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EXCEL - IDEA: XBRL DOCUMENT - AMSURG CORP | Financial_Report.xls |
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EX-32.1 - EX-32.1 - AMSURG CORP | g24785exv32w1.htm |
EX-31.2 - EX-31.2 - AMSURG CORP | g24785exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2010
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in its Charter)
Tennessee | 62-1493316 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
20 Burton Hills Boulevard | ||
Nashville, TN | 37215 | |
(Address of principal executive offices) | (Zip code) |
(615) 665-1283
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of November 4, 2010 there were outstanding 30,933,458 shares of the registrants Common
Stock, no par value.
Table of Contents to Form 10-Q for the Nine Months Ended September 30, 2010
i
Table of Contents
Part I
Item 1. Financial Statements
AmSurg Corp.
Consolidated Balance Sheets
September 30, 2010 (unaudited) and December 31, 2009
Consolidated Balance Sheets
September 30, 2010 (unaudited) and December 31, 2009
(Dollars in thousands)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 28,797 | $ | 29,377 | ||||
Accounts receivable, net of allowance of $13,201 and $12,375, respectively |
71,270 | 66,886 | ||||||
Supplies inventory |
9,145 | 8,745 | ||||||
Deferred income taxes |
2,652 | 2,324 | ||||||
Prepaid and other current assets |
15,629 | 15,408 | ||||||
Current assets held for sale |
232 | 34 | ||||||
Total current assets |
127,725 | 122,774 | ||||||
Long-term receivables and other assets |
| 56 | ||||||
Property and equipment, net |
111,487 | 112,084 | ||||||
Goodwill, net |
873,797 | 813,876 | ||||||
Intangible assets, net |
13,679 | 9,797 | ||||||
Long-term assets held for sale |
48 | 170 | ||||||
Total assets |
$ | 1,126,736 | $ | 1,058,757 | ||||
Liabilities and Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 5,750 | $ | 5,657 | ||||
Accounts payable |
12,436 | 14,821 | ||||||
Accrued salaries and benefits |
15,928 | 18,156 | ||||||
Other accrued liabilities |
3,446 | 3,208 | ||||||
Current income taxes payable |
| 402 | ||||||
Current liabilities held for sale |
169 | 37 | ||||||
Total current liabilities |
37,729 | 42,281 | ||||||
Long-term debt |
284,842 | 289,041 | ||||||
Deferred income taxes |
86,117 | 71,665 | ||||||
Other long-term liabilities |
20,880 | 22,036 | ||||||
Commitments and contingencies |
||||||||
Noncontrolling interests redeemable |
139,436 | 123,363 | ||||||
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued or outstanding |
| | ||||||
Equity: |
||||||||
Common stock, no par value, 70,000,000 shares authorized, 30,925,206 and 30,674,525
shares outstanding, respectively |
168,212 | 163,729 | ||||||
Retained earnings |
382,193 | 343,236 | ||||||
Accumulated other comprehensive loss, net of income taxes |
(908 | ) | (1,849 | ) | ||||
Total AmSurg Corp. equity |
549,497 | 505,116 | ||||||
Noncontrolling interests non-redeemable |
8,235 | 5,255 | ||||||
Total equity |
557,732 | 510,371 | ||||||
Total liabilities and equity |
$ | 1,126,736 | $ | 1,058,757 | ||||
See accompanying notes to the unaudited consolidated financial statements.
1
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Consolidated Statements of Earnings (unaudited)
Three Months and Nine Months Ended September 30, 2010 and 2009
Consolidated Statements of Earnings (unaudited)
Three Months and Nine Months Ended September 30, 2010 and 2009
(In thousands, except earnings per share)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 180,275 | $ | 167,873 | $ | 532,692 | $ | 500,141 | ||||||||
Operating expenses: |
||||||||||||||||
Salaries and benefits |
54,400 | 51,328 | 158,725 | 149,708 | ||||||||||||
Supply cost |
23,900 | 20,365 | 70,474 | 61,198 | ||||||||||||
Other operating expenses |
37,740 | 33,660 | 114,081 | 102,082 | ||||||||||||
Depreciation and amortization |
7,113 | 5,743 | 18,896 | 17,092 | ||||||||||||
Total operating expenses |
123,153 | 111,096 | 362,176 | 330,080 | ||||||||||||
Operating income |
57,122 | 56,777 | 170,516 | 170,061 | ||||||||||||
Interest expense |
4,042 | 1,921 | 9,079 | 5,986 | ||||||||||||
Earnings from continuing operations before income taxes |
53,080 | 54,856 | 161,437 | 164,075 | ||||||||||||
Income tax expense |
7,880 | 8,944 | 25,966 | 26,855 | ||||||||||||
Net earnings from continuing operations |
45,200 | 45,912 | 135,471 | 137,220 | ||||||||||||
Discontinued operations: |
||||||||||||||||
Earnings (loss) from operations of discontinued interests in surgery
centers, net of income tax |
32 | (1 | ) | (99 | ) | 122 | ||||||||||
(Loss) gain on disposal of discontinued interests in surgery
centers, net of income tax |
(97 | ) | 411 | (97 | ) | 148 | ||||||||||
Net (loss) earnings from discontinued operations |
(65 | ) | 410 | (196 | ) | 270 | ||||||||||
Net earnings |
45,135 | 46,322 | 135,275 | 137,490 | ||||||||||||
Less net earnings attributable to noncontrolling interests: |
||||||||||||||||
Net earnings from continuing operations |
31,997 | 32,519 | 96,288 | 97,416 | ||||||||||||
Net earnings from discontinued operations |
20 | | 30 | 75 | ||||||||||||
Total net earnings attributable to noncontrolling interests |
32,017 | 32,519 | 96,318 | 97,491 | ||||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 13,118 | $ | 13,803 | $ | 38,957 | $ | 39,999 | ||||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||||||||||
Earnings from continuing operations, net of income tax |
$ | 13,203 | $ | 13,393 | $ | 39,183 | $ | 39,804 | ||||||||
Discontinued operations, net of income tax |
(85 | ) | 410 | (226 | ) | 195 | ||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 13,118 | $ | 13,803 | $ | 38,957 | $ | 39,999 | ||||||||
Earnings per share-basic: |
||||||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders |
$ | 0.44 | $ | 0.44 | $ | 1.30 | $ | 1.30 | ||||||||
Net earnings (loss) from discontinued operations attributable to
AmSurg Corp. common shareholders |
| 0.01 | (0.01 | ) | 0.01 | |||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 0.43 | $ | 0.46 | $ | 1.29 | $ | 1.30 | ||||||||
Earnings per share-diluted: |
||||||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders |
$ | 0.43 | $ | 0.44 | $ | 1.28 | $ | 1.29 | ||||||||
Net earnings (loss) from discontinued operations attributable to
AmSurg Corp. common shareholders |
| 0.01 | (0.01 | ) | 0.01 | |||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 0.43 | $ | 0.45 | $ | 1.27 | $ | 1.29 | ||||||||
Weighted average number of shares and share equivalents outstanding: |
||||||||||||||||
Basic |
30,251 | 30,195 | 30,234 | 30,699 | ||||||||||||
Diluted |
30,620 | 30,528 | 30,663 | 30,921 |
See accompanying notes to the unaudited consolidated financial statements.
2
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months and Nine Months Ended September 30, 2010 and 2009
Consolidated Statements of Comprehensive Income (unaudited)
Three Months and Nine Months Ended September 30, 2010 and 2009
(In thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings |
$ | 45,135 | $ | 46,322 | $ | 135,275 | $ | 137,490 | ||||||||
Other comprehensive income, net of income tax: |
||||||||||||||||
Unrealized gain on interest rate swap, net of income tax |
333 | 150 | 941 | 700 | ||||||||||||
Comprehensive income, net of income tax |
45,468 | 46,472 | 136,216 | 138,190 | ||||||||||||
Less comprehensive income attributable to noncontrolling interests |
32,017 | 32,519 | 96,318 | 97,491 | ||||||||||||
Comprehensive income attributable to AmSurg Corp. common
shareholders |
$ | 13,451 | $ | 13,953 | $ | 39,898 | $ | 40,699 | ||||||||
See accompanying notes to the unaudited consolidated financial statements.
