UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
333-144337
United Surgical Partners
International, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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75-2749762
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification Number)
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15305 Dallas Parkway, Suite 1600
Addison, Texas
(Address of principal
executive offices)
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75001
(Zip
Code)
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(972) 713-3500
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes 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):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares of Common Stock of the Registrant
outstanding at November 1, 2011 was 100.
UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Note: Items 1A, 2, 3, 4, and 5 of Part II are omitted because they are not applicable.
i
PART I.
FINANCIAL INFORMATION
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ITEM 1.
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Financial
Statements
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Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
United Surgical Partners International, Inc.:
We have reviewed the consolidated balance sheet of United
Surgical Partners International, Inc. and subsidiaries (the
Company) as of September 30, 2011, the related consolidated
statements of income, comprehensive income (loss) and changes in
equity for the three-month and nine-month periods ended
September 30, 2011 and 2010, and the related consolidated
statements of cash flows for the nine-month periods ended
September 30, 2011 and 2010. These consolidated financial
statements are the responsibility of the Companys
management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of United Surgical Partners
International, Inc. and subsidiaries as of December 31,
2010, and the related consolidated statements of income,
comprehensive income (loss), changes in equity and cash flows
for the year then ended (not presented herein); and in our
report dated February 25, 2011, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2010, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Dallas, Texas
November 1, 2011
2
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30,
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December 31,
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2011
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2010
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(Unaudited)
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(In thousands except share data)
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ASSETS
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Cash and cash equivalents
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$
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55,926
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$
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60,253
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Accounts receivable, net of allowance for doubtful accounts of
$7,908 and $7,481, respectively
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48,336
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50,082
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Other receivables
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15,177
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15,242
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Inventories of supplies
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8,778
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9,191
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Deferred tax asset, net
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11,050
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14,961
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Prepaids and other current assets
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22,239
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14,682
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Total current assets
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161,506
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164,411
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Property and equipment, net
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203,132
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202,260
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Investments in unconsolidated affiliates
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419,313
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393,561
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Goodwill
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1,288,305
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1,268,663
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Intangible assets, net
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327,878
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319,213
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Other assets
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21,436
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24,631
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Total assets
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$
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2,421,570
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$
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2,372,739
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LIABILITIES AND EQUITY
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Accounts payable
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$
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24,887
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$
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23,488
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Accrued salaries and benefits
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24,391
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26,153
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Due to affiliates
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129,840
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116,104
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Accrued interest
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16,552
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8,714
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Current portion of long-term debt
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23,840
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22,386
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Other current liabilities
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54,113
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67,815
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Total current liabilities
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273,623
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264,660
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Long-term debt, less current portion
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1,018,207
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1,047,440
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Other long-term liabilities
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27,996
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26,615
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Deferred tax liability, net
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140,486
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131,205
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Total liabilities
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1,460,312
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1,469,920
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Noncontrolling interests redeemable (Note 4)
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98,838
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81,668
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Commitments and contingencies (Note 11)
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Equity:
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United Surgical Partners International, Inc. (USPI)
stockholders equity:
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Common stock, $0.01 par value; 100 shares authorized;
issued and outstanding
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Additional paid-in capital
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771,385
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784,573
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Accumulated other comprehensive loss
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(60,961
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)
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(66,351
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)
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Retained earnings
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117,328
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68,535
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Total USPI stockholders equity
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827,752
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786,757
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Noncontrolling interests nonredeemable (Note 4)
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34,668
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34,394
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Total equity
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862,420
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821,151
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Total liabilities and equity
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$
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2,421,570
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$
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2,372,739
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See accompanying notes to consolidated financial statements.
3
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
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Three Months
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Three Months
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Ended
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Ended
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September 30,
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September 30,
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2011
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2010
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(Unaudited in thousands)
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Revenues:
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Net patient service revenues
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$
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129,493
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$
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123,499
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Management and contract service revenues
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17,807
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16,176
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Other revenues
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2,158
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1,717
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Total revenues
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149,458
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141,392
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Equity in earnings of unconsolidated affiliates
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18,684
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17,247
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Operating expenses:
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Salaries, benefits, and other employee costs
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41,589
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39,027
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Medical services and supplies
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24,680
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23,571
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Other operating expenses
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24,694
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27,568
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General and administrative expenses
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11,807
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9,626
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Provision for doubtful accounts
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2,845
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1,964
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Net (gain) loss on deconsolidations, disposals and impairments
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(1,271
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)
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(57
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)
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Depreciation and amortization
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7,169
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7,342
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Total operating expenses
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111,513
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109,041
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Operating income
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56,629
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49,598
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Interest income
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167
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211
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Interest expense
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(15,674
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)
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(17,205
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)
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Other, net
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5
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367
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Total other expense, net
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(15,502
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)
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(16,627
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)
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Income from continuing operations before income taxes
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41,127
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32,971
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Income tax expense
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(9,253
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)
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(7,095
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)
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Income from continuing operations
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31,874
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25,876
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Discontinued operations, net of tax (Note 2):
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Income from discontinued operations
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10
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281
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Gain on disposal of discontinued operations
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Total earnings from discontinued operations
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10
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281
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Net income
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31,884
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26,157
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Less: Net income attributable to noncontrolling interests
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(16,598
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)
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(14,309
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)
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Net income attributable to USPIs common stockholder
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$
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15,286
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$
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11,848
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Amounts attributable to USPIs common stockholder:
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Income from continuing operations, net of tax
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$
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15,276
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$
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11,527
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Earnings from discontinued operations, net of tax
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10
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321
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Net income attributable to USPIs common stockholder
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$
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15,286
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$
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11,848
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See accompanying notes to consolidated financial statements.
4
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
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|
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Nine Months
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Nine Months
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Ended
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Ended
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September 30,
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|
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September 30,
|
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|
|
2011
|
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|
2010
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(Unaudited in thousands)
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Revenues:
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Net patient service revenues
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$
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388,141
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$
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370,184
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Management and contract service revenues
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52,874
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47,136
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Other revenues
