maturity. On September 12, 2014, the Amended and Restated Credit Agreement was amended to, among other things, extend the deadline by which we must reinvest the proceeds of certain assets sales from 12 months to 24 months.

Borrowings under the senior secured term loan facility (giving effect to the repricing amendment) bear interest at a rate per annum equal to, at our option, either (1) a base rate (the “base rate”) determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum. Borrowings under the senior secured revolving credit facility generally bear interest at a rate per annum equal to, at our option, either (1) the base rate plus a margin of 2.50% per annum, or (2) the LIBOR rate for the interest period relevant to such borrowing plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, we are required to pay a commitment fee on the unutilized commitments under the senior secured revolving credit facility, as well as pay customary letter of credit fees and agency fees.

 

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The Senior Secured Credit Facilities are unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the “Credit Facility Guarantors”) and are required to be guaranteed by all of our future material wholly owned subsidiaries, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Credit Facility Guarantors, including (1) a pledge of 100% of our equity interests and that of the Credit Facility Guarantors, (2) mortgage liens on all of our material real property and that of the Credit Facility Guarantors, and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires us to mandatorily prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions, following certain casualty events, certain borrowings or debt issuances, and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Senior Secured Credit Facilities, cross-defaults, certain bankruptcy events and certain change of control events.

On May 15, 2015 we entered into a waiver agreement with our senior credit lenders with respect to certain amended filings on Form 10-K/A and Form 10-Q/A and the financial statements contained therein. The waiver agreement, pursuant to which we have paid a waiver fee, effectuates a release by our senior credit lenders of any possible claims related to these amended filings and financial statements.

8.375% Senior Notes due 2019

We and IASIS Capital Corporation (together, the “Issuers”) issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to an indenture, dated as of May 3, 2011, among the Issuers and certain of the Issuers’ wholly owned domestic subsidiaries that guarantee the Senior Secured Credit Facilities (the “Notes Guarantors”) (the “Indenture”). The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries.

On October 31, 2014, the Issuers completed an offer to purchase up to $210.0 million aggregate principal amount of its outstanding Senior Notes. The Issuers were required to make the offer to purchase under the terms of the Indenture governing the Senior Notes using excess proceeds from certain asset dispositions. The offer to purchase was made at a price equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest, to but excluding the redemption date. Holders validly tendered $0.1 million in aggregate principal amount of the Senior Notes, all of which were accepted by the Issuers. We made payment to settle all validly tendered Senior Notes on November 6, 2014.

The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

We may redeem the Senior Notes in whole or in part, at anytime on or after May 15, 2015, the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions. Each subsequent year the redemption price declines 2.093 percentage points until 2017, and thereafter, at which point the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

 

Date		Percentage
May 15, 2015			104.188	%
May 15, 2016			102.094	%
May 15, 2017 and thereafter			100.000	%

The Indenture contains covenants that limit our (and our restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain

 

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circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this filing:

 

		Moody’s		Standard & Poor’s
Corporate credit		B2		B
Senior secured term loan facility		Ba3		B
Senior secured revolving credit facility		Ba3		BB-
Senior Notes		Caa1		CCC+
Outlook		Stable		Stable

Other

We executed interest rate swaps with Citibank, N.A. (“Citibank”) and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire September 30, 2015 and September 30, 2016. Under these remaining agreements, we are required to make quarterly fixed rate payments to the counterparties at annual rates ranging from 1.9% to 2.2%. The counterparties are obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, each subject to a floor of 1.25%. The interest rate swaps outstanding at March 31, 2015 are as follows:

 

		Total Notional Amounts
Effective Dates		(in thousands)
Effective from March 28, 2013 to September 30, 2015		$	100,000
Effective from March 28, 2013 to September 30, 2016			200,000

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We expect our capital expenditures for fiscal 2015 to be $130 million to $140 million, including the following significant expenditures:

 

•

$65 million to $70 million for growth and new business projects, including approximately $30 million related to our new greenfield hospital in Lehi, Utah;

 

•

$45 million to $50 million in replacement or maintenance related projects at our hospitals; and

 

•

$20 million in hardware and software costs related to information systems projects, including healthcare IT stimulus initiatives.

Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors” included in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, as amended and restated in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC.

 

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Including available cash at March 31, 2015, we have available liquidity as follows (in millions):

 

Cash and cash equivalents		$	326.6
Available capacity under our senior secured revolving credit facility			217.3
Net available liquidity at March 31, 2015		$	543.9

Net available liquidity assumes 100% participation from all lenders currently committed under our senior secured revolving credit facility. In addition to our available liquidity, we expect to generate sufficient operating cash flows in fiscal 2015. We will also utilize proceeds from our financing activities as needed.

Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see our risk factors in Item 1A. “Risk Factors” our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, as amended and restated in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see our risk factors in Item 1A. “Risk Factors” our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014, as amended and restated in our Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2014, as filed with the SEC.

SEASONALITY

The patient volumes and total revenue of our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At March 31, 2015, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $300.0 million, five-year revolving credit facility. As of March 31, 2015, we had outstanding variable rate debt of $984.4 million.