3
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Consolidated Statements of Changes in Equity (unaudited)
Nine Months Ended September 30, 2010 and 2009
Consolidated Statements of Changes in Equity (unaudited)
Nine Months Ended September 30, 2010 and 2009
(In thousands)
Non- | ||||||||||||||||||||||||||||||||
AmSurg Corp. Shareholders | Non- | controlling | ||||||||||||||||||||||||||||||
Accumulated | controlling | Interests | ||||||||||||||||||||||||||||||
Other | Interests | Total | Redeemable | |||||||||||||||||||||||||||||
Common Stock | Retained | Comprehensive | Non- | Equity | (Temporary | Net | ||||||||||||||||||||||||||
Shares | Amount | Earnings | Loss | redeemable | (Permanent) | Equity) | Earnings | |||||||||||||||||||||||||
Balance at December 31, 2009 |
30,674 | $ | 163,729 | $ | 343,236 | $ | (1,849 | ) | $ | 5,255 | $ | 510,371 | $ | 123,363 | ||||||||||||||||||
Issuance of restricted common
stock |
231 | | | | | | | |||||||||||||||||||||||||
Cancellation of restricted
common stock |
(23 | ) | | | | | | | ||||||||||||||||||||||||
Stock options exercised |
43 | 683 | | | | 683 | | |||||||||||||||||||||||||
Share-based compensation |
| 3,425 | | | | 3,425 | | |||||||||||||||||||||||||
Change in tax benefit related
to exercise of stock options |
| (16 | ) | | | | (16 | ) | | |||||||||||||||||||||||
Net earnings |
| | 38,957 | | 3,278 | 42,235 | 93,040 | $ | 135,275 | |||||||||||||||||||||||
Distributions to noncontrolling
interests, net of capital
contributions |
| | | | (3,766 | ) | (3,766 | ) | (94,872 | ) | ||||||||||||||||||||||
Purchase of noncontrolling
interest |
| 893 | | | (137 | ) | 756 | (1,046 | ) | |||||||||||||||||||||||
Sale of noncontrolling interest |
| (502 | ) | | | 219 | (283 | ) | 614 | |||||||||||||||||||||||
Acquisitions and other
transactions impacting
noncontrolling interests |
| | | | 3,386 | 3,386 | 18,337 | |||||||||||||||||||||||||
Gain on interest rate swap, net
of income tax expense of $607 |
| | | 941 | | 941 | | |||||||||||||||||||||||||
Balance at September 30, 2010 |
30,925 | $ | 168,212 | $ | 382,193 | $ | (908 | ) | $ | 8,235 | $ | 557,732 | $ | 139,436 | ||||||||||||||||||
Balance at January 1, 2009 |
31,342 | $ | 172,192 | $ | 291,088 | $ | (2,851 | ) | $ | 2,877 | $ | 463,306 | $ | 63,202 | ||||||||||||||||||
Issuance of restricted common
stock |
162 | | | | | | | |||||||||||||||||||||||||
Cancellation of restricted
common stock |
(14 | ) | | | | | | | ||||||||||||||||||||||||
Stock options exercised |
12 | 178 | | | | 178 | | |||||||||||||||||||||||||
Stock repurchased |
(831 | ) | (12,587 | ) | | | | (12,587 | ) | | ||||||||||||||||||||||
Share-based compensation |
| 3,102 | | | | 3,102 | | |||||||||||||||||||||||||
Change in tax benefit related
to exercise of stock options |
| 1 | | | | 1 | | |||||||||||||||||||||||||
Net earnings |
| | 39,999 | | 2,987 | 42,986 | 94,504 | $ | 137,490 | |||||||||||||||||||||||
Distributions to noncontrolling
interests, net of capital
contributions |
| | | | (2,858 | ) | (2,858 | ) | (94,246 | ) | ||||||||||||||||||||||
Sale of noncontrolling interest |
| (80 | ) | | | | (80 | ) | 90 | |||||||||||||||||||||||
Acquisitions and other
transactions impacting
noncontrolling interests |
| | | | 2,161 | 2,161 | 12,546 | |||||||||||||||||||||||||
Gain on interest rate swap, net
of income tax expense of $451 |
| | | 700 | | 700 | | |||||||||||||||||||||||||
Balance at September 30, 2009 |
30,671 | $ | 162,806 | $ | 331,087 | $ | (2,151 | ) | $ | 5,167 | $ | 496,909 | $ | 76,096 | ||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
4
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2010 and 2009
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2010 and 2009
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$135,275 | $137,490 | ||||||
Adjustments to reconcile net earnings to net cash flows provided by
operating activities: |
||||||||
Depreciation and amortization |
18,896 | 17,092 | ||||||
Net loss on sale of long-lived assets held for sale |
159 | 434 | ||||||
Share-based compensation |
3,425 | 3,102 | ||||||
Excess tax benefit from share-based compensation |
(81 | ) | (27 | ) | ||||
Deferred income taxes |
13,417 | 11,240 | ||||||
Increase (decrease) in cash and cash equivalents, net of effects of
acquisitions and dispositions, due to changes in: |
||||||||
Accounts receivable, net |
(2,953 | ) | (2,102 | ) | ||||
Supplies inventory |
360 | 376 | ||||||
Prepaid and other current assets |
(180 | ) | 1,021 | |||||
Accounts payable |
(2,253 | ) | (944 | ) | ||||
Accrued expenses and other liabilities |
(1,948 | ) | 8,138 | |||||
Other, net |
639 | 248 | ||||||
Net cash flows provided by operating activities |
164,756 | 176,068 | ||||||
Cash flows from investing activities: |
||||||||
Acquisition of interests in surgery centers and related transactions |
(41,615 | ) | (19,705 | ) | ||||
Acquisition of property and equipment |
(13,500 | ) | (16,509 | ) | ||||
Proceeds from sale of surgery centers |
| 898 | ||||||
Repayment of notes receivable |
| 1,666 | ||||||
Net cash flows used in investing activities |
(55,115 | ) | (33,650 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from long-term borrowings |
156,589 | 52,459 | ||||||
Repayment on long-term borrowings |
(164,537 | ) | (87,049 | ) | ||||
Distributions to noncontrolling interests |
(98,661 | ) | (97,195 | ) | ||||
Proceeds from issuance of common stock upon exercise of stock options |
683 | 178 | ||||||
Repurchase of common stock |
| (12,587 | ) | |||||
Capital contributions and ownership transactions by noncontrolling interests |
64 | 858 | ||||||
Excess tax benefit from share-based compensation |
81 | 27 | ||||||
Financing cost incurred |
(4,440 | ) | (11 | ) | ||||
Net cash flows used in financing activities |
(110,221 | ) | (143,320 | ) | ||||
Net decrease in cash and cash equivalents |
(580 | ) | (902 | ) | ||||
Cash and cash equivalents, beginning of period |
29,377 | 31,548 | ||||||
Cash and cash equivalents, end of period |
$28,797 | $30,646 | ||||||
See accompanying notes to the unaudited consolidated financial statements.
5
Table of Contents
Item 1.
Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements
Notes to the Unaudited Consolidated Financial Statements
(1) Basis of Presentation
AmSurg Corp. (the Company), through its wholly owned subsidiaries, owns majority interests,
primarily 51%, in limited partnerships and limited liability companies (LLCs) which own and
operate ambulatory surgery centers (centers). The Company also has majority ownership interests
in other limited partnerships and LLCs formed to develop additional centers. The consolidated
financial statements include the accounts of the Company and its subsidiaries and the majority
owned limited partnerships and LLCs in which the Companys wholly owned subsidiaries are the
general partner or majority member. Consolidation of such limited partnerships and LLCs is
necessary as the Companys wholly owned subsidiaries have 51% or more of the financial interest,
are the general partner or majority member with all the duties, rights and responsibilities
thereof, are responsible for the day-to-day management of the limited partnerships and LLCs, and
have control of the entities. The responsibilities of the Companys noncontrolling partners
(limited partners and noncontrolling members) are to supervise the delivery of medical services,
with their rights being restricted to those that protect their financial interests, such as
approval of the acquisition of significant assets or the incurrence of debt which they are
generally required to guarantee on a pro rata basis based upon their respective ownership
interests. Intercompany profits, transactions and balances have been eliminated. All limited
partnerships and LLCs and noncontrolling partners are referred to herein as partnerships and
partners, respectively.
Ownership interests in subsidiaries held by parties other than the Company are identified and
generally presented in the consolidated financial statements within the equity section but separate
from the Companys equity. However, in instances in which certain redemption features that are not
solely within the control of the Company are present, classification of noncontrolling interests
outside of permanent equity is required. Consolidated net income attributable to the Company and
to the noncontrolling interests are identified and presented on the face of the consolidated
statements of earnings; changes in ownership interests are accounted for as equity transactions;
and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the
former subsidiary and the gain or loss on the deconsolidation of the subsidiary is measured at fair
value. Certain transactions with noncontrolling interests are also classified within financing
activities in the statements of cash flows.
As further described in note 11, upon the occurrence of certain fundamental regulatory changes, the
Company would be obligated, under the terms of substantially all of its partnership and operating
agreements, to purchase the noncontrolling interests related to those partnerships. While the
Company believes that the likelihood of a change in current law that would trigger such purchases
was remote as of September 30, 2010, the occurrence of such regulatory changes is outside the
control of the Company. As a result, these noncontrolling interests that are subject to this
redemption feature are not included as part of the Companys equity and are classified as
noncontrolling interests redeemable on the Companys consolidated balance sheets.
Center profits and losses are allocated to the Companys partners in proportion to their ownership
percentages and reflected in the aggregate as net earnings attributable to noncontrolling
interests. The partners of the Companys center partnerships typically are organized as general
partnerships, limited partnerships or limited liability companies that are not subject to federal
income tax. Each partner shares in the pre-tax earnings of the center in which it is a partner.
Accordingly, the earnings attributable to noncontrolling interests in each of the Companys
partnerships are generally determined on a pre-tax basis, and total net earnings attributable to
noncontrolling interests are presented after net earnings. However, the Company considers the
impact of the net earnings attributable to noncontrolling interests on earnings before income taxes
in order to determine the amount of pre-tax earnings on which the Company must determine its tax
expense. In addition, distributions from the partnerships are made to both the Companys wholly
owned subsidiaries and the partners on a pre-tax basis.
The Company operates in one reportable business segment, the ownership and operation of ambulatory
surgery centers.
These unaudited financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim
financial statements contained in this report reflect all adjustments, consisting of only normal
recurring accruals, which are necessary for a fair presentation of the financial position and the
results of operations for the interim periods presented. The results of operations for any interim
period are not necessarily indicative of results for the full year.
The accompanying unaudited consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2009 Annual Report on Form 10-K.