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6,583
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5,134
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Total revenues
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447,598
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422,454
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Equity in earnings of unconsolidated affiliates
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56,718
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49,754
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Operating expenses:
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Salaries, benefits, and other employee costs
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122,060
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113,707
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Medical services and supplies
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73,857
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71,878
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Other operating expenses
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72,405
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72,847
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General and administrative expenses
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32,700
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27,295
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Provision for doubtful accounts
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6,878
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6,271
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Net (gain) loss on deconsolidations, disposals and impairments
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(3,749
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)
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|
536
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Depreciation and amortization
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|
22,042
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|
|
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22,128
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|
|
|
|
|
|
|
|
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Total operating expenses
|
|
|
326,193
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|
|
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314,662
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|
|
|
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|
|
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Operating income
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|
178,123
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|
|
|
157,546
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Interest income
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|
|
531
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|
|
|
653
|
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Interest expense
|
|
|
(49,815
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)
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|
|
(52,669
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)
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Other, net
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(114
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)
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|
|
723
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|
|
|
|
|
|
|
|
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Total other expense, net
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|
|
(49,398
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)
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|
|
(51,293
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)
|
|
|
|
|
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|
|
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Income from continuing operations before income taxes
|
|
|
128,725
|
|
|
|
106,253
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|
Income tax expense
|
|
|
(29,821
|
)
|
|
|
(24,238
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)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
98,904
|
|
|
|
82,015
|
|
Discontinued operations, net of tax (Note 2):
|
|
|
|
|
|
|
|
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Income from discontinued operations
|
|
|
10
|
|
|
|
810
|
|
Loss on disposal of discontinued operations
|
|
|
(529
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings (loss) from discontinued operations
|
|
|
(519
|
)
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
98,385
|
|
|
|
82,825
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(49,592
|
)
|
|
|
(43,079
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
48,793
|
|
|
$
|
39,746
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to USPIs common stockholder:
|
|
|
|
|
|
|
|
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Income from continuing operations, net of tax
|
|
$
|
49,316
|
|
|
$
|
38,869
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
(523
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)
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
48,793
|
|
|
$
|
39,746
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(loss)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited in thousands)
|
|
|
Net income
|
|
$
|
31,884
|
|
|
$
|
26,157
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(7,230
|
)
|
|
|
11,857
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
342
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(6,888
|
)
|
|
|
12,649
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
24,996
|
|
|
|
38,806
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
(16,598
|
)
|
|
|
(14,309
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to USPIs common
stockholder
|
|
$
|
8,398
|
|
|
$
|
24,497
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited in thousands)
|
|
|
Net income
|
|
$
|
98,385
|
|
|
$
|
82,825
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
2,867
|
|
|
|
(6,294
|
)
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
2,523
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
5,390
|
|
|
|
(4,084
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
103,775
|
|
|
|
78,741
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
(49,592
|
)
|
|
|
(43,079
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to USPIs common
stockholder
|
|
$
|
54,183
|
|
|
$
|
35,662
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in
Equity
For the Three Months and Nine Months Ended
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs Common Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Comprehensive
|
|
|
Outstanding
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Interests
|
|
|
|
Total
|
|
|
Income
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Non-Redeemable
|
|
|
|
(Unaudited in thousands, except share amounts)
|
|
|
Balance, December 31, 2010
|
|
$
|
821,151
|
|
|
$
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
784,573
|
|
|
$
|
(66,351
|
)
|
|
$
|
68,535
|
|
|
$
|
34,394
|
|
Distributions to noncontrolling interests
|
|
|
(1,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,578
|
)
|
Purchases of noncontrolling interests
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
Sales of noncontrolling interests
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,324
|
)
|
|
|
|
|
|
|
|
|
|
|
272
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,329
|
|
|
|
15,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,721
|
|
|
|
1,608
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
1,251
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
9,509
|
|
|
|
9,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
10,760
|
|
|
|
10,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
28,089
|
|
|
$
|
26,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011
|
|
|
846,037
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
782,703
|
|
|
|
(55,591
|
)
|
|
|
84,256
|
|
|
|
34,669
|
|
Distributions to noncontrolling interests
|
|
|
(2,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,654
|
)
|
Purchases of noncontrolling interests
|
|
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(483
|
)
|
|
|
|
|
|
|
|
|
|
|
(603
|
)
|
Sales of noncontrolling interests
|
|
|
(9,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,124
|
)
|
|
|
|
|
|
|
|
|
|
|
409
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,027
|
|
|
|
17,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,786
|
|
|
|
2,241
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
930
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
588
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
1,518
|
|
|
|
1,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
21,545
|
|
|
$
|
19,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011
|
|
|
854,479
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
772,448
|
|
|
|
(54,073
|
)
|
|
|
102,042
|
|
|
|
34,062
|
|
Distributions to noncontrolling interests
|
|
|
(1,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,624
|
)
|
Purchases of noncontrolling interests
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of noncontrolling interests
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(813
|
)
|
|
|
|
|
|
|
|
|
|
|
273
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,243
|
|
|
|
15,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,286
|
|
|
|
1,957
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
342
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(7,230
|
)
|
|
|
(7,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(6,888
|
)
|
|
|
(6,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
10,355
|
|
|
$
|
8,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011
|
|
$
|
862,420
|
|
|
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
771,385
|
|
|
$
|
(60,961
|
)
|
|
$
|
117,328
|
|
|
$
|
34,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
For the Three Months and Nine Months Ended September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs Common Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Comprehensive
|
|
|
Outstanding
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Interests
|
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Nonredeemable
|
|
|
|
(Unaudited in thousands, except share
amounts)
|
|
|
Balance, December 31, 2009
|
|
$
|
798,003
|
|
|
$
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
789,505
|
|
|
$
|
(58,845
|
)
|
|
$
|
27,292
|
|
|
$
|
40,051
|
|
Distributions to noncontrolling interests
|
|
|
(1,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,702
|
)
|
Purchases of noncontrolling interests
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
Sales of noncontrolling interests
|
|
|
(2,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,950
|
)
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,518
|
|
|
|
12,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,011
|
|
|
|
1,507
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(14,588
|
)
|
|
|
(14,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(14,288
|
)
|
|
|
(14,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(770
|
)
|
|
$
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
|
793,178
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
787,059
|
|
|
|
(73,133
|
)
|
|
|
39,303
|
|
|
|
39,949
|
|
Distributions to noncontrolling interests
|
|
|
(1,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,450
|
)
|
Purchases of noncontrolling interests
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
Sales of noncontrolling interests
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,496
|
)
|
|
|
|
|
|
|
|
|
|
|
577
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend to USPI Holdings/USPI Group Holdings
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,058
|
|
|
|
15,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,887
|
|
|
|
1,171
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
1,118
|
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(3,563
|
)
|
|
|
(3,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(2,445
|
)
|
|
|
(2,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
14,613
|
|
|
$
|
13,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
|
804,882
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
785,900
|
|
|
|
(75,578
|
)
|
|
|
54,340
|
|
|
|
40,220
|
|
Distributions to noncontrolling interests
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,565
|
)
|
Purchases of noncontrolling interests
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
208
|
|
Sales of noncontrolling interests
|
|
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,228
|
)
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12,976
|
|
|
|
11,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,848
|
|
|
|
1,128
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
792
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
11,857
|
|
|
|
11,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
12,649
|
|
|
|
12,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
25,625
|
|
|
$
|
24,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
828,066
|
|
|
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
784,867
|
|
|
$
|
(62,929
|
)
|
|
$
|
66,188
|
|
|
$
|
39,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
8
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
98,385
|
|
|
$
|
82,825
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Loss (earnings) from discontinued operations
|
|
|
519
|
|
|
|
(810
|
)
|
Provision for doubtful accounts
|
|
|
6,878
|
|
|
|
6,271
|
|
Depreciation and amortization
|
|
|
22,042
|
|
|
|
22,128
|
|
Net (gain) loss on deconsolidations, disposals and impairments
|
|
|
(3,749
|
)
|
|
|
536
|
|
Amortization of debt issue costs and discount
|
|
|
2,677
|
|
|
|
2,429
|
|
Deferred income tax expense
|
|
|
11,317
|
|
|
|
14,054
|
|
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
|
|
5,904
|
|
|
|
7,633
|
|
Equity-based compensation
|
|
|
1,008
|
|
|
|
1,263
|
|
Increases (decreases) in cash from changes in operating assets
and liabilities, net of effects from purchases of new businesses:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,121
|
)
|
|
|
(268
|
)
|
Other receivables
|
|
|
787
|
|
|
|
(1,990
|
)
|
Inventories of supplies, prepaids and other current assets
|
|
|
(2,601
|
)
|
|
|
3,107
|
|
Accounts payable and other current liabilities
|
|
|
(2,576
|
)
|
|
|
(731
|
)
|
Long-term liabilities
|
|
|
2,900
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
140,370
|
|
|
|
137,797
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of new businesses and equity interests, net of cash
received
|
|
|
(65,266
|
)
|
|
|
(15,005
|
)
|
Proceeds from sale of businesses and equity interests
|
|
|
13,315
|
|
|
|
9,953
|
|
Purchases of property and equipment
|
|
|
(22,050
|
)
|
|
|
(27,963
|
)
|
Purchases of marketable securities, net
|
|
|
(4,820
|
)
|
|
|
|
|
Returns of capital from unconsolidated affiliates
|
|
|
1,197
|
|
|
|
870
|
|
Decrease (increase) in deposits and notes receivable
|
|
|
2,324
|
|
|
|
(1,132
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(75,300
|
)
|
|
|
(33,277
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
12,958
|
|
|
|
13,032
|
|
Payments on long-term debt
|
|
|
(45,720
|
)
|
|
|
(29,094
|
)
|
(Decrease) increase in cash held on behalf of unconsolidated
affiliates and other
|
|
|
13,584
|
|
|
|
(21,246
|
)
|
Sales of noncontrolling interests, net
|
|
|
531
|
|
|
|
1,200
|
|
Distributions to noncontrolling interests
|
|
|
(50,691
|
)
|
|
|
(44,927
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(69,338
|
)
|
|
|
(81,035
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
|
|
|
|
4,338
|
|
Investing cash flows
|
|
|
|
|
|
|
(1,471
|
)
|
Financing cash flows
|
|
|
|
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(59
|
)
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(4,327
|
)
|
|
|
25,836
|
|
Cash and cash equivalents at beginning of period
|
|
|
60,253
|
|
|
|
34,890
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
55,926
|
|
|
$
|
60,726
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
39,385
|
|
|
$
|
42,624
|
|
Income taxes paid
|
|
|
28,955
|
|
|
|
13,071
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Assets acquired under capital lease obligations
|
|
$
|
5,291
|
|
|
$
|
12,562
|
|
See accompanying notes to consolidated financial statements
9
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
(1)
|
Basis of
Presentation
|
|
|
(a)
|
Description
of Business
|
United Surgical Partners International, Inc., a Delaware
Corporation, and subsidiaries (USPI or the Company) was formed
in February 1998 for the primary purpose of ownership and
operation of ambulatory surgery centers, surgical hospitals and
related businesses in the United States and the United Kingdom.
At September 30, 2011, the Company, headquartered in
Dallas, Texas, operated 204 short-stay surgical facilities. Of
these 204 facilities, the Company consolidates the results of 61
and accounts for 143 under the equity method. The Company
operates in two countries, with 199 of its 204 facilities
located in the United States of America; the remaining five
facilities are located in the United Kingdom. The majority of
the Companys U.S. facilities are jointly owned with
local physicians and a
not-for-profit
healthcare system that has other healthcare businesses in the
region. At September 30, 2011, the Company had agreements
with
not-for-profit
healthcare systems providing for joint ownership of 138 of the
Companys 199 U.S. facilities and also providing a
framework for the construction or acquisition of additional
facilities in the future.
Global Healthcare Partners Limited (Global), a USPI subsidiary
incorporated in England, manages and owns three surgical
hospitals and an oncology center in the greater London area and
a diagnostic and surgery center in Edinburgh, Scotland.
The Company is subject to various risks, including changes in
government legislation that could impact Medicare, Medicaid, and
U.K. government reimbursement levels and is also subject to
increased levels of managed care penetration and changes in
payor patterns that may impact the level and timing of payments
for services rendered.
The Company maintains its books and records on the accrual basis
of accounting, and the accompanying consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The
accompanying consolidated financial statements and notes should
be read in conjunction with the Companys December 31,
2010
Form 10-K.
It is managements opinion that the accompanying
consolidated financial statements reflect all adjustments
necessary for a fair presentation of the results for the periods
presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with GAAP
requires management to make a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts in the consolidated financial statements for
prior periods have been reclassified to conform to the 2011
presentation. Net operating results have not been affected by
these reclassifications.
|
|
(2)
|
Discontinued
Operations and Other Dispositions
|
Sales of consolidated subsidiaries in which the Company has no
continuing involvement are classified as discontinued
operations, as are consolidated subsidiaries that are held for
sale. The gains or losses on these transactions are classified
within discontinued operations in the Companys
consolidated statements of income. Also, the Company has
reclassified its historical results of operations to remove the
operations of these entities from its revenues and expenses,
collapsing the net income or loss from these operations into a
single line within discontinued operations.