We have managed our market exposure to changes in interest rates by implementing a comprehensive interest rate hedging strategy that includes converting variable rate debt to fixed rate debt. We have executed interest rate swaps for non-trading and non-speculative purposes with Citibank and Barclays, as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014. The remaining agreements were effective March 28, 2013 and expire between September 30, 2015 and September 30, 2016, and have annual rates ranging from 1.9% to 2.2%. Our interest rate hedging agreements expose us to credit risk in the event of non-performance by our counterparties, Citibank and Barclays. However, we do not anticipate non-performance by either of our counterparties.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 1.25% LIBOR floor that exists in our Senior Secured Credit Facilities.

 

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We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility. Our ability to borrow funds under our senior secured revolving credit facility is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

Item 4. Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective as of March 31, 2015, solely based upon the material weakness described below.

In connection with the restatement of our consolidated financial statements with respect to the third and fourth fiscal quarters of our 2014 fiscal year and the first quarter of the 2015 fiscal year, our Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has identified a material weakness in the internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. For these periods, our management identified a lack of sufficient controls regarding appropriate segregation of duties with respect to our managed care business’ accounting for estimated program settlements under our largest state managed Medicaid contract. A lack of appropriate segregation of duties occurred because the managed care division finance employee charged with reviewing journal entries with respect to such program settlements also prepared the related supporting schedules. Solely as a result of such material weakness, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2015.

In light of the deficiency described above, we have performed additional analysis and reviews to provide reasonable assurance that the financial statements in this Report have been prepared in accordance with generally accepted accounting principles.

Remediation Plan

Our management team has developed a plan to address this material weakness. This plan includes the adoption of polices that specifically delineate responsibility for the preparation and review of estimated program settlement amounts and practices to ensure a separation of duties in these areas, as well as adding an additional level of review of supporting documentation and related journal entries. We believe that these steps will correct the material weakness described above.

Changes in Internal Control Over Financial Reporting

Excepts as described above, during the period covered by this report, there have been no changes in our internal controls that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        In November 2010, the U.S. Department of Justice (“DOJ”) sent a letter to IAS requesting a 12-month tolling agreement in connection with an investigation into Medicare claims submitted by our hospitals in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) between January 1, 2003 and November 30, 2010. At that time, neither the precise number of procedures, number of claims, nor the hospitals involved were identified by the DOJ. We subsequently learned that the DOJ was conducting a national initiative with respect to ICD procedures involving a number of healthcare providers and was seeking information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. On January 11, 2011, IAS entered into the tolling agreement with the DOJ and, subsequently, the DOJ provided us with a list of 194 procedures between October 1, 2003 and November 30, 2010, involving ICDs at 14 of our hospitals which are the subject of further medical necessity review by the DOJ. Our outside counsel has submitted to the DOJ summary justifications and supporting evidence relating to the medical claims at seven of our hospitals. We are cooperating fully with the government and, to date, the DOJ has not asserted any claim against our hospitals. On August 31, 2012 the DOJ issued a nationwide proposed framework for resolving the DOJ’s review of the ICD claims. We continue to review the claims applying the resolution model proposed by the DOJ. We believe that at least 131 of these procedure claims were properly documented and comply with the Medicare coverage criteria and billed appropriately. We continue to provide support for the remaining 63 of these cases that could have some likelihood of enforcement by the DOJ. If we are unable to place these claims in a non-enforcement or lesser enforcement category, the government may require repayment, which could impose a multiplier. Given the case-specific nature of the claims and the DOJ’s discretion to compromise claims, we are unable at this time to estimate any potential repayment obligation related to this matter. The tolling agreement extends through July 31, 2015.

We have settled with CMS all matters related to its voluntary self-disclosure with respect to non-compliance by certain of its affiliated hospitals, owned in part with physicians, with respect to an aspect of the Stark Law’s “whole hospital” exception. Apart from payment that is immaterial to the Company, which has been made, the settlement entered into with respect to this matter does not place restrictions or conditions on the operations of the applicable hospitals.

 

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Item 1A. Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors described in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014 and Form 10-Q/A for the quarterly period ended December 31, 2014, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014 and Form 10-Q/A for the quarterly period ended December 31, 2014.

Item 6. Exhibits

 

(a)	List of Exhibits:

Exhibits: See the Index to Exhibits at the end of this report, which is incorporated herein by reference.

 

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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.

 

				IASIS HEALTHCARE LLC
Date: May 15, 2015				By:		/s/ John M. Doyle
						John M. Doyle
						Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Principal Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from our quarterly report on Form 10-Q for the quarter ended March 31, 2015, filed with the SEC on May 15, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at March 31, 2015 and September 30, 2014, (ii) the condensed consolidated statements of operations for the quarters and six months ended March 31, 2015 and 2014, (iii) the condensed consolidated statements of comprehensive income (loss) for the quarters and six months ended March 31, 2015 and 2014, (iv) the condensed consolidated statement of equity, (v) the condensed consolidated statements of cash flows for the six months ended March 31, 2015 and 2014, and (vi) the notes to the condensed consolidated financial statements (tagged as blocks of text). (1)

 

(1)

The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

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