6
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
(2) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
The determination of contractual and bad debt allowances constitutes a significant estimate. Some
of the factors considered by management in determining the amount of such allowances are the
historical trends of the centers cash collections and contractual and bad debt write-offs,
accounts receivable agings, established fee schedules, contracts with payors and procedure
statistics. Accordingly, net accounts receivable at September 30, 2010 and December 31, 2009
reflect allowances for contractual adjustments of $116,928,000 and $100,088,000, respectively, and
allowances for bad debt expense of $13,201,000 and $12,375,000, respectively. Bad debt expense is
included in other operating expenses and was approximately $4,239,000 and $13,385,000 for the three
and nine months ended September 30, 2010, respectively, and $4,315,000 and $13,085,000 for the
three and nine months ended September 30, 2009, respectively.
(3) Revenue Recognition
Center revenues consist of billing for the use of the centers facilities (the facility fee)
directly to the patient or third-party payor and, in limited instances, billing for anesthesia
services. Such revenues are recognized when the related surgical procedures are performed.
Revenues exclude any amounts billed for physicians surgical services, which are billed separately
by the physicians to the patient or third-party payor.
Revenues from centers are recognized on the date of service, net of estimated contractual
adjustments from third-party medical service payors including Medicare and Medicaid. During the
nine months ended September 30, 2010 and 2009, the Company derived approximately 32%, in both
periods presented, of its revenues from governmental healthcare programs, primarily Medicare.
Concentration of credit risk with respect to other payors is limited due to the large number of
such payors.
(4) Acquisitions and Dispositions
The Company accounts for its business combinations under the fundamental requirements of the
acquisition method of accounting and under the premise that an acquirer be identified for each
business combination. The acquirer is the entity that obtains control of one or more businesses in
the business combination and the acquisition date is the date the acquirer achieves control. The
assets acquired, liabilities assumed and any noncontrolling interests in the acquired business at
the acquisition date are recognized at their fair values as of that date, and the direct costs
incurred in connection with the business combination are recorded and expensed separately from the
business combination.
As a significant part of its growth strategy, the Company acquires controlling interests in
centers. During the nine months ended
September 30, 2010 and 2009, the Company, through a wholly owned subsidiary and in separate
transactions, acquired controlling interests in four centers and five centers, respectively. The
aggregate amount paid for the acquisitions during the nine months ended September 30, 2010 and 2009
was approximately $41,615,000 and $19,705,000, respectively, and was paid in cash and funded by a
combination of operating cash flow and borrowings under the Companys revolving credit facility.
The total fair value of an acquisition includes an amount allocated to goodwill, which results from
the centers favorable reputations in their markets, their market positions and their ability to
deliver quality care with high patient satisfaction consistent with the Companys business model.
The acquisition date fair value of the total consideration transferred and acquisition date fair
value of each major class of consideration for the acquisitions completed in the nine months ended
September 30, 2010 are as follows (in thousands):
Accounts receivable |
$ | 2,033 | ||
Supplies inventory, prepaid and other current assets |
792 | |||
Property and equipment |
1,720 | |||
Accounts payable |
(1,077 | ) | ||
Other accrued liabilities |
(90 | ) | ||
Long-term debt |
(199 | ) | ||
Goodwill (approximately $39,600 deductible for tax purposes) |
60,250 | |||
Total fair value |
63,429 | |||
Less: Fair value attributable to noncontrolling interests |
21,814 | |||
Acquisition date fair value of total consideration transferred |
$ | 41,615 | ||
7
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
Fair value attributable to noncontrolling interests is based on significant inputs that are not
observable in the market. Key inputs used to determine the fair value include financial multiples
used in the purchase of noncontrolling interests in centers. Such multiples, based on earnings,
are used as a benchmark for the discount to be applied for the lack of control or marketability.
The fair value of noncontrolling interests may be subject to adjustment as the Company completes
its initial accounting for acquired tangible assets.
The Company incurred and expensed in other operating expenses approximately $189,000 and $104,000
in the nine months ended
September 30, 2010 and 2009, respectively, in acquisition related costs, primarily attorney fees.
Revenues and net earnings included in the nine months ended September 30, 2010 and 2009 associated
with these acquisitions are as follows (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 10,071 | $ | 6,882 | ||||
Net earnings |
3,246 | 2,389 | ||||||
Less: Net earnings attributable to noncontrolling interests |
1,597 | 1,448 | ||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 1,649 | $ | 941 | ||||
The unaudited consolidated pro forma results for the nine months ended September 30, 2010 and 2009,
assuming all 2010 and 2009 acquisitions had been consummated on January 1, 2009, are as follows (in
thousands, except per share data):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 539,655 | $ | 549,424 | ||||
Net earnings |
136,727 | 148,364 | ||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||
Net earnings from continuing operations |
39,688 | 45,405 | ||||||
Net earnings |
39,462 | 45,600 | ||||||
Net earnings from continuing operations per common share: |
||||||||
Basic |
$ | 1.31 | $ | 1.48 | ||||
Diluted |
$ | 1.29 | $ | 1.47 | ||||
Net earnings: |
||||||||
Basic |
$ | 1.31 | $ | 1.49 | ||||
Diluted |
$ | 1.29 | $ | 1.47 | ||||
Weighted average number of shares and share equivalents: |
||||||||
Basic |
30,234 | 30,699 | ||||||
Diluted |
30,663 | 30,921 |
At September 30, 2010, the Company held one surgery center for sale, which was subsequently sold in
October 2010. The Company classified and completed the disposition of an additional center in
2009. The decision to dispose of these centers was the result of managements assessment of the
limited growth and operational opportunities at the centers. The results of operations of these
centers have been classified as discontinued operations in all periods presented. Results of
operations of all discontinued surgery centers disposed of or classified as held for sale in 2010
and 2009 for the three and nine months ended September 30, 2010 and 2009 were as follows (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 362 | $ | 431 | $ | 1,008 | $ | 1,268 | ||||||||
Earnings before income taxes |
40 | (1 | ) | 60 | 153 | |||||||||||
Net earnings (loss) |
32 | (1 | ) | (99 | ) | 122 |
8
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
(5) Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three and nine months ended September 30,
2010 and 2009 are as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance, beginning of period |
$ | 859,759 | $ | 694,752 | $ | 813,876 | $ | 661,693 | ||||||||
Purchase price allocations |
14,053 | (685 | ) | 59,936 | 32,764 | |||||||||||
Disposals |
(15 | ) | | (15 | ) | (390 | ) | |||||||||
Balance, end of period |
$ | 873,797 | $ | 694,067 | $ | 873,797 | $ | 694,067 | ||||||||
Amortizable intangible assets at September 30, 2010 and December 31, 2009 consisted of the
following (in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Deferred financing cost |
$ | 4,493 | $ | (326 | ) | $ | 4,167 | $ | 2,780 | $ | (2,310 | ) | $ | 470 | ||||||||||
Customer and restrictive
covenant agreements |
3,180 | (1,768 | ) | 1,412 | 3,180 | (1,618 | ) | 1,562 | ||||||||||||||||
Total amortizable
intangible assets |
$ | 7,673 | $ | (2,094 | ) | $ | 5,579 | $ | 5,960 | $ | (3,928 | ) | $ | 2,032 | ||||||||||
Amortization of intangible assets for the three months ended September 30, 2010 and 2009 was
$278,000 and $123,000, respectively, and for the nine months ended September 30, 2010 and 2009 was
$892,000 and $368,000, respectively. Estimated amortization of intangible assets for the remainder
of 2010 and the following five years and thereafter is $278,000, $1,108,000, $1,108,000,
$1,105,000, $1,101,000, $598,000 and $281,000, respectively. The Company expects to recognize
amortization of intangible assets over a weighted average period of 5.2 years.
At September 30, 2010 and December 31, 2009, other non-amortizable intangible assets related to
restrictive covenant arrangements were $8,100,000 and $7,765,000, respectively.
(6) Long-term Debt
Long-term debt at September 30, 2010 and December 31, 2009 was comprised of the following (in
thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Revolving credit agreement |
$ | 199,000 | $ | 276,300 | ||||
Fixed rate senior secured notes |
75,000 | | ||||||
Other debt |
10,803 | 14,250 | ||||||
Capitalized lease arrangements |
5,789 | 4,148 | ||||||
290,592 | 294,698 | |||||||
Less current portion |
5,750 | 5,657 | ||||||
Long-term debt |
$ | 284,842 | $ | 289,041 | ||||
The Company refinanced its revolving credit facility on May 28, 2010. The new revolving credit
agreement permits the Company to borrow up to $375,000,000 to, among other things, finance its
acquisition and development projects and any future stock repurchase programs at an interest rate
equal to, at the Companys option, the base rate plus 1.25% to 2.50%, or LIBOR plus 2.25% to 3.50%,
or a combination thereof; provides for a fee of 0.25% to 0.625% of unused commitments; and contains
certain covenants relating to the ratio of debt to operating performance measurements, interest
coverage ratios and minimum net worth. Borrowings under the revolving credit agreement mature in
May 2015 and are secured primarily by a pledge of the stock of our subsidiaries that serve as the
general partners of our limited partnerships and our partnership and membership interests in the
limited partnerships and limited liability companies. The Company was in compliance with all
covenants contained in the revolving credit agreement at September 30, 2010.
9
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
On May 28, 2010, the Company issued, pursuant to a note purchase agreement, $75,000,000 of 6.04%
senior secured notes due May 28, 2020. The senior secured notes are pari passu with the
indebtedness under the Companys revolving credit facility and require payment of principal
beginning in year four. The note purchase agreement governing the senior secured notes contains
covenants similar to the covenants in the revolving credit agreement. The Company was in
compliance with all covenants contained in the note purchase agreement at September 30, 2010.