Discontinued operations consist of an endoscopy business and
surgical facility, which were sold in December 2010, and two
investments in surgery centers that were designated as held for
sale at December 31, 2010 and were
10
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
sold in February 2011. The estimated net loss on disposal of
these operations was recorded in the fourth quarter of 2010 and
adjusted in 2011.
The table below summarizes certain amounts related to the
Companys discontinued operations for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
575
|
|
|
$
|
7,398
|
|
|
$
|
21,390
|
|
Income from discontinued operations before income taxes
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
432
|
|
|
$
|
1,247
|
|
Income tax expense
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(151
|
)
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
281
|
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations before income taxes
|
|
$
|
|
|
|
$
|
(902
|
)
|
|
$
|
|
|
|
$
|
|
|
Income tax benefit
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from disposal of discontinued operations
|
|
$
|
|
|
|
$
|
(529
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2011, the
Company sold five facilities it operated through unconsolidated
affiliates and terminated its contracts to manage them. The
resulting gains and losses are classified within Net
(gain) loss on deconsolidations, disposals and impairments
in the accompanying consolidated statements of income. Equity
method investments that are sold do not represent discontinued
operations under GAAP. These transactions are summarized below
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
Gain (loss)
|
|
April 2011
|
|
Richmond, Virginia
|
|
$
|
0.6 million
|
|
|
$
|
0.2 million
|
|
May 2011
|
|
Flint, Michigan
|
|
|
1.1 million
|
|
|
|
0.4 million
|
|
May 2011
|
|
Fort Worth, Texas
|
|
|
0.7 million
|
|
|
|
(0.1 million
|
)
|
June 2011
|
|
Lawton, Oklahoma
|
|
|
1.7 million
|
|
|
|
0.8 million
|
|
September 2011
|
|
Cleveland, Ohio
|
|
|
1.2 million
|
|
|
|
0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5.3 million
|
|
|
$
|
1.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Business
Combinations and Investments in Unconsolidated
Affiliates
|
The Company acquires interests in existing surgery centers from
third parties and invests in new facilities that it develops in
partnership with hospital partners and local physicians. Some of
these transactions result in the Company controlling the
acquired entity and meet the GAAP definition of a business
combination. The financial results of acquired entities are
included in the Companys consolidated financial statements
beginning on the acquisitions effective date.
Effective September 1, 2011, the Company completed the
acquisition of 100% of the equity interests in Titan Health
Corporation (Titan), a privately-held, Sacramento,
California-based owner and operator of surgery centers. Titan
has an equity investment in 14 surgery centers, nine of which
are located in markets in which the Company already operates.
The Company paid cash totaling approximately $43.4 million,
net of $5.0 million of cash acquired, and subject to
certain purchase price adjustments set forth in the purchase
agreement. The purchase price was allocated to Titans
tangible and identifiable intangible assets and liabilities
based upon preliminary estimates
11
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
of fair value, with the remainder allocated to goodwill. The
Company funded the purchase using cash on hand. The Company
incurred approximately $1.7 million in acquisition and
severance costs, of which $0.4 million is included in
general and administrative expenses and the
remaining $1.3 million is included in salaries,
benefits, and other employee costs in the accompanying
consolidated statements of income.
The following is a summary of the assets acquired and
liabilities assumed in the acquisition of Titan
(in thousands):
|
|
|
|
|
Purchase price allocated
|
|
$
|
48,419
|
|
|
|
|
|
|
Estimated fair value of net tangible assets acquired:
|
|
|
|
|
Cash
|
|
$
|
4,952
|
|
Other current assets
|
|
|
909
|
|
Investments in affiliates
|
|
|
24,979
|
|
Property and equipment and other noncurrent assets
|
|
|
515
|
|
Current liabilities
|
|
|
(1,656
|
)
|
Long term liabilities
|
|
|
(1,737
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
27,962
|
|
Intangible assets acquired
|
|
|
10,157
|
|
Goodwill
|
|
|
10,300
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
48,419
|
|
|
|
|
|
|
The goodwill recorded in conjunction with the Titan acquisition
was allocated to the Companys United States reporting unit
and the Company expects that none of the goodwill will be
deductible for income tax purposes. Indefinite-lived intangibles
of $10.2 million relate to long-term management contracts
and are not subject to amortization.
The following table presents the unaudited pro forma results as
if the acquisition of Titan had occurred on January 1 of each
year. The pro forma results are not necessarily indicative of
the results of operations that would have occurred if the
acquisition had been completed on the dates indicated, nor is it
indicative of the future operating results of the Company. The
pro forma results include acquisition and severance costs of
approximately $1.7 million.
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2011
|
|
2010
|
|
|
(In thousands)
|
|
Total revenues
|
|
$
|
450,121
|
|
|
$
|
425,511
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
50,914
|
|
|
$
|
39,640
|
|
In April and September 2011, the Company obtained control of two
separate facilities in which it already had ownership due to
changes in the voting rights of the facilities. Although no
consideration was transferred, US GAAP requires the transactions
to be accounted for as business combinations and requires
adjusting the carrying value of the Companys existing
ownership to its fair value. As a result, the Company recorded
gains totaling $1.1 million in the three months ended
September 30, 2011 and $1.7 million in the nine months
ended September 30, 2011, which are included in Net
(gain) loss on deconsolidations, disposals and impairments
in the accompanying consolidated statements of operations. The
pro forma operating results for these acquisitions is not
material.
The Companys facilities are generally operated through
separate legal entities in which the Company holds an equity
interest. Other investors generally include physicians who
utilize the facility and, in a majority of cases, a
12
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
local
not-for-profit
health system. The Company controls 61 of these entities and
therefore consolidates their results. However, the Company
accounts for an increasing majority (143 of its 204 facilities
at September 30, 2011) as investments in
unconsolidated affiliates, i.e., under the equity method, as the
Companys level of influence is significant but does not
reach the threshold of controlling the entity. The majority of
these investments are partnerships or limited liability
companies, which require the associated tax benefit or expense
to be recorded by the partners or members. Summarized financial
information for the Companys equity method investees on a
combined basis is as follows (amounts are in thousands, except
number of facilities, reflect 100% of the investees
results on an aggregated basis and are unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Unconsolidated facilities operated at period-end
|
|
|
143
|
|
|
|
114
|
|
|
|
143
|
|
|
|
114
|
|
Income statement information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
378,644
|
|
|
$
|
329,882
|
|
|
$
|
1,100,997
|
|
|
$
|
951,420
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
89,960
|
|
|
|
77,875
|
|
|
|
263,513
|
|
|
|
224,641
|
|
Medical services and supplies
|
|
|
88,194
|
|
|
|
76,520
|
|
|
|
256,077
|
|
|
|
222,362
|
|
Other operating expenses
|
|
|
88,021
|
|
|
|
78,592
|
|
|
|
256,786
|
|
|
|
224,055
|
|
Loss (gain) on asset disposals, net
|
|
|
(100
|
)
|
|
|
1,042
|
|
|
|
(479
|
)
|
|
|
937
|
|
Depreciation and amortization
|
|
|
17,286
|
|
|
|
13,813
|
|
|
|
48,743
|
|
|
|
40,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
283,361
|
|
|
|
247,842
|
|
|
|
824,640
|
|
|
|
712,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
95,283
|
|
|
|
82,040
|
|
|
|
276,357
|
|
|
|
238,789
|
|
Interest expense, net
|
|
|
(8,883
|
)
|
|
|
(6,431
|
)
|
|
|
(24,711
|
)
|
|
|
(19,090
|
)
|
Other, net
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
10
|
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
86,399
|
|
|
$
|
75,602
|
|
|
$
|
251,656
|
|
|
$
|
219,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
307,475
|
|
|
$
|
261,874
|
|
|
$
|
307,475
|
|
|
$
|
261,874
|
|
Noncurrent assets
|
|
|
613,027
|
|
|
|
439,402
|
|
|
|
613,027
|
|
|
|
439,402
|
|
Current liabilities
|
|
|
178,421
|
|
|
|
146,095
|
|
|
|
178,421
|
|
|
|
146,095
|
|
Noncurrent liabilities
|
|
|
435,795
|
|
|
|
305,316
|
|
|
|
435,795
|
|
|
|
305,316
|
|
The Company regularly engages in the purchase and sale of equity
interests with respect to its investments in unconsolidated
affiliates that do not result in a change of control. These
transactions are primarily the acquisitions and sales of equity
interests in unconsolidated surgical facilities and the
investment of additional cash in surgical
13
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
facilities under development. During the nine months ended
September 30, 2011, these transactions resulted in a net
cash outflow of approximately $14.0 million, which is
summarized as follows:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
Investments
|
|
|
|
|
|
|
January 2011
|
|
Dallas, Texas(1)
|
|
$
|
1.3 million
|
|
January 2011
|
|
Rancho Mirage, California(2)
|
|
|
0.5 million
|
|
January 2011
|
|
Edinburgh, Scotland(3)
|
|
|
1.1 million
|
|
March 2011
|
|
Plano, Texas(4)
|
|
|
1.9 million
|
|
March 2011
|
|
Oklahoma City, Oklahoma(5)
|
|
|
1.2 million
|
|
September 2011
|
|
Various(6)
|
|
|
14.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 million
|
|
Sales
|
|
|
|
|
|
|
September 2011
|
|
Dallas, Texas(7)
|
|
|
1.6 million
|
|
Various
|
|
Various(8)
|
|
|
4.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.3 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
14.0 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents additional capital the Company contributed to a joint
venture with one of the Companys
not-for-profit
hospital partners, which the joint venture used to acquire an
equity interest in this facility. The Company already was
providing management services to the facility. The remainder of
this facility is owned by local physicians. |
|
(2) |
|
Acquisition of additional equity interest in a surgical facility
in which the Company already held an investment. This facility
is jointly owned with physicians and continued to be accounted
for under the equity method. |
|
(3) |
|
Acquisition of a 50% noncontrolling interest in diagnostic and
surgery facility in which the Company had no previous
involvement. |
|
(4) |
|
Represents additional capital the Company contributed to a joint
venture with one of the Companys
not-for-profit
hospital partners, which the joint venture used to acquire an
equity interest in this facility. The remainder of this facility
is owned by local physicians. The Company also acquired the
right to manage this facility. |
|
(5) |
|
Represents additional capital the Company contributed to a
facility in which it holds an equity interest. |
|
(6) |
|
Through negotiations with each facilitys other owners, the
Company acquired additional ownership in six of Titans
facilities. These facilities are jointly owned with local
physicians and one facility also has a hospital partner. |
|
(7) |
|
A hospital partner obtained ownership in this entity, which is
also owned with local physicians. Additionally, this hospital
partner is a related party (Note 10). |
|
(8) |
|
Represents the net receipt related to various other purchases
and sales of equity interests and contributions of cash to
equity method investees. |
|
|
(4)
|
Noncontrolling
Interests
|
The Company controls and therefore consolidates the results of
61 of its 204 facilities. Similar to its investments in
unconsolidated affiliates, the Company regularly engages in the
purchase and sale of equity interests with respect to its
consolidated subsidiaries that do not result in a change of
control. These transactions are
14
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
accounted for as equity transactions, as they are undertaken
among the Company, its consolidated subsidiaries, and
noncontrolling interests, and their cash flow effect is
classified within financing activities.
