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Table of Contents

 

 

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.

 

 

 


Table of Contents

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   

 

 

2


Table of Contents

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.

 

3


Table of Contents

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.

 

4


Table of Contents

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.

 

5


Table of Contents

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.

 

6


Table of Contents

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.

 

7


Table of Contents

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.

 

8


Table of Contents

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.

 

9


Table of Contents

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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Table of Contents
     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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Table of Contents
     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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Table of Contents
     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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

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   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

28


Table of Contents

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
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

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   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

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
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

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