(7) Derivative Instruments
The Company entered into an interest rate swap agreement in April 2006, the objective of which is
to hedge exposure to the variability of the future expected cash flows attributable to the variable
interest rate of a portion of the Companys outstanding balance under its revolving credit
facility. The interest rate swap has a notional amount of $50,000,000. The Company pays to the
counterparty a fixed rate of 5.365% of the notional amount of the interest rate swap and receives a
floating rate from the counterparty based on LIBOR. The interest rate swap matures in April 2011.
The critical terms of the underlying hedge arrangement remained unchanged upon the refinancing of
the revolving credit facility. In the opinion of management and as permitted by Accounting
Standards Codification Topic 815, Derivatives and Hedging (ASC 815), the interest rate swap (as a
cash flow hedge) is a fully effective hedge. Payments or receipts of cash under the interest rate
swap are shown as a part of operating cash flows, consistent with the interest expense
incurred pursuant to the revolving credit agreement. The value of the swap represents the
estimated amount the Company would have paid as of September 30, 2010 upon termination of the
agreement based on a valuation obtained from the financial institution that is the counterparty to
the interest rate swap agreement. An increase of $333,000 and $941,000 in the fair value of the
interest rate swap, net of tax, was included in other comprehensive income for the three and nine
months ended September 30, 2010, respectively. An increase of $150,000 and $700,000 in the fair
value of the interest rate swap, net of tax, was included in other comprehensive income for the
three and nine months ended September 30, 2009, respectively. Accumulated other comprehensive loss,
net of income taxes, was $908,000 and $1,849,000 at September 30, 2010 and December 31, 2009,
respectively.
The fair values of derivative instruments in the consolidated balance sheets as of September 30,
2010 and December 31, 2009 were as follows (in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
September 30, 2010 | December 31, 2009 | September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||
Balance | Balance | Balance | Balance | |||||||||||||||||||||||||||||
Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | |||||||||||||||||||||||||
Location | Value | Location | Value | Location | Value | Location | Value | |||||||||||||||||||||||||
Derivatives designated as hedging instruments |
Other assets, net | $ | | Other assets, net | $ | | Other long-term liabilities | $ | 1,548 | Other long-term liabilities | $ | 3,095 |
(8) Fair Value Measurements
The fair value of a financial instrument is the amount at which the instrument could be exchanged
in an orderly transaction between market participants to sell the asset or transfer the liability.
The inputs used by the Company to measure fair value are classified into the following fair value
hierarchy:
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. | |
Level 2:
|
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. | |
Level 3:
|
Unobservable inputs that reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
Effective January 1, 2010, the Company adopted the updated guidance of the Financial Accounting
Standards Board (FASB) related to fair value measurements and disclosures, which requires a
reporting entity to disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in
the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a
reporting entity should disclose separately information about purchases, sales, issuances and
settlements. The updated guidance also requires that an entity should provide fair value
measurement disclosures for each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and non-recurring
fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective
for interim or annual financial reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level
3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the
guidance with respect to the roll
10
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
forward activity in Level 3 fair value measurements. The adoption of the updated guidance for
Levels 1 and 2 fair value measurements did not have an impact on the Companys consolidated results
of operations or financial condition.
In determining the fair value of assets and liabilities that are measured on a recurring basis, the
following measurement methods were applied as of September 30, 2010 and December 31, 2009 and were
commensurate with the market approach (in thousands):
Fair Value Measurements at | Fair Value Measurements at | |||||||||||||||||||||||||||||||
September 30, | Reporting Date Using: | December 31, | Reporting Date Using: | |||||||||||||||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Supplemental executive
retirement savings plan
investments |
$ | 5,897 | $ | | $ | 5,897 | $ | | $ | 4,544 | $ | | $ | 4,544 | $ | | ||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||
Interest rate swap agreement |
$ | 1,548 | $ | | $ | 1,548 | $ | | $ | 3,095 | $ | | $ | 3,095 | $ | | ||||||||||||||||
The fair value of the supplemental executive retirement savings plan investments, which are
included in prepaid and other current assets, was determined using the calculated net asset values
obtained from the plan administrator and observable inputs of similar public mutual fund
investments. The fair value of the interest rate swap agreement, which is included in other
long-term liabilities, was determined by a valuation obtained from the financial institution that
is the counterparty to the interest rate swap agreement. The valuation, which represents the
amount that the Company would have paid as of September 30, 2010 upon termination of the agreement,
considered current interest rate swap rates, the critical terms of the agreement and interest rate
projections. There were no transfers to or from Levels 1 and 2 during the three and nine months
ended September 30, 2010.
Cash and cash equivalents, receivables and payables are reflected in the consolidated financial
statements at cost, which approximates fair value. The fair value of fixed rate long-term debt,
with a carrying value of $137,929,000, was $139,640,000 at September 30, 2010. The fair value of
variable rate long-term debt approximates its carrying value of $152,663,000 at
September 30, 2010. The fair value of fixed rate long-term debt, with a carrying value of
$63,348,000, was $59,548,000 and the fair value of variable-rate long-term debt, with a carrying
value of $231,350,000, was $227,536,000 at December 31, 2009. The fair value of the fixed and
variable rate long-term debt as quoted above is determined based on an estimation of discounted
future cash flows of the debt at rates currently quoted or offered to the Company for similar debt
instruments of comparable maturities by its lenders.
(9) Shareholders Equity
a. Common Stock
During the nine months ended September 30, 2009, the Company purchased 830,700 shares of the
Companys common stock for approximately $12,587,000, at an average price of $15 per share, which
completed a $25,000,000 stock repurchase program authorized by the Companys board of directors in
September 2008. On April 22, 2009 the Companys board of directors approved an additional stock
repurchase program for up to $40,000,000 of the Companys shares of common stock over the following
18 months. As of September 30, 2010, no shares had been repurchased pursuant to this plan.
b. Stock Incentive Plans
In May 2006, the Company adopted the AmSurg Corp. 2006 Stock Incentive Plan. The Company also has
options outstanding under the AmSurg Corp. 1997 Stock Incentive Plan, under which no additional
options may be granted. Under these plans, the Company has granted restricted stock and
non-qualified options to purchase shares of common stock to employees and outside directors from
its authorized but unissued common stock. Restricted stock granted to outside directors in 2010
vests in two equal installments on the first and second anniversary of the date of grant.
Restricted stock granted to outside directors prior to 2010 vests one-third on the date of grant,
with the remaining shares vesting over a two-year term, and is restricted from trading for five
years from the date of grant. Restricted stock granted to employees in 2010 vests over four years
in three equal installments beginning on the second anniversary of the date of grant. Restricted
stock granted to employees prior to 2010 vests at the end of four years from the date of grant.
The fair value of restricted stock is determined based on the closing price of the Companys common
stock on the grant date.
Options are granted at market value on the date of the grant. Prior to 2007, granted options
vested ratably over four years. Options granted in 2007 and 2008 vest at the end of four years
from the grant date. Options have a term of ten years from the date of grant. No options were
granted in 2009 or 2010. At September 30, 2010, 2,760,250 shares were authorized for grant under
the 2006 Stock Incentive Plan and 1,466,164 shares were available for future equity grants,
including 753,391 shares available for issuance as awards other than stock options or stock
appreciation rights.
11
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
Other information pertaining to share-based activity during the three and nine months ended
September 30, 2010 and 2009 was as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Share-based compensation expense |
$ | 885 | $ | 861 | $ | 3,425 | $ | 3,102 | ||||||||
Fair value of shares vested |
242 | 517 | 2,809 | 4,994 | ||||||||||||
Cash received from option exercises |
141 | 178 | 683 | 178 | ||||||||||||
Tax benefit from option exercises |
12 | 27 | 81 | 27 |
As of September 30, 2010, the Company had total unrecognized compensation cost of approximately
$8,700,000 related to non-vested awards, which the Company expects to recognize through 2014 and
over a weighted average period of 1.2 years.
Average outstanding share-based awards to purchase approximately 2,346,580 and 2,622,655 shares of
common stock that had an exercise price in excess of the average market price of the common stock
during the nine months ended September 30, 2010 and 2009, respectively, were not included in the
calculation of diluted securities options under the treasury method for purposes of determining
diluted earnings per share due to their anti-dilutive impact.
A summary of the changes in non-vested restricted shares during the nine months ended September 30,
2010 is as follows:
Weighted | ||||||||
Number | Average | |||||||
of | Grant | |||||||
Shares | Price | |||||||
Non-vested shares at December 31, 2009 |
466,387 | $ | 22.29 | |||||
Shares granted |
231,708 | 21.95 | ||||||
Shares vested |
(6,838 | ) | 20.15 | |||||
Shares forfeited |
(23,472 | ) | 22.10 | |||||
Non-vested shares at September 30, 2010 |
667,785 | $ | 22.20 | |||||
A summary of stock option activity for the nine months ended September 30, 2010 is summarized as
follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Number | Average | Contractual | ||||||||||
of | Exercise | Term | ||||||||||
Shares | Price | (in years) | ||||||||||
Outstanding at December 31, 2009 |
3,151,052 | $ | 22.22 | 5.0 | ||||||||
Options granted |
| | ||||||||||
Options exercised with total intrinsic value of $211,000 |
(64,320 | ) | 18.87 | |||||||||
Options terminated |
(49,938 | ) | 23.73 | |||||||||
Outstanding at September 30, 2010 with aggregate intrinsic value of $1,107,000 |
3,036,794 | $ | 22.27 | 4.3 | ||||||||
Vested or expected to vest at September 30, 2010 with aggregate intrinsic value
of $1,107,000 |
3,036,794 | $ | 22.27 | 4.3 | ||||||||
Exercisable at September 30, 2010 with aggregate intrinsic value of $1,107,000 |
2,560,077 | $ | 22.08 | 3.8 |
The aggregate intrinsic value represents the total pre-tax intrinsic value received by the option
holders on the exercise date or that would have been received by the option holders had all holders
of in-the-money outstanding options at September 30, 2010 exercised their options at the Companys
closing stock price on September 30, 2010.