During the nine months ended September 30, 2011, the
Company purchased and sold equity interests in various
consolidated subsidiaries in the amounts of $2.5 million
and $3.1 million, respectively. The basis difference
between the Companys carrying amount and the proceeds
received or paid in each transaction is recorded as an
adjustment to additional paid-in capital. The impact of these
transactions is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
15,286
|
|
|
$
|
48,793
|
|
|
$
|
11,848
|
|
|
$
|
39,746
|
|
Transfers to the noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in USPIs additional paid-in capital for sales of
subsidiaries equity interests
|
|
|
(813
|
)
|
|
|
(13,261
|
)
|
|
|
(1,228
|
)
|
|
|
(5,674
|
)
|
Decrease in USPIs additional paid-in capital for purchases
of subsidiaries equity interests
|
|
|
(517
|
)
|
|
|
(996
|
)
|
|
|
(283
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers to noncontrolling interests
|
|
|
(1,330
|
)
|
|
|
(14,257
|
)
|
|
|
(1,511
|
)
|
|
|
(6,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in equity from net income attributable to USPI and
transfers to noncontrolling interests
|
|
$
|
13,956
|
|
|
$
|
34,536
|
|
|
$
|
10,337
|
|
|
$
|
33,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
Upon the occurrence of certain fundamental regulatory changes,
the Company could be obligated, under the terms of its
investees partnership and operating agreements, to
purchase some or all of the noncontrolling interests related to
the Companys consolidated subsidiaries. These repurchase
requirements are limited to the portions of its facilities that
are owned by physicians who perform surgery at the
Companys facilities and would be triggered by regulatory
changes making the existing ownership structure illegal. While
the Company is not aware of events that would make the
occurrence of such a change probable, regulatory changes are
outside the control of the Company. Accordingly, the
noncontrolling interests subject to these repurchase provisions
have been classified outside of equity and are carried as
noncontrolling interests redeemable on
the Companys consolidated balance sheets. The activity for
quarters ending through September 30, 2011 and 2010 is
summarized below (in thousands):
|
|
|
|
|
|
|
2011
|
|
|
|
Noncontrolling
|
|
|
|
Interests
|
|
|
|
Redeemable
|
|
|
Balance, December 31, 2010
|
|
$
|
81,668
|
|
Net income attributable to noncontrolling interests
|
|
|
14,104
|
|
Distributions to noncontrolling interests
|
|
|
(13,939
|
)
|
Purchases of noncontrolling interests
|
|
|
(145
|
)
|
Sales of noncontrolling interests
|
|
|
3,187
|
|
|
|
|
|
|
Balance, March 31, 2011
|
|
|
84,875
|
|
Net income attributable to noncontrolling interests
|
|
|
15,041
|
|
Distributions to noncontrolling interests
|
|
|
(14,471
|
)
|
Purchases of noncontrolling interests
|
|
|
(291
|
)
|
Sales of noncontrolling interests
|
|
|
12,510
|
|
Acquisition of new business
|
|
|
984
|
|
|
|
|
|
|
Balance, June 30, 2011
|
|
|
98,648
|
|
Net income attributable to noncontrolling interests
|
|
|
14,641
|
|
Distributions to noncontrolling interests
|
|
|
(16,425
|
)
|
Purchases of noncontrolling interests
|
|
|
(492
|
)
|
Sales of noncontrolling interests
|
|
|
1,009
|
|
Acquisition of new business
|
|
|
1,457
|
|
|
|
|
|
|
Balance, September 30, 2011
|
|
$
|
98,838
|
|
|
|
|
|
|
16
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
2010
|
|
|
|
Noncontrolling
|
|
|
|
Interests
|
|
|
|
Redeemable
|
|
|
Balance, December 31, 2009
|
|
$
|
63,865
|
|
Net income attributable to noncontrolling interests
|
|
|
12,128
|
|
Distributions to noncontrolling interests
|
|
|
(12,452
|
)
|
Purchases of noncontrolling interests
|
|
|
(195
|
)
|
Sales of noncontrolling interests
|
|
|
3,708
|
|
Deconsolidation of noncontrolling interests and other
|
|
|
75
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
|
67,129
|
|
Net income attributable to noncontrolling interests
|
|
|
13,964
|
|
Distributions to noncontrolling interests
|
|
|
(13,881
|
)
|
Purchases of noncontrolling interests
|
|
|
(229
|
)
|
Sales of noncontrolling interests
|
|
|
1,923
|
|
Deconsolidation of noncontrolling interests and other
|
|
|
2,455
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
|
71,361
|
|
Net income attributable to noncontrolling interests
|
|
|
13,180
|
|
Distributions to noncontrolling interests
|
|
|
(14,085
|
)
|
Purchases of noncontrolling interests
|
|
|
(443
|
)
|
Sales of noncontrolling interests
|
|
|
1,982
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
71,995
|
|
|
|
|
|
|
The consolidated financial statements include the financial
statements of USPI and its wholly-owned and controlled
subsidiaries. The Company also determines if it is the primary
beneficiary of (and therefore should consolidate) any entity
whose operations it does not control with voting rights. At
September 30, 2011, the Company consolidated one entity in
accordance with this accounting guidance.
This entity operates and manages seven surgical facilities in
the Houston, Texas area. Despite not holding a controlling
voting interest, the Company is the primary beneficiary because
the Company has loaned the entity funds to purchase surgical
facilities, but the Company does not have full recourse to the
entitys other owner with respect to repayment of the
loans. As the entity earns management fees and receives cash
distributions of earnings from the surgical facilities, a
portion of those proceeds are used to repay the loans prior to
being eligible for distribution to the entitys other
owner. At September 30, 2011 and 2010, $7.4 million
and $8.4 million, respectively, of such advances are
outstanding and are included in other long-term assets. The
Company has no exposure for the entitys losses beyond this
investment. Accordingly, the Company did not provide any
financial or other support to the entity that it was not
previously contractually required to provide during the nine
months ended September 30, 2011 or 2010. At
September 30, 2011 and 2010, the total assets of this
entity were $79.6 million and $65.1 million, and the
total liabilities owed to third parties were $19.3 million
and $20.5 million, respectively. Such amounts are included
in the accompanying consolidated balance sheets.
17
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
The Company does not enter into derivative contracts for
speculative purposes but has at times entered into interest rate
swaps to fix the rate of interest owed on a portion of its
variable rate debt. By using derivative financial instruments to
hedge exposures to changes in interest rates, the Company
exposes itself to credit risk and market risk. Credit risk is
the failure of the counterparty to perform under the terms of
the derivative contract. If the fair value of a derivative
contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. The Company minimizes the
credit risk in derivative instruments by entering into
transactions with counterparties who maintain a strong credit
rating. Market risk is the risk of an adverse effect on the
value of a derivative instrument that results from a change in
interest rates. This risk essentially represents the risk that
variable interest rates decline to a level below the fixed rate
the Company has locked in. The market risk associated with
interest rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market
risk that may be undertaken.
At the inception of the interest rate swap, the Company formally
documents the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging
instrument, the hedged item, the nature of the risk being
hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed prospectively and
retrospectively, and a description of the method of measuring
ineffectiveness. The Company also formally assesses, both at the
hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate U.K. debt, on
February 29, 2008, the Company entered into an interest
rate swap agreement for a notional amount of
£20.0 million. The interest rate swap required the
Company to pay 4.99% and it received interest at a variable rate
of three-month GBP-LIBOR. The interest rate swap matured in
March 2011.
The Company entered into a new interest swap effective
March 31, 2011 for a notional amount of
£18.0 million ($28.1 million). The interest rate
swap requires the Company to pay 1.45% and to receive interest
at a variable rate of three-month GBP-LIBOR (currently 0.95%),
and is reset quarterly. No collateral is required under the
interest rate swap agreement. The swap matures in June 2012.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate senior secured credit
facility, effective July 24, 2008, the Company entered into
a three-year interest rate swap agreement for a notional amount
of $200.0 million. The interest rate swap required the
Company to pay 3.6525% and it received interest at a variable
rate of three-month USD-LIBOR. The swap matured in July 2011.
The proceeds from the swaps are used to settle the
Companys interest obligations on the hedged portion of the
variable rate debt, which has the overall outcome of the Company
paying and expensing a fixed rate of interest on the hedged debt.
The Company recognizes all derivative instruments as either
assets or liabilities at fair value in the consolidated balance
sheet. The Company designated the interest rate swaps as cash
flow hedges of certain of its variable-rate borrowings. For
derivative instruments that are designated and qualify as a cash
flow hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive
income (loss) and reclassified to earnings in the same period or
periods during which the hedged transaction affects earnings.
Gains and losses on the derivatives representing either hedge
ineffectiveness or hedge components excluded from the assessment
of effectiveness are recognized in current earnings and would be
classified as interest expense in the Companys
consolidated statements of income. The Company recorded no
expense related to ineffectiveness for the three and nine months
ended September 30, 2011 or 2010. For the three and nine
months ended September 30, 2011, the Company reclassified
$0.5 million and $4.2 million, respectively, out of
other comprehensive income to interest expense related to the
swaps. For the three and nine months ended September 30,
2010, the Company reclassified $1.9 million and
$5.9 million, respectively, out of other comprehensive
income to interest expense related to the
18
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
swaps. During the remaining term of the U.K. swap, if current
interest rates remain at September 30, 2011 levels, the
Company will record approximately $0.1 million more
interest expense than if it had not entered into the interest
rate swap.
At September 30, 2011 and 2010, the fair values of the U.K.
interest rate swap were approximately $0.1 million and
$0.6 million (both recorded in other current liabilities),
respectively, with the offset to other comprehensive income. At
September 30, 2010, the fair value of the
U.S. interest rate swap was approximately $5.1 million
(recorded in other current liabilities), respectively, with the
offset to other comprehensive income. During the three and nine
months ended September 30, 2011, the amounts, net of taxes,
recorded in other comprehensive income related to the interest
rate swaps were $0.3 million and $2.5 million,
respectively. During the three and nine months ended
September 30, 2010, the amounts, net of taxes, recorded in
other comprehensive income related to the interest rate swaps
were $0.8 million and $2.2 million, respectively.
The estimated fair value of the interest rate swaps was
determined using present value models of the contractual
payments. Inputs to the models were based on prevailing LIBOR
market data and incorporate credit data that measure
nonperformance risk. The estimated fair value represents the
theoretical exit cost the Company would have to pay to transfer
the obligations to a market participant with similar credit
risk. The interest rate swap agreements are classified within
Level 2 of the valuation hierarchy.
|
|
(7)
|
Fair
Value of Financial Instruments
|
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. The Company uses fair value measurements based on
quoted prices in active markets for identical assets or
liabilities (Level 1), significant other observable inputs
(Level 2) or unobservable inputs for assets or
liabilities (Level 3), depending on the nature of the item
being valued. The estimated fair values may not be
representative of actual values that will be realized or settled
in the future.
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these
instruments. The fair value of the Companys interest rate
swaps is disclosed in Note 6.
The fair value of the Companys long-term debt is
determined by either (i) estimation of the discounted
future cash flows of the debt at rates currently quoted or
offered to the Company for similar debt instruments of
comparable maturities by its lenders, or (ii) quoted market
prices at the reporting date for the traded debt securities. At
September 30, 2011, the aggregate carrying amount and
estimated fair value of long-term debt were each
$1.0 billion. At September 30, 2010, the aggregate
carrying amount and estimated fair value of long-term debt were
each $1.1 billion.
The Company purchased $4.8 million of marketable
securities, primarily corporate bonds and U.S. Treasury
securities, during the nine months ended September 30,
2011, which are included in other current assets on the
accompanying consolidated balance sheet. The Company has
designated these securities as
available-for-sale.
At September 30, 2011, the carrying value of such
securities approximates fair value. The fair value of these
securities are classified within Level 2 of the valuation
hierarchy, and are based on closing market prices of the
investments when applicable, or alternatively, valuations
utilizing market data and other observable inputs.
|
|
(8)
|
Equity-Based
Compensation
|
The Company accounts for equity-based compensation, such as
stock options and other stock-based awards to employees and
directors, at fair value. The fair value of the compensation is
measured at the date of grant and recognized as expense over the
recipients requisite service period.
19
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
The Companys equity-based compensation consists primarily
of stock options and restricted stock granted by the
Companys parent, USPI Group Holdings, Inc., to certain
employees and members of the board of directors. The fair value
of stock options was estimated at the date of grant using the
Black-Scholes formula based on assumptions derived from
historical experience.
Total equity-based compensation included in the accompanying
consolidated statements of income, classified by line item, is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
Salaries, benefits and other employee costs
|
|
$
|
80
|
|
|
$
|
326
|
|
|
$
|
147
|
|
|
$
|
421
|
|
General and administrative expenses
|
|
|
163
|
|
|
|
682
|
|
|
|
285
|
|
|
|
842
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense before income tax benefit
|
|
|
243
|
|
|
|
1,008
|
|
|
|
460
|
|
|
|
1,383
|
|
Income tax benefit
|
|
|
(30
|
)
|
|
|
(178
|
)
|
|
|
(92
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense, net of tax
|
|
$
|
213
|
|
|
$
|
830
|
|
|
$
|
368
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation, included in the accompanying
consolidated statements of income, classified by type of award,
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
Share awards
|
|
$
|
123
|
|
|
$
|
721
|
|
|
$
|
332
|
|
|
$
|
993
|
|
Stock options
|
|
|
120
|
|
|
|
287
|
|
|
|
128
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense before income tax benefit
|
|
|
243
|
|
|
|
1,008
|
|
|
|
460
|
|
|
|
1,383
|
|
Income tax benefit
|
|
|
(30
|
)
|
|
|
(178
|
)
|
|
|
(92
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense, net of tax
|
|
$
|
213
|
|
|
$
|
830
|
|
|
$
|
368
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
The Companys business is the operation of surgical
facilities and related businesses in the United States and the
United Kingdom. The Companys chief operating decision
maker, as that term is defined in the accounting standard,
regularly reviews financial information about its surgical
facilities for assessing performance and allocating resources
both domestically and abroad. Accordingly, the Companys
reportable segments consist of (1) U.S. based
facilities and (2) U.K. based facilities and are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
Three Months Ended September 30, 2011
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Net patient service revenues
|
|
$
|
102,297
|
|
|
$
|
27,196
|
|
|
$
|
129,493
|
|
Other revenues
|
|
|
19,965
|
|
|
|
|
|
|
|
19,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
122,262
|
|
|
$
|
27,196
|
|
|
$
|
149,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
5,226
|
|
|
$
|
1,943
|
|
|
$
|
7,169
|
|
Operating income
|
|
|
53,754
|
|
|
|
2,875
|
|
|
|
56,629
|
|
Net interest expense
|
|
|
(15,165
|
)
|
|
|
(342
|
)
|
|
|
(15,507
|
)
|
Income tax expense
|
|
|
(8,717
|
)
|
|
|
(536
|
)
|
|
|
(9,253
|
)
|
Total assets
|
|
|
2,086,803
|
|
|
|
334,767
|
|
|
|
2,421,570
|
|
Capital expenditures
|
|
|
7,230
|
|
|
|
4,816
|
|
|
|
12,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Net patient service revenues
|
|
$
|
305,345
|
|
|
$
|
82,796
|
|
|
$
|
388,141
|
|
Other revenues
|
|
|
59,457
|
|
|
|
|
|
|
|
59,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
364,802
|
|
|
$
|
82,796
|
|
|
$
|
447,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
15,946
|
|
|
$
|
6,096
|
|
|
$
|
22,042
|
|
Operating income
|
|
|
166,506
|
|
|
|
11,617
|
|
|
|
178,123
|
|
Net interest expense
|
|
|
(47,928
|
)
|
|
|
(1,356
|
)
|
|
|
(49,284
|
)
|
Income tax expense
|
|
|
(27,291
|
)
|
|
|
(2,530
|
)
|
|
|
(29,821
|
)
|
Total assets
|
|
|
2,086,803
|
|
|
|
334,767
|
|
|
|
2,421,570
|
|
Capital expenditures
|
|
|
13,582
|
|
|
|
13,759
|
|
|
|
27,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
Three Months Ended September 30, 2010
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Net patient service revenues
|
|
$
|
98,386
|
|
|
$
|
25,113
|
|
|
$
|
123,499
|
|
Other revenues
|
|
|
17,893
|
|
|
|
|
|
|
|
17,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
116,279
|
|
|
$
|
25,113
|
|
|
$
|
141,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
5,490
|
|
|
$
|
1,852
|
|
|
$
|
7,342
|
|
Operating income
|
|
|
45,771
|
|
|
|
3,827
|
|
|
|
49,598
|
|
Net interest expense
|
|
|
(16,425
|
)
|
|
|
(569
|
)
|
|
|
(16,994
|
)
|
Income tax expense
|
|
|
(6,289
|
)
|
|
|
(806
|
)
|
|
|
(7,095
|
)
|
Total assets
|
|
|
2,018,663
|
|
|
|
331,996
|
|
|
|
2,350,659
|
|
Capital expenditures
|
|
|
11,327
|
|
|
|
7,326
|
|
|
|
18,653
|
|
21
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
Nine Months Ended September 30, 2010
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Net patient service revenues
|
|
$
|
293,909
|
|
|
$
|
76,275
|
|
|
$
|
370,184
|
|
Other revenues
|
|
|
52,270
|
|
|
|
|
|
|
|
52,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
346,179
|
|
|
$
|
76,275
|
|
|
$
|
422,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
16,875
|
|
|
$
|
5,253
|
|
|
$
|
22,128
|
|
Operating income
|
|
|
145,563
|
|
|
|
11,983
|
|
|
|
157,546
|
|
Net interest expense
|
|
|
(49,576
|
)
|
|
|
(2,440
|
)
|
|
|
(52,016
|
)
|
Income tax expense
|
|
|
(21,822
|
)
|
|
|
(2,416
|
)
|
|
|
(24,238
|
)
|
Total assets
|
|
|
2,018,663
|
|
|
|
331,996
|
|
|
|
2,350,659
|
|
Capital expenditures
|
|
|
22,153
|
|
|
|
18,372
|
|
|
|
40,525
|
|
|
|
(10)
|
Related
Party Transactions
|
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in the Company, in the amount of
$0.5 million and $1.5 million in both the three months
and nine months ended September 30, 2011 and 2010,
respectively. Such amounts accrue at an annual rate of
$2.0 million. The Company pays $1.0 million in cash
per year with the unpaid balance due and payable upon a change
in control. At September 30, 2011, the Company had
approximately $5.0 million accrued related to such
management fee, of which $0.5 million is included in other
current liabilities and $4.5 million is included in other
long-term liabilities in the accompanying consolidated balance
sheet.