12
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
c. Earnings per Share
The following is a reconciliation of the numerator and denominators of basic and diluted earnings
per share (in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
Per | Per | |||||||||||||||||||||||
Earnings | Shares | Share | Earnings | Shares | Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
2010: |
||||||||||||||||||||||||
Net earnings from
continuing
operations
attributable to
AmSurg Corp. per
common share
(basic) |
$ | 13,203 | 30,251 | $ | 0.44 | $ | 39,183 | 30,234 | $ | 1.30 | ||||||||||||||
Effect of dilutive
securities options
and non-vested
shares |
| 369 | | 429 | ||||||||||||||||||||
Net earnings from
continuing
operations
attributable to
AmSurg Corp. per
common share
(diluted) |
$ | 13,203 | 30,620 | $ | 0.43 | $ | 39,183 | 30,663 | $ | 1.28 | ||||||||||||||
Net earnings
attributable to
AmSurg Corp. per
common share
(basic) |
$ | 13,118 | 30,251 | $ | 0.43 | $ | 38,957 | 30,234 | $ | 1.29 | ||||||||||||||
Effect of dilutive
securities options
and non-vested
shares |
| 369 | | 429 | ||||||||||||||||||||
Net earnings
attributable to
AmSurg Corp. per
common share
(diluted) |
$ | 13,118 | 30,620 | $ | 0.43 | $ | 38,957 | 30,663 | $ | 1.27 | ||||||||||||||
2009: |
||||||||||||||||||||||||
Net earnings from
continuing
operations
attributable to
AmSurg Corp. per
common share
(basic) |
$ | 13,393 | 30,195 | $ | 0.44 | $ | 39,804 | 30,699 | $ | 1.30 | ||||||||||||||
Effect of dilutive
securities options
and non-vested
shares |
| 333 | | 222 | ||||||||||||||||||||
Net earnings from
continuing
operations
attributable to
AmSurg Corp. per
common share
(diluted) |
$ | 13,393 | 30,528 | $ | 0.44 | $ | 39,804 | 30,921 | $ | 1.29 | ||||||||||||||
Net earnings
attributable to
AmSurg Corp. per
common share
(basic) |
$ | 13,803 | 30,195 | $ | 0.46 | $ | 39,999 | 30,699 | $ | 1.30 | ||||||||||||||
Effect of dilutive
securities options
and non-vested
shares |
| 333 | | 222 | ||||||||||||||||||||
Net earnings
attributable to
AmSurg Corp. per
common share
(diluted) |
$ | 13,803 | 30,528 | $ | 0.45 | $ | 39,999 | 30,921 | $ | 1.29 | ||||||||||||||
13
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
(10) Income Taxes
The Company files a consolidated federal income tax return. Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company applies recognition thresholds and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return as it
relates to accounting for uncertainty in income taxes. In addition, it is the Companys policy to
recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax
expense in its statement of earnings. The Company does not expect significant changes to its tax
positions or liability for tax uncertainties during the next 12 months.
The Company and its subsidiaries file U.S. federal and various state tax returns. With few
exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for
years prior to 2006.
(11) Commitments and Contingencies
The Company and its partnerships are insured with respect to medical malpractice risk on a
claims-made basis. The Company also maintains insurance for general liability, director and
officer liability and property. Certain policies are subject to deductibles. In addition to the
insurance coverage provided, the Company indemnifies its officers and directors for actions taken
on behalf of the Company and its partnerships. Management is not aware of any claims against it or
its partnerships which would have a material financial impact on the Company.
The Companys wholly owned subsidiaries, as general partners in the limited partnerships, are
responsible for all debts incurred but unpaid by the limited partnerships. As manager of the
operations of the limited partnerships, the Company has the ability to limit potential liabilities
by curtailing operations or taking other operating actions.
In the event of a change in current law that would prohibit the physicians current form of
ownership in the partnerships, the Company would be obligated to purchase the physicians interests
in substantially all of the Companys partnerships. The purchase price to be paid in such event
would be determined by a predefined formula, as specified in the partnership agreements. The
Company believes the likelihood of a change in current law that would trigger such purchases was
remote as of September 30, 2010.
(12) Recent Accounting Pronouncements
In June 2009, the FASB amended the consolidation guidance related to variable interest entities.
The amendments include the elimination of the exemption for qualifying special purpose entities,
revised criteria for determining the primary beneficiary of a variable interest entity, and
expanded the requirements for reconsideration of the primary beneficiary. Effective January 1, 2010
the Company adopted this standard, which did not have an impact on its consolidated results of
operations or financial condition.
14
Table of Contents
Item 1. Financial Statements (continued)
AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements (continued)
Notes to the Unaudited Consolidated Financial Statements (continued)
(13) Supplemental Cash Flow Information
Supplemental cash flow information for the nine months ended September 30, 2010 and 2009 is as
follows (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 8,102 | $ | 5,962 | ||||
Income taxes, net of refunds |
14,647 | 14,048 | ||||||
Non-cash investing and financing activities: |
||||||||
Decrease in accounts payable associated with acquisition of property and equipment |
(712 | ) | (2,752 | ) | ||||
Capital lease obligations incurred to acquire equipment |
3,542 | 148 | ||||||
Effect of acquisitions: |
||||||||
Assets acquired, net of cash and adjustments |
64,954 | 35,651 | ||||||
Liabilities assumed and noncontrolling interests |
(23,339 | ) | (15,946 | ) | ||||
Payment for assets acquired |
$ | 41,615 | $ | 19,705 | ||||
(14) Subsequent Events
The Company assessed events occurring subsequent to September 30, 2010 for potential recognition
and disclosure in the consolidated financial statements. In October and November 2010, the
Company, through a wholly owned subsidiary acquired a majority interest in two centers for an
aggregate purchase price of approximately $12.3 million.
Subsequent to September 30, 2010, the $40.0 million stock repurchase program approved by the
Companys board of directors on April 22, 2009 expired. On October 20, 2010, the board of
directors approved a new stock repurchase program for up to $40.0 million of the Companys
outstanding shares of common stock to be purchased over the following 18 months. The Company
intends to fund the purchase price for any shares acquired using primarily cash generated from
operations and borrowings under the Companys revolving credit agreement.
15
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains certain forward-looking statements (all statements other than with respect to
historical fact) within the meaning of the federal securities laws, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve known and unknown risks and uncertainties including, without limitation, those
described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, some of
which are beyond our control. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore there can be no assurance that the forward-looking statements included in
this report will prove to be accurate. Actual results could differ materially and adversely from
those contemplated by any forward-looking statement. In light of the significant risks and
uncertainties inherent in the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements in this discussion to reflect events and circumstances
occurring after the date hereof or to reflect unanticipated events.
Forward-looking statements and our liquidity, financial condition and results of operations, may be
affected by the following risks and uncertainties and the other risks and uncertainties discussed
in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 under Item 1A. Risk Factors, as well as other unknown risks and
uncertainties:
| adverse impacts on our business associated with current and future economic conditions; |
| the risk that payments from third-party payors, including government healthcare programs, may decrease or not increase as our costs increase; |
| adverse developments affecting the medical practices of our physician partners; |
| our ability to maintain favorable relations with our physician partners; |
| our ability to acquire and develop additional surgery centers on favorable terms; |
| our ability to grow revenues by increasing procedure volume while maintaining operating margins and profitability at our existing centers; |
| our ability to manage the growth in our business; |
| our ability to obtain sufficient capital resources to complete acquisitions and develop new surgery centers; |
| our ability to compete for physician partners, managed care contracts, patients and strategic relationships; |
| adverse weather and other factors beyond our control that may affect our surgery centers; |
| our failure to comply with applicable laws and regulations; |
| the risk of changes in legislation, regulations or regulatory interpretations that may negatively affect us; |
| the risk of becoming subject to federal and state investigation; |
| the risk of regulatory changes that may obligate us to buy out the ownership interests of physicians who are minority owners of our surgery centers; |
| potential liabilities associated with our status as a general partner of limited partnerships; |
| liabilities for claims brought against our facilities; |
| our legal responsibility to minority owners of our surgery centers, which may conflict with our interests and prevent us from acting solely in our best interests; |
| potential write-off of all or a portion of intangible assets; and |
| potential liabilities relating to the tax deductibility of goodwill. |
16
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Overview
We acquire, develop and operate ambulatory surgery centers, or centers or ASCs, in partnership with
physicians. As of September 30, 2010, we owned a majority interest (51% or greater) in 206 ASCs.
The following table presents the number of procedures performed at our continuing centers and
changes in the number of ASCs in operation, under development and under letter of intent for the
three and nine months ended September 30, 2010 and 2009. An ASC is deemed to be under development
when a limited partnership or limited liability company has been formed with the physician partners
to develop the ASC.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Procedures |
327,003 | 310,676 | 959,813 | 927,499 | ||||||||||||
Continuing centers in operation, end of period |
206 | 194 | 206 | 194 | ||||||||||||
Average number of continuing centers in operation, during period |
206 | 194 | 204 | 192 | ||||||||||||
New centers added during period |
2 | 1 | 4 | 6 | ||||||||||||
Centers under development, end of period |
1 | 2 | 1 | 2 | ||||||||||||
Centers held for sale, end of period |
1 | 2 | 1 | 2 | ||||||||||||
Centers under letter of intent, end of period |
7 | 2 | 7 | 2 |
Of the continuing centers in operation at September 30, 2010, 143 centers performed
gastrointestinal endoscopy procedures, 37 centers performed ophthalmology surgery procedures, 18
centers performed procedures in multiple specialties and eight centers performed orthopedic
procedures. We intend to expand primarily through the acquisition and development of additional
ASCs in targeted surgical specialties and through future same-center growth. Our growth targets
for 2010 include the acquisition or development of 13 to 16 surgery centers. We expect our
same-center revenue to decline by 2% in 2010 due to the current economic environment and high
unemployment, which we believe will result in reduced patient visits and surgical procedures.
While we generally own 51% of the entities that own the centers, our consolidated statements of
earnings include 100% of the results of operations of the entities, reduced by the noncontrolling
partners share of the net earnings or loss of the surgery center entities. The noncontrolling
interest in each limited partnership or limited liability company is generally held directly or
indirectly by physicians who perform procedures at the center.
Sources of Revenues
Substantially all of our revenues are derived from facility fees charged for surgical procedures
performed in our surgery centers. These fees vary depending on the procedure, but usually include
all charges for operating room usage, special equipment usage, supplies, recovery room usage,
nursing staff and medications. Facility fees do not include the charges of the patients surgeon,
anesthesiologist or other attending physicians, which are billed directly by the physicians. In
limited instances, our surgery centers provide and bill separately for anesthesia services. Our
revenues are recorded net of estimated contractual adjustments from third-party medical service
payors.
ASCs depend upon third-party reimbursement programs, including governmental and private insurance
programs, to pay for services rendered to patients. The amount of payment a surgery center
receives for its services may be adversely affected by market and cost factors as well as other
factors over which we have no control, including changes to the Medicare and Medicaid payment
systems and the cost containment and utilization decisions of third-party payors. We derived
approximately 32% of our revenues in the nine months ended September 30, 2010 and 2009, from
governmental healthcare programs, primarily Medicare, and the remainder from a wide mix of
commercial payors and patient co-pays and deductibles. The Medicare program currently pays ASCs in
accordance with predetermined fee schedules.
Effective January 1, 2008, the Centers for Medicare and Medicaid Services, or CMS, revised the
payment system for services provided in ASCs. The key points of the revised payment system as it
relates to us are:
| ASCs are paid based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective payment system; |
| a scheduled phase in of the revised rates over four years, beginning January 1, 2008; and |
| planned annual increases in the ASC rates beginning in 2010 based on the consumer price index, or CPI, net of a productivity adjustment. |
The revised payment system has resulted in a significant reduction in the reimbursement rates for
gastroenterology procedures, which comprise approximately 79% of the procedures performed by our
surgery centers, and certain ophthalmology and pain procedures. We estimate that our net earnings
per share were negatively impacted by the revised payment system by $0.05 in 2008 and an additional
$0.07 in 2009. In October 2009, CMS announced final reimbursement rates for 2010 under the revised
payment system, which included a 1.2% CPI increase to the scheduled rate for 2010. Based upon our
current procedure mix, payor mix and volume,
17
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Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
we believe the 2010 payment rates will reduce our net earnings per diluted share for 2010 by
approximately $0.06 as compared to 2009. Further, based on the final reimbursement rates announced
in November 2010 by CMS for 2011, which reflect a 1.5% CPI increase and a 1.3% productivity
adjustment decrease, we believe that our diluted earnings per share in 2011 will be reduced by an
incremental $0.06 as compared to the prior year. Beginning in 2012, the scheduled phase-in of the
revised rates will be completed, and reimbursement rates for our ASCs should be increased annually
based upon increases in the CPI, net of a productivity adjustment. Effective for fiscal year 2011
and subsequent years, the Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act of 2010 (the Health Reform Law) provides for the annual CPI
increases applicable to ASCs to be reduced by a productivity adjustment, which will be based on
historical nationwide productivity gains. There can be no assurance, however, that CMS will not
further revise the payment system or that any annual CPI increases will be material.
In March 2010, President Obama signed the Health Reform Law. The Health Reform Law represents
significant change across the healthcare industry. The Health Reform Law contains a number of
provisions designed to reduce Medicare program spending, including an annual productivity
adjustment that will reduce payment updates to ASCs beginning in fiscal year 2011. However, the
Health Reform Law also expands coverage of uninsured individuals through a combination of public
program expansion and private sector health insurance reforms. For example, the Health Reform Law
expands eligibility under existing Medicaid programs, imposes financial penalties on individuals
who fail to carry insurance coverage, creates affordability credits for those not enrolled in an
employer-sponsored health plan, requires each state to establish a health insurance exchange and
permits states to create federally funded, non-Medicaid plans for low-income residents not eligible
for Medicaid. The Health Reform Law also establishes a number of private health insurance market
reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit
mandates, and increased dependent coverage.
Effective for plan years beginning on or after September 23, 2010, many health plans are required
to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive
Services Task Force, including colonoscopies. Beginning January 1, 2011, Medicare must also cover
these preventive services without cost-sharing, and, beginning in 2013, states that provide
Medicaid coverage of these preventive services without cost-sharing will receive a one percentage
point increase in their federal medical assistance percentage for these services.
Health insurance market reforms that expand insurance coverage may result in an increased volume
for certain procedures at our centers. However, many of these provisions of the Health Reform Law
will not become effective until 2014 or later, and these provisions may be amended or eliminated or
their impact could be offset by reductions in reimbursement under the Medicare program.
Because of the many variables involved, including the laws complexity, lack of implementing
regulations or interpretive guidance, gradual implementation, and possible amendment or repeal, we
are unable to predict the net effect of the reductions in Medicare spending, the expected increases
in revenues from increased procedure volumes, and numerous other provisions in the law that may
affect the Company. We are further unable to foresee how individuals and employers will respond to
the choices afforded them by the Health Reform Law. Thus, we cannot predict the full impact of the
Health Reform Law on the Company at this time.
CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery
audit contractor, or RAC, program. RACs are private contractors that conduct post-payment reviews
of providers and suppliers that bill Medicare to detect and correct improper payments for services.
The Health Reform Law expands the RAC programs scope to include Medicaid claims by requiring all
states to establish programs to contract with RACs by December 31, 2010. In addition to RACs,
other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and
correct improper payments. We could incur costs associated with appealing any alleged overpayments
and be required to repay any alleged overpayments identified by these or other administrative
audits.
We expect value-based purchasing programs, including programs that condition reimbursement on
patient outcome measures, to become more common and involve a higher percentage of reimbursement
amounts. Effective January 15, 2009, CMS promulgated three national coverage determinations that
prevent Medicare from paying for certain serious, preventable medical errors performed in any
healthcare facility, such as surgery performed on the wrong patient. Several commercial payors
also do not reimburse providers for certain preventable adverse events. In addition, federal law
authorizes CMS to require ASCs to submit data on certain quality measures. ASCs that fail to
submit the required data would face a two percentage point reduction in their annual reimbursement
rate increase. CMS has not yet implemented the quality measure reporting requirement, but has
announced that it expects to do so in a future rulemaking. Further, the Health Reform Law requires
the Department of Health and Human Services, or HHS, to present a plan to Congress by January 1,
2011 for implementing a value-based purchasing system that would tie Medicare payments to ASCs to
quality and efficiency measures. The Health Reform Law also requires HHS to study whether to
expand to ASCs its current policy of not paying additional amounts for care provided to treat
conditions acquired during an inpatient hospital stay.
In addition to payment from governmental programs, ASCs derive a significant portion of their
revenues from private healthcare insurance plans. These plans include both standard indemnity
insurance programs as well as managed care programs, such as PPOs and HMOs.
18
Table of Contents
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Critical Accounting Policies
A summary of significant accounting policies is disclosed in our 2009 Annual Report on Form 10-K.
Our critical accounting policies are further described under the caption Critical Accounting
Policies in Managements Discussion and Analysis of Financial Condition and Results of Operations
in our 2009 Annual Report on Form 10-K. There have been no changes in the nature of our critical
accounting policies or the application of those policies since December 31, 2009.
Results of Operations
Our revenues are directly related to the number of procedures performed at our centers. Our
overall growth in procedure volume is impacted directly by the increase in the number of centers in
operation and the growth in procedure volume at existing centers. We increase our number of
centers through both acquisitions and developments. Procedure growth at any existing center may
result from additional contracts entered into with third-party payors, increased market share of
our physician partners, additional physicians utilizing the center and/or scheduling and operating
efficiencies gained at the center. A significant measurement of how much our revenues grow from
year to year for existing centers is our same-center revenue percentage. We define our same-center
group each year as those centers that contain full year-to-date operations in both comparable
reporting periods, including the expansion of the number of operating centers associated with a
limited partnership or limited liability company. Our 2010 same-center group, comprised of 192
centers and constituting approximately 93% of our total number of centers, had a 2% revenue decline
during the three and nine months ended September 30, 2010. We believe this decline is primarily
related to the soft economic environment and high unemployment, which we believe has caused
patients to delay or cancel surgical procedures. This trend was generally experienced throughout
our same-center base, without significant variations in any particular geography or surgical
specialty. We expect our same-center revenue to decline 2% for 2010.