In September 2011, Baylor Health Care System (Baylor) acquired
ownership in a facility from the Company for $1.6 million.
Baylors Chief Executive Officer is a member of the
Companys board of directors. The Company believes that the
sales price was the same as if it had been negotiated on an
arms length basis, and the price equaled the value
assigned by an external appraiser who valued the business
immediately prior to the sale.
|
|
(11)
|
Commitments
and Contingencies
|
As of September 30, 2011, the Company had issued guarantees
of the indebtedness and other obligations of its investees to
third parties, which could potentially require the Company to
make maximum aggregate payments totaling approximately
$74.8 million. Of the total, $17.8 million relates to
the obligations of consolidated subsidiaries, whose obligations
are included in the Companys consolidated balance sheet
and related disclosures, and $48.1 million of the remaining
$57.0 million relates to the obligations of unconsolidated
affiliated companies, whose obligations are not included in the
Companys consolidated balance sheet and related
disclosures. The remaining $8.9 million represents a
guarantee of the obligations of four facilities which have been
sold. The Company has full recourse to the buyers with respect
to these amounts.
The Company has recorded long-term liabilities totaling
approximately $0.5 million related to the guarantees the
Company has issued to unconsolidated affiliates on or after
January 1, 2003, and has not recorded any liabilities
related to guarantees issued prior to that date. Generally,
these arrangements (a) consist of guarantees of real estate
and equipment financing, (b) are secured by the related
property and equipment, (c) require payments by the
Company, when the collateral is insufficient, in the event of a
default by the investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2022, and (e) provide no recourse for the Company
to recover any amounts from third parties. The Company also has
$1.6 million of letters of credit outstanding.
22
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
The Company has entered into letters of intent with various
entities regarding possible joint venture, development, or other
transactions. These possible joint ventures, developments of new
facilities, or other transactions are in various stages of
negotiation. On October 31, 2011, the Company borrowed $16.0
million on its revolving credit facility to fund expected
acquisitions.
|
|
(13)
|
Condensed
Consolidating Financial Statements
|
The following information is presented as required by
regulations of the Securities and Exchange Commission (SEC) in
connection with the Companys subordinated notes that have
been registered with the SEC. This information is not routinely
prepared for use by management. The operating and investing
activities of the separate legal entities included in the
consolidated financial statements are fully interdependent and
integrated. Accordingly, the operating results of the separate
legal entities are not representative of what the operating
results would be on a stand-alone basis. Revenues and operating
expenses of the separate legal entities include intercompany
charges for management and other services.
The $240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes, all due 2017 (the Notes), were issued
in a private offering on April 19, 2007 and were
subsequently registered as publicly traded securities through a
Form S-4
declared effective by the SEC on July 25, 2007. The
exchange offer was completed in August 2007. The Notes are
unsecured senior subordinated obligations of the Company;
however, the Notes are guaranteed by all of the Companys
current and future direct and indirect wholly-owned domestic
subsidiaries. USPI, which issued the Notes, does not have
independent assets or operations. USPIs investees in the
United Kingdom are not guarantors of the obligation. USPIs
investees in the United States in which USPI owns less than 100%
are not guarantors of the obligation. The financial positions
and results of operations (below, in thousands) of the
respective guarantors are based upon the guarantor relationship
at the end of the period presented. Consolidation adjustments
include purchase accounting entries for investments in which the
Companys ownership percentage in non-participating
investees is not high enough to permit the application of
pushdown accounting.
23
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
Condensed
Consolidating Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
As of September 30, 2011
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,547
|
|
|
$
|
8,379
|
|
|
$
|
|
|
|
$
|
55,926
|
|
Accounts receivable, net
|
|
|
|
|
|
|
48,336
|
|
|
|
|
|
|
|
48,336
|
|
Other receivables
|
|
|
24,289
|
|
|
|
27,375
|
|
|
|
(36,487
|
)
|
|
|
15,177
|
|
Inventories of supplies
|
|
|
802
|
|
|
|
7,976
|
|
|
|
|
|
|
|
8,778
|
|
Prepaids and other current assets
|
|
|
30,384
|
|
|
|
2,905
|
|
|
|
|
|
|
|
33,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
103,022
|
|
|
|
94,971
|
|
|
|
(36,487
|
)
|
|
|
161,506
|
|
Property and equipment, net
|
|
|
19,202
|
|
|
|
183,591
|
|
|
|
339
|
|
|
|
203,132
|
|
Investments in unconsolidated affiliates
|
|
|
1,025,833
|
|
|
|
|
|
|
|
(606,520
|
)
|
|
|
419,313
|
|
Goodwill and intangible assets, net
|
|
|
924,157
|
|
|
|
346,512
|
|
|
|
345,514
|
|
|
|
1,616,183
|
|
Other assets
|
|
|
88,400
|
|
|
|
397
|
|
|
|
(67,361
|
)
|
|
|
21,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,160,614
|
|
|
$
|
625,471
|
|
|
$
|
(364,515
|
)
|
|
$
|
2,421,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,263
|
|
|
$
|
20,624
|
|
|
$
|
|
|
|
$
|
24,887
|
|
Accrued expenses and other
|
|
|
225,513
|
|
|
|
34,527
|
|
|
|
(35,144
|
)
|
|
|
224,896
|
|
Current portion of long-term debt
|
|
|
5,593
|
|
|
|
19,529
|
|
|
|
(1,282
|
)
|
|
|
23,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
235,369
|
|
|
|
74,680
|
|
|
|
(36,426
|
)
|
|
|
273,623
|
|
Long-term debt, less current portion
|
|
|
938,054
|
|
|
|
81,212
|
|
|
|
(1,059
|
)
|
|
|
1,018,207
|
|
Other long-term liabilities
|
|
|
159,439
|
|
|
|
9,401
|
|
|
|
(358
|
)
|
|
|
168,482
|
|
Parents equity
|
|
|
827,752
|
|
|
|
435,861
|
|
|
|
(435,861
|
)
|
|
|
827,752
|
|
Noncontrolling interests
|
|
|
|
|
|
|
24,317
|
|
|
|
109,189
|
|
|
|
133,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,160,614
|
|
|
$
|
625,471
|
|
|
$
|
(364,515
|
)
|
|
$
|
2,421,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
As of December 31, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
60,186
|
|
|
$
|
67
|
|
|
$
|
|
|
|
$
|
60,253
|
|
Accounts receivable, net
|
|
|
|
|
|
|
50,082
|
|
|
|
|
|
|
|
50,082
|
|
Other receivables
|
|
|
27,313
|
|
|
|
45,146
|
|
|
|
(57,217
|
)
|
|
|
15,242
|
|
Inventories of supplies
|
|
|
685
|
|
|
|
8,506
|
|
|
|
|
|
|
|
9,191
|
|
Prepaids and other current assets
|
|
|
27,477
|
|
|
|
2,166
|
|
|
|
|
|
|
|
29,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
115,661
|
|
|
|
105,967
|
|
|
|
(57,217
|
)
|
|
|
164,411
|
|
Property and equipment, net
|
|
|
24,343
|
|
|
|
177,803
|
|
|
|
114
|
|
|
|
202,260
|
|
Investments in unconsolidated affiliates
|
|
|
1,010,592
|
|
|
|
|
|
|
|
(617,031
|
)
|
|
|
393,561
|
|
Goodwill and intangible assets, net
|
|
|
904,108
|
|
|
|
342,777
|
|
|
|
340,991
|
|
|
|
1,587,876
|
|
Other assets
|
|
|
91,151
|
|
|
|
2,602
|
|
|
|
(69,122
|
)
|
|
|
24,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,145,855
|
|
|
$
|
629,149
|
|
|
$
|
(402,265
|
)
|
|
$
|
2,372,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,684
|
|
|
$
|
21,804
|
|
|
$
|
|
|
|
$
|
23,488
|
|
Accrued expenses and other
|
|
|
236,835
|
|
|
|
37,868
|
|
|
|
(55,917
|
)
|
|
|
218,786
|
|
Current portion of long-term debt
|
|
|
4,932
|
|
|
|
19,751
|
|
|
|
(2,297
|
)
|
|
|
22,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
243,451
|
|
|
|
79,423
|
|
|
|
(58,214
|
)
|
|
|
264,660
|
|
Long-term debt, less current portion
|
|
|
966,999
|
|
|
|
82,732
|
|
|
|
(2,291
|
)
|
|
|
1,047,440
|
|
Other long-term liabilities
|
|
|
148,648
|
|
|
|
9,692
|
|
|
|
(520
|
)
|
|
|
157,820
|
|
Parents equity
|
|
|
786,757
|
|
|
|
432,261
|
|
|
|
(432,261
|
)
|
|
|
786,757
|
|
Noncontrolling interests
|
|
|
|
|
|
|
25,041
|
|
|
|
91,021
|
|
|
|
116,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,145,855
|
|
|
$
|
629,149
|
|
|
$
|
(402,265
|
)
|
|
$
|
2,372,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
Condensed
Consolidating Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
For the Nine Months Ended September 30, 2011
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Revenues
|
|
$
|
78,097
|
|
|
$
|
386,826
|
|
|
$
|
(17,325
|
)
|
|
$
|
447,598
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
104,313
|
|
|
|
2,284
|
|
|
|
(49,879
|
)
|
|
|
56,718
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
56,341
|
|
|
|
263,329
|
|
|
|
(15,519
|
)
|
|
|
304,151
|
|
Depreciation and amortization
|
|
|
5,071
|
|
|
|
16,858
|
|
|
|
113
|
|
|
|
22,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
120,998
|
|
|
|
108,923
|
|
|
|
(51,798
|
)
|
|
|
178,123
|
|
Interest expense, net
|
|
|
(44,890
|
)
|
|
|
(4,394
|
)
|
|
|
|
|
|
|
(49,284
|
)
|
Other income (expense), net
|
|
|
(196
|
)
|
|
|
265
|
|
|
|
(183
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
75,912
|
|
|
|
104,794
|
|
|
|
(51,981
|
)
|
|
|
128,725
|
|
Income tax expense
|
|
|
(26,600
|
)
|
|
|
(3,221
|
)
|
|
|
|
|
|
|
(29,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
49,312
|
|
|
|
101,573
|
|
|
|
(51,981
|
)
|
|
|
98,904
|
|
Loss from discontinued operations, net of tax
|
|
|
(519
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
48,793
|
|
|
|
101,571
|
|
|
|
(51,979
|
)
|
|
|
98,385
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(11,640
|
)
|
|
|
(37,952
|
)
|
|
|
(49,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Parent
|
|
$
|
48,793
|
|
|
$
|
89,931
|
|
|
$
|
(89,931
|
)
|
|
$
|
48,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
For the Nine Months Ended September 30, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Revenues
|
|
$
|
70,892
|
|
|
$
|
367,651
|
|
|
$
|
(16,089
|
)
|
|
$
|
422,454
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
95,913
|
|
|
|
1,744
|
|
|
|
(47,903
|
)
|
|
|
49,754
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
56,676
|
|
|
|
252,635
|
|
|
|
(16,777
|
)
|
|
|
292,534
|
|
Depreciation and amortization
|
|
|
5,422
|
|
|
|
16,549
|
|
|
|
157
|
|
|
|
22,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
104,707
|
|
|
|
100,211
|
|
|
|
(47,372
|
)
|
|
|
157,546
|
|
Interest expense, net
|
|
|
(45,825
|
)
|
|
|
(6,101
|
)
|
|
|
(90
|
)
|
|
|
(52,016
|
)
|
Other income (expense), net
|
|
|
726
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
59,608
|
|
|
|
94,107
|
|
|
|
(47,462
|
)
|
|
|
106,253
|
|
Income tax expense
|
|
|
(20,672
|
)
|
|
|
(3,566
|
)
|
|
|
|
|
|
|
(24,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
38,936
|
|
|
|
90,541
|
|
|
|
(47,462
|
)
|
|
|
82,015
|
|
Earnings from discontinued operations, net of tax
|
|
|
810
|
|
|
|
592
|
|
|
|
(592
|
)
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
39,746
|
|
|
|
91,133
|
|
|
|
(48,054
|
)
|
|
|
82,825
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(8,571
|
)
|
|
|
(34,508
|
)
|
|
|
(43,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Parent
|
|
$
|
39,746
|
|
|
$
|
82,562
|
|
|
$
|
(82,562
|
)
|
|
$
|
39,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
Condensed
Consolidating Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
For the Nine Months Ended September 30, 2011
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
48,793
|
|
|
$
|
101,571
|
|
|
$
|
(51,979
|
)
|
|
$
|
98,385
|
|
Loss (earnings) on discontinued operations
|
|
|
519
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
519
|
|
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
|
|
25,261
|
|
|
|
6,616
|
|
|
|
9,589
|
|
|
|
41,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
74,573
|
|
|
|
108,189
|
|
|
|
(42,392
|
)
|
|
|
140,370
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(2,318
|
)
|
|
|
(19,732
|
)
|
|
|
|
|
|
|
(22,050
|
)
|
Purchases and sales of new businesses and equity interests, net
|
|
|
(50,681
|
)
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
(51,951
|
)
|
Other items, net
|
|
|
(47
|
)
|
|
|
19,333
|
|
|
|
(20,585
|
)
|
|
|
(1,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(53,046
|
)
|
|
|
(1,669
|
)
|
|
|
(20,585
|
)
|
|
|
(75,300
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net
|
|
|
(28,949
|
)
|
|
|
(6,068
|
)
|
|
|
2,255
|
|
|
|
(32,762
|
)
|
Purchases and sales of noncontrolling interests, net
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
(93,083
|
)
|
|
|
42,392
|
|
|
|
(50,691
|
)
|
Increase in cash held on behalf of noncontrolling interest
holders and other
|
|
|
(5,748
|
)
|
|
|
1,002
|
|
|
|
18,330
|
|
|
|
13,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(34,166
|
)
|
|
|
(98,149
|
)
|
|
|
62,977
|
|
|
|
(69,338
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(12,639
|
)
|
|
|
8,312
|
|
|
|
|
|
|
|
(4,327
|
)
|
Cash at the beginning of the period
|
|
|
60,186
|
|
|
|
67
|
|
|
|
|
|
|
|
60,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
47,547
|
|
|
$
|
8,379
|
|
|
$
|
|
|
|
$
|
55,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
For the Nine Months Ended September 30, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,746
|
|
|
$
|
91,133
|
|
|
$
|
(48,054
|
)
|
|
$
|
82,825
|
|
Loss (earnings) on discontinued operations
|
|
|
(810
|
)
|
|
|
(592
|
)
|
|
|
592
|
|
|
|
(810
|
)
|
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
|
|
27,881
|
|
|
|
21,481
|
|
|
|
6,420
|
|
|
|
55,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
66,817
|
|
|
|
112,022
|
|
|
|
(41,042
|
)
|
|
|
137,797
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(3,288
|
)
|
|
|
(24,675
|
)
|
|
|
|
|
|
|
(27,963
|
)
|
Purchases and sales of new businesses and equity interests, net
|
|
|
(5,052
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,052
|
)
|
Other items, net
|
|
|
(3,775
|
)
|
|
|
4,353
|
|
|
|
(840
|
)
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,115
|
)
|
|
|
(20,322
|
)
|
|
|
(840
|
)
|
|
|
(33,277
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net
|
|
|
(8,949
|
)
|
|
|
(8,261
|
)
|
|
|
1,148
|
|
|
|
(16,062
|
)
|
Purchases and sales of noncontrolling interests, net
|
|
|
850
|
|
|
|
350
|
|
|
|
|
|
|
|
1,200
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
(85,969
|
)
|
|
|
41,042
|
|
|
|
(44,927
|
)
|
Increase in cash held on behalf of noncontrolling interest
holders and other
|
|
|
(25,599
|
)
|
|
|
4,661
|
|
|
|
(308
|
)
|
|
|
(21,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(33,698
|
)
|
|
|
(89,219
|
)
|
|
|
41,882
|
|
|
|
(81,035
|
)
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
2,168
|
|
|
|
|
|
|
|
2,168
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
21,004
|
|
|
|
4,832
|
|
|
|
|
|
|
|
25,836
|
|
Cash at the beginning of the period
|
|
|
27,430
|
|
|
|
7,460
|
|
|
|
|
|
|
|
34,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
48,434
|
|
|
$
|
12,292
|
|
|
$
|
|
|
|
$
|
60,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
ITEM 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with the
Companys unaudited Consolidated Financial Statements and
the notes thereto included in Item 1 of this Quarterly
Report on
Form 10-Q.