Expenses directly and indirectly related to procedures performed at our centers include clinical
and administrative salaries and benefits, supply cost and other operating expenses such as linen
cost, repair and maintenance of equipment, billing fees and bad debt expense. The majority of our
corporate salary and benefits cost is associated directly with the number of centers we own and
manage and tends to grow in proportion to the growth of our centers in operation. Our
centers and corporate offices also incur costs that are more fixed in nature, such as
lease expense, legal fees, property taxes, utilities and depreciation and amortization.
Our interest expense results primarily from our borrowings used to fund acquisition and development
activity, as well as interest incurred on capital leases. We refinanced our revolving credit
facility in May 2010, which resulted in the payment of additional fees and has increased our
interest expense as a result of higher interest rates under our new credit facilities. See
Liquidity and Capital Resources.
Surgery center profits are allocated to our noncontrolling partners in proportion to their
individual ownership percentages and reflected in the aggregate as total net earnings attributable
to noncontrolling interests and are presented after net earnings. The noncontrolling partners of
our center limited partnerships and limited liability companies typically are organized as general
partnerships, limited partnerships or limited liability companies that are not subject to federal
income tax. Each noncontrolling partner shares in the pre-tax earnings of the center of which it
is a partner. Accordingly, net earnings attributable to the noncontrolling interests in each of
our center limited partnerships and limited liability companies are generally determined on a
pre-tax basis, and pre-tax earnings are presented before net earnings attributable to
noncontrolling interests have been subtracted.
Accordingly, the effective tax rate on pre-tax earnings as presented has been reduced to
approximately 16%. However, the effective tax rate based on pre-tax earnings attributable to
AmSurg Corp. common shareholders, on an annual basis, will remain near the historical percentage of
39.6%. We file a consolidated federal income tax return and numerous state income tax returns with
varying tax rates. Our income tax expense reflects the blending of these rates.
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders are
supplementally disclosed on the consolidated statements of earnings.
19
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
The following table shows certain statement of earnings items expressed as a percentage of revenues
for the three and nine months ended September 30, 2010 and 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Salaries and benefits |
30.2 | 30.6 | 29.8 | 30.0 | ||||||||||||
Supply cost |
13.3 | 12.1 | 13.2 | 12.2 | ||||||||||||
Other operating expenses |
20.9 | 20.1 | 21.5 | 20.4 | ||||||||||||
Depreciation and amortization |
3.9 | 3.4 | 3.5 | 3.4 | ||||||||||||
Total operating expenses |
68.3 | 66.2 | 68.0 | 66.0 | ||||||||||||
Operating income |
31.7 | 33.8 | 32.0 | 34.0 | ||||||||||||
Interest expense |
2.3 | 1.1 | 1.7 | 1.2 | ||||||||||||
Earnings from continuing operations before income taxes |
29.4 | 32.7 | 30.3 | 32.8 | ||||||||||||
Income tax expense |
4.3 | 5.3 | 4.9 | 5.4 | ||||||||||||
Net earnings from continuing operations, net of income tax |
25.1 | 27.4 | 25.4 | 27.4 | ||||||||||||
Discontinued operations: |
||||||||||||||||
Earnings from operations of discontinued interests in surgery
centers, net of income tax |
| | | | ||||||||||||
(Loss) gain on disposal of discontinued interests in surgery
centers, net of income tax |
| 0.2 | | 0.1 | ||||||||||||
Net loss from discontinued operations |
| 0.2 | | 0.1 | ||||||||||||
Net earnings |
25.1 | 27.6 | 25.4 | 27.5 | ||||||||||||
Less net earnings attributable to noncontrolling interests: |
||||||||||||||||
Net earnings from continuing operations |
17.8 | 19.4 | 18.1 | 19.5 | ||||||||||||
Net earnings from discontinued operations |
| | | | ||||||||||||
Total net earnings attributable to noncontrolling interests |
17.8 | 19.4 | 18.1 | 19.5 | ||||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
7.3 | % | 8.2 | % | 7.3 | % | 8.0 | % | ||||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||||||||||
Earnings from continuing operations, net of income tax |
7.3 | % | 8.0 | % | 7.4 | % | 8.0 | % | ||||||||
Discontinued operations, net of income tax |
| 0.2 | (0.1 | ) | | |||||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
7.3 | % | 8.2 | % | 7.3 | % | 8.0 | % | ||||||||
Revenues increased $12.4 million, or 7.4%, to $180.3 million and $32.6 million, or 6.5%, to $532.7
million in the three and nine months ended September 30, 2010, respectively, from $167.9 million
and $500.1 million in the comparable 2009 periods. The number of procedures performed in our ASCs
increased by 16,327, or 5.3%, to 327,003 and 32,314, or 3.5%, to 959,813 in the three and nine
months ended September 30, 2010, respectively, from 310,676 and 927,499 in the comparable 2009
periods. Our same-center revenue growth declined approximately 2% during the three and nine months
ended September 30, 2010, primarily due to the soft economic environment and high unemployment,
which we believe has resulted in reduced patient visits and surgical procedures. The increase in
procedure and revenue growth is attributable to the additional centers acquired in 2009 and 2010 as
follows:
| centers acquired or opened in 2009, which contributed $11.9 million and $35.0 million of additional revenues in the three and nine months ended September 30, 2010, respectively, due to having a full period of operations in 2010; and |
| centers acquired in 2010, which generated $5.2 million and $10.1 million in revenues during the three and nine months ended September 30, 2010, respectively. |
20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Salaries
and benefits increased in total by 6.0% to $54.4 million and $158.7 million in the three and
nine months ended September 30, 2010, respectively, from $51.3 million and $149.7 million in the
comparable 2009 periods. Salaries and benefits as a percentage of revenues were 30.2% and 29.8% in
the three and nine months ended September 30, 2010, consistent with comparable prior year periods.
Staff at newly acquired and developed centers, as well as the additional staffing required at
existing centers, resulted in a 9.3% increase in salaries and benefits at our surgery centers in
the three and nine months ended September 30, 2010. However, we experienced an 8.8% decrease in
salaries and benefits at our corporate offices during the three and nine months ended September 30,
2010, over the comparable 2009 periods, primarily due to lower bonus expense.
Supply cost was $23.9 million and $70.5 million in the three and nine months ended September 30,
2010, respectively, an increase of $3.5 million and $9.3 million, or 17.4% and 15.2%, over supply
cost in the comparable 2009 periods. This increase was primarily the result of additional
procedure volume. Our average supply cost per procedure in the nine months ended September 30,
2010, increased by approximately $7. This increase is related to greater use of premium cataract
lenses at our ophthalmology centers, the migration from reusable to disposable supplies, the
temporary increase in certain drug costs at our gastroenterology centers, and procedures with
greater acuity performed at our multi-specialty centers, which had a higher weighted average cost.
Other operating expenses increased $4.1 million, or 12.1%, and $12.0 million, or 11.8%, to $37.7
million and $114.1 million in the three and nine months ended September 30, 2010, respectively,
from $33.7 million and $102.1 million in the comparable 2009 periods. The additional expense in
the 2010 periods resulted primarily from:
| centers acquired or opened during 2009, which resulted in an increase of $1.9 million and $6.0 million in other operating expenses in the three and nine months ended September 30, 2010, respectively; |
| an increase of $536,000, or 1.7%, and $1.9 million, or 2.0%, in other operating expenses at our 2010 same-center group in the three and nine months ended September 30, 2010, respectively, resulting primarily from general inflationary cost increases; and |
| centers acquired during 2010, which resulted in an increase of $819,000 and $1.3 million in the three and nine months ended September 30, 2010, respectively, in other operating expenses. |
Depreciation and amortization expense increased $1.4 million, or 23.9%, and $1.8 million, or 10.6%,
in the three and nine months ended September 30, 2010, respectively, from the comparable 2009
periods, primarily as a result of centers acquired since 2009 and newly developed surgery centers
in operation, which have an initially higher level of depreciation expense due to their
construction costs. In addition, the Company recorded additional depreciation expense of
approximately $1.1 million associated with the acceleration of scheduled leasehold improvement
depreciation at a center that will be relocated in 2011, prior to the expiration of its original
expected lease term.
We anticipate further increases in operating expenses in 2010, primarily due to additional acquired
centers and additional start-up centers expected to be placed in operation. Typically, a start-up
center will incur start-up losses while under development and during its initial months of
operation and will experience lower revenues and operating margins than an established center.
This typically continues until the case load at the center grows to a more normal operating level,
which generally is expected to occur within 12 months after the center opens. At September 30,
2010, we had one center under development and one center that had been open for less than one year.
Interest expense increased $2.1 million, or 110.4%, and $3.0 million, or 51.7%, to $4.0 million and
$9.1 million in the three and nine months ended September 30, 2010, respectively, from $1.9 million
and $6.0 million in the comparable 2009 periods. We refinanced our revolving credit facility in
May 2010, which resulted in an increase of approximately $2.3 million and $3.3 million in interest
expense in the three and nine months ended September 30, 2010, due to higher interest rates under
our new credit agreements and the write-off of remaining unamortized deferred financing costs in
May 2010. See Liquidity and Capital Resources.
We recognized income tax expense from continuing operations of $7.9 million and $26.0 million in
the three and nine months ended September 30, 2010, compared to $8.9 million and $26.9 million in
the comparable 2009 periods. Our effective tax rate in the nine months ended September 30, 2010
and 2009 was 16.1% and 16.3%, respectively, of earnings from continuing operations before income
taxes. This differs from the federal statutory income tax rate of 35.0%, primarily due to the
exclusion of the noncontrolling interests share of pre-tax earnings and the impact of state
income taxes. In the three months ended September 30, 2010, our effective rate was positively
impacted by approximately 1% due to the recording of a previously disallowed state net operating loss and
changes to our tax liability for certain tax uncertainties. Because we deduct goodwill
amortization for tax purposes only, approximately 40% of our income tax expense is deferred and
our deferred tax liability continues to increase, which would only be due in part or in whole
upon the disposition of a portion or all of our surgery centers.
We have one center classified as held for sale at September 30, 2010, which was subsequently
disposed in October 2010. The net earnings derived from the operations and the loss on disposal
of the discontinued surgery center held for sale were $99,000 and $97,000, respectively, for the
nine months ended September 30, 2010. For the nine months ended September 30, 2009, we sold our
interest in one surgery center and had one center classified as held for sale, which resulted in
net earnings derived from operations and a gain on disposal of discontinued surgery centers of
$122,000 and $148,000, respectively. Discontinued centers results of operations and losses
associated with the dispositions have been classified as discontinued operations in all periods
presented.
21
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Noncontrolling interests in net earnings for the three and nine months ended September 30, 2010
decreased $502,000, or 1.5%, and $1.2 million, or 1.2%, from the comparable 2009 periods, primarily
as a result of reduced center profit margins caused by lower same-center revenue growth. As a
percentage of revenues, noncontrolling interests decreased to 17.8% in the 2010 period from 19.4%
in the 2009 period, and to 18.1% from 19.5% in the three and nine months ended September 30, 2010,
respectively, as a result of reduced center profit margins caused by lower same-center revenue
growth. The net earnings from discontinued operations attributable to noncontrolling interests was
$20,000 and $30,000 in the three and nine months ended September 30, 2010, respectively, and the
net earnings from discontinued operations attributable to noncontrolling interests was $75,000
during the nine months ended September 30, 2009.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2010 and 2009 were $28.8 million and $30.6 million,
respectively. At September 30, 2010, we had working capital of $90.0 million, compared to $80.5
million at December 31, 2009. Operating activities for the nine months ended September 30, 2010
generated $164.8 million in cash flow from operations, compared to $176.1 million in the nine
months ended September 30, 2009. The decrease in operating cash flow resulted primarily from
higher corporate bonus payments related to 2009 that were paid in the 2010 period and additional
interest expense paid in 2010 compared to 2009. Positive operating cash flows of individual
centers are the sole source of cash used to make distributions to our wholly-owned subsidiaries, as
well as to the partners, which we are obligated to make on a monthly basis in accordance with each
partnerships partnership or operating agreement. Distributions to noncontrolling interests, which
is considered a financing activity, in the nine months ended September 30, 2010 and 2009 were $98.7
million and $97.2 million, respectively. Distributions to noncontrolling interests increased $1.5
million, primarily as a result of additional centers in operation.
The principal source of our operating cash flow is the collection of accounts receivable from
governmental payors, commercial payors and individuals. Each of our surgery centers bills for
services as delivered, usually within several days following the date of the procedure. Generally,
unpaid amounts that are 30 days past due are rebilled based on a standard set of procedures. If
amounts remain uncollected after 60 days, our surgery centers proceed with a series of late-notice
notifications until amounts are either collected, contractually written off in accordance with
contracted rates or determined to be uncollectible, typically after 90 to 120 days. Receivables
determined to be uncollectible are written off and such amounts are applied to our estimate of
allowance for bad debts as previously established in accordance with our policy for bad debt
expense. The amount of actual write-offs of account balances for each of our surgery centers is
continuously compared to established allowances for bad debt to
ensure that such
allowances are adequate. At September 30, 2010 and 2009, our net accounts receivable represented
32 and 34 days of revenue outstanding, respectively.
During the nine months ended September 30, 2010, we had total acquisitions and capital expenditures
of $55.1 million, which included:
| $41.6 million for acquisitions of interests in ASCs and related transactions; |
| $14.8 million for new or replacement property at existing centers, including $3.5 million in new capital leases; and |
| $2.2 million for centers under development. |
At September 30, 2010, we had unfunded construction and equipment purchase commitments for centers
under development or under renovation of approximately $5.5 million, which we intend to fund
through additional borrowings of long-term debt, operating cash flow and capital contributions by
our partners.
During the nine months ended September 30, 2010, we had net repayments on long-term debt of $7.9
million, and at September 30, 2010 we had $199.0 million outstanding under our revolving credit
agreement and $75.0 million outstanding in senior secured notes. At September 30, 2010, we were in
compliance with all covenants contained in our revolving credit agreement and note purchase
agreement.
We refinanced our revolving credit facility on May 28, 2010. Our revolving credit agreement
permits us to borrow up to $375.0 million to, among other things, finance our acquisition and
development projects and any future stock repurchase programs at an interest rate equal to, at our
option, the base rate plus 1.25% to 2.50%, or LIBOR plus 2.25% to 3.50%, or a combination thereof;
provide for a fee of 0.25% to 0.625% of unused commitments; and contain certain covenants relating
to the ratio of debt to net worth, operating performance and minimum net worth. Borrowings under
the revolving credit agreement mature in May 2015 and are secured primarily by a pledge of the
stock of our subsidiaries that serve as the general partners of our limited partnerships and our
partnership and membership interests in the limited partnerships and limited liability companies.
On May 28, 2010, we issued, pursuant to a note purchase agreement, $75.0 million of 6.04% senior
secured notes due May 29, 2020. The senior secured notes are pari passu with the indebtedness
under our revolving credit facility and require payment of principal beginning in year four. The
note purchase agreement governing the senior secured notes contains covenants similar to the
covenants contained in the revolving credit agreement.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
The refinancing of our revolving credit facility, an increase in the interest rate under our new
credit facilities, and additional fixed rate debt under the private placement debt arrangement
will result in an increase in interest expense and a decrease in operating cash flow of
approximately $5.5 million in 2010.
In September 2008, our board of directors authorized a stock repurchase program for up to $25.0
million of our outstanding common stock. During the nine months ended September 30, 2009, we
repurchased 830,700 shares for $12.6 million, which completed this program. On April 22, 2009, our
board of directors approved an additional stock repurchase program for up to $40.0 million of our
outstanding shares of common stock to be purchased over the following 18 months. As of September
30, 2010, no shares had been repurchased pursuant to this repurchase program. In October 2010, our
board of directors approved a new stock repurchase program for up to $40.0 million of our
outstanding shares of common stock to be purchased over the following 18 months. We intend to fund
the purchase price for any shares acquired using primarily cash generated from our operations and
borrowings under our revolving credit agreement.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board amended the consolidation guidance related
to variable-interest entities. The amendments include the elimination of the exemption for
qualifying special purpose entities, revised criteria for determining the primary beneficiary of a
variable-interest entity, and expanded the requirements for reconsideration of the primary
beneficiary. Effective January 1, 2010 we adopted this standard, which did not have an impact on
our consolidated results of operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk from exposure to changes in interest rates based on our financing,
investing and cash management activities. We utilize a balanced mix of maturities along with
both fixed rate and variable rate debt to manage our exposures to changes in interest rates. Our
debt instruments are primarily indexed to the prime rate or LIBOR. We entered into an interest
rate swap agreement in April 2006 in which $50.0 million of the principal amount outstanding
under the revolving credit facility will bear interest at a fixed rate of 5.365% for the period
from April 28, 2006 to April 28, 2011. The principal amounts of our senior secured notes due May
29, 2020 bear interest at a fixed rate of 6.04%. Interest rate changes would result in gains or
losses in the market value of our debt portfolio due to differences in market interest rates and
the rates at the inception of the debt agreements. Based upon our indebtedness at September 30,
2010, a 100 basis point interest rate change would impact our net earnings and cash flow by
approximately $930,000 annually. Although there can be no assurances that interest rates
will not change significantly, we do not expect changes in interest rates to have a
material effect on our net earnings or cash flows in 2010.
As previously discussed, we refinanced our revolving credit facility and entered into a private
placement debt arrangement in May 2010. The new credit agreements provide for additional fees
and higher interest rate spreads. Accordingly, we expect our interest expense will increase and
our operating cash flow will decrease by approximately $5.5 million in 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our chief
executive officer and chief financial officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act) as of September 30, 2010. Based on that
evaluation, our chief executive officer (principal executive officer) and chief financial officer
(principal accounting officer) have concluded that our disclosure controls and procedures are
effective to allow timely decisions regarding disclosure of material information required to be
included in our periodic reports.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in our internal control over
financial reporting that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
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Part II
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits
31.1 | Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) | ||
31.2 | Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) | ||
32.1 | Section 1350 Certification | ||
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at September 30, 2010 and December 31, 2009, (ii) the Consolidated Statements of Earnings for the three and nine month periods ended September 30, 2010 and 2009, (iii) the Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2010 and 2009, (iv) the Consolidated Statements of Changes in Equity for the nine month periods ended September 30, 2010 and 2009 and (v) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2010 and 2009. |
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMSURG CORP. |
||||
Date: November 5, 2010 | By: | /s/ Claire M. Gulmi | ||
Claire M. Gulmi | ||||
Executive Vice President and Chief Financial Officer (Principal Financial and Duly Authorized Officer) |
||||
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