Forward-Looking
Statements
Certain statements contained in this Quarterly Report on
Form 10-Q,
including, without limitation, statements containing the words
believes, anticipates,
expects, continues, will,
may, should, estimates,
intends, plans and similar expressions,
and statements regarding the Companys business strategy
and plans, constitute forward-looking statements.
Such forward-looking statements are based on managements
current expectations and involve known and unknown risks,
uncertainties and other factors, many of which the Company is
unable to predict or control, that may cause the Companys
actual results, performance or achievements to be materially
different from those expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: our significant indebtedness; general economic
and business conditions; foreign currency fluctuations;
demographic changes; changes in, or the failure to comply with,
laws and governmental regulations; the ability to enter into or
renew managed care provider arrangements on acceptable terms;
changes in Medicare, Medicaid and other government funded
payments or reimbursement in the United States (U.S.) and the
United Kingdom (U.K.); the efforts of insurers, healthcare
providers and others to contain healthcare costs; the impact of
healthcare reform; liability and other claims asserted against
us; the highly competitive nature of healthcare; changes in
business strategy or development plans of healthcare systems
with which we partner; the ability to attract and retain
qualified physicians and personnel, including nurses, and other
health care professionals and other personnel; the availability
of suitable acquisition and development opportunities and the
length of time it takes to complete acquisitions and
developments; our ability to integrate new and acquired
businesses with our existing operations; the availability and
terms of capital to fund the expansion of our business,
including the acquisition and development of additional
facilities and certain additional factors, risks and
uncertainties discussed in this Quarterly Report on
Form 10-Q.
We disclaim any obligation and make no promise to update any
such factors or forward-looking statements or to publicly
announce the results of any revisions to any such factors or
forward-looking statements, whether as a result of changes in
underlying factors, to reflect new information as a result of
the occurrence of events or developments or otherwise. Given
these uncertainties, investors and prospective investors are
cautioned not to rely on such forward-looking statements.
Overview
We operate ambulatory surgery centers and surgical hospitals in
the United States and the United Kingdom. As of
September 30, 2011, we operated 204 facilities, consisting
of 199 in the United States and five in the United Kingdom.
Fourteen of our 199 U.S. facilities are surgical hospitals.
All but two of our 199 U.S. facilities includes local
physician owners, and 138 of these facilities are also partially
owned by various
not-for-profit
healthcare systems (hospital partners). In addition to
facilitating the joint ownership of the majority of our existing
facilities, our agreements with these healthcare systems provide
a framework for the construction or acquisition of additional
facilities in the future. Both facilities we are currently
constructing include a hospital partner. We have opened four de
novo facilities during 2011. We opened our newest facility, a
surgical hospital in Phoenix, Arizona, in June 2011. This
facility is a joint venture between us and our hospital partner.
Our U.S. facilities, consisting of ambulatory surgery
centers and surgical hospitals, specialize in non-emergency
surgical cases. Due in part to advancements in medical
technology, the volume and complexity of surgical cases
performed in an outpatient setting has steadily increased over
the past two decades. Our facilities earn a fee from patients,
insurance companies, or other payors in exchange for providing
the facility and related services a surgeon requires in order to
perform a surgical case. In addition, we earn a monthly fee from
each facility we operate in exchange for managing its
operations. All but five of our facilities are located in the
U.S., where we have focused increasingly on adding facilities
with hospital partners, which we believe improves the long-term
profitability and potential of our facilities.
In the United Kingdom we operate and own three hospitals, an
oncology clinic and a diagnostic and surgery center, which
supplement the services provided by the government-sponsored
healthcare system. Our patients
29
choose to receive care at private facilities primarily because
of the long wait to receive diagnostic procedures or elective
surgery at government-sponsored facilities and pay us either
from personal funds or through private insurance, which is
offered by some employers as a benefit to their employees. Since
acquiring our first two facilities in London in 2000, we have
expanded selectively by acquiring a third facility and
increasing the capacity and services offered at each facility,
including the construction of an oncology clinic near the campus
of one of our hospitals and other expansion projects. In January
2011, we acquired an equity interest in a diagnostic and surgery
center located in Edinburgh, Scotland.
Our growth and success depends on our ability to continue to
grow volumes at our existing facilities, to successfully open
new facilities we develop, to successfully integrate acquired
facilities into our operations, and to maintain productive
relationships with our physician and hospital partners. We
believe we will have significant opportunities to operate more
facilities in the future in existing and new markets and that
many of these will include hospital partners.
Due in large part to our partnerships with physician and
hospital partners, we do not consolidate 143 of the 204
facilities in which we have ownership interests. To help analyze
our results of operations, we disclose an operating measure we
refer to as systemwide revenue growth, which includes both
consolidated and unconsolidated facilities. While revenues of
our unconsolidated facilities are not recorded as revenues by
USPI, we believe the information is important in understanding
USPIs financial performance because these revenues are the
basis for calculating the Companys management services
revenues and, together with the expenses of our unconsolidated
facilities, are the basis for USPIs equity in earnings of
unconsolidated affiliates. In addition, USPI discloses growth
rates and operating margins (both consolidated and
unconsolidated) for the facilities that were operational in both
the current and prior year periods, a group the Company refers
to as same store facilities.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results
of operations and liquidity and capital resources are based on
our consolidated financial statements which have been prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP). The preparation of
consolidated financial statements under GAAP requires our
management to make certain estimates and assumptions that impact
the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the
consolidated financial statements. These estimates and
assumptions also impact the reported amount of net earnings
during any period. Estimates are based on information available
as of the date financial statements are prepared. Accordingly,
actual results could differ from those estimates. Critical
accounting policies and estimates are defined as those that are
both most important to the portrayal of our financial condition
and operating results and that require managements most
subjective judgments. Our critical accounting policies and
estimates include our policies and estimates regarding
consolidation, revenue recognition, income taxes and intangible
assets.
Our determination of whether to consolidate an entity in which
we hold an investment, account for it under the equity method,
or carry it at cost has a significant impact on our consolidated
financial statements because of the typical business model under
which we operate, particularly in the United States, where the
majority of the facilities we operate are partially owned by
hospital partners, physicians, and other parties. These
quarterly consolidated financial statements have been prepared
using the same consolidation policy as that used in our latest
audited consolidated financial statements.
We also consider our accounting policy regarding intangible
assets to be a critical accounting policy given the significance
of intangible assets as compared to the total assets of the
Company. There have been no significant changes in our
application of GAAP to intangible assets since the preparation
of our latest audited consolidated financial statements.
Our revenue recognition and accounts receivable policy and our
method of accounting for income taxes involve significant
judgments and estimates. There have been no significant changes
in assumptions, estimates, and judgments in the preparation of
these quarterly consolidated financial statements from the
assumptions, estimates, and judgments used in the preparation of
our latest audited consolidated financial statements.
30
Dispositions
During the nine months ended September 30, 2011, we sold
five facilities we operated through unconsolidated affiliates
and terminated our contracts to manage them. The resulting gains
and losses are classified within Net (gain) loss on
deconsolidations, disposals and impairments in the
accompanying consolidated statements of income. Equity method
investments that are sold do not represent discontinued
operations under GAAP. These transactions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (loss)
|
|
|
April 2011
|
|
Richmond, Virginia
|
|
$
|
0.6 million
|
|
|
$
|
0.2 million
|
|
May 2011
|
|
Flint, Michigan
|
|
|
1.1 million
|
|
|
|
0.4 million
|
|
May 2011
|
|
Fort Worth, Texas
|
|
|
0.7 million
|
|
|
|
(0.1 million
|
)
|
June 2011
|
|
Lawton, Oklahoma
|
|
|
1.7 million
|
|
|
|
0.8 million
|
|
September 2011
|
|
Cleveland, Ohio
|
|
|
1.2 million
|
|
|
|
0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5.3 million
|
|
|
$
|
1.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions,
Equity Investments and Development Projects
As part of our growth strategy, we acquire interests in existing
surgical facilities and invest in new facilities that we develop
in partnership with hospital partners and local physicians. Some
of these transactions result in our controlling the acquired
entity (business combinations). In September 2011, we acquired
100% the equity interests of Titan Healthcare Corporation
(Titan), a privately-held, Sacramento, California-based owner
and operator of surgery centers. Titan has an equity investment
in 14 surgery centers, nine of which are located in markets in
which we already operate. We paid cash totaling approximately
$43.4 million, net of $5.0 million of cash acquired,
and subject to certain purchase price adjustments set forth in
the purchase agreement. The Company funded the purchase using
cash on hand. The Company incurred approximately
$1.7 million in acquisition and severance costs, of which
$0.4 million is included in general and
administrative expenses and the remaining
$1.3 million is included in salaries, benefits, and
other employee costs in the accompanying consolidated
statements of income.
In April and September 2011, we obtained control of two separate
facilities in which we already had ownership due to changes in
the voting rights of the facilities. Although no consideration
was transferred, US GAAP requires the transactions to be
accounted for as business combinations and requires adjusting
the carrying value of our existing ownership to its fair value.
As a result, we recorded gains totaling $1.1 million in the
three months ended September 30, 2011 and $1.7 million
in the nine months ended September 30, 2011, which are
included in Net (gain) loss on deconsolidations, disposals
and impairments in the accompanying consolidated
statements of operations.
We also regularly engage in the purchase and sale of equity
interests with respect to facilities we are constructing or
already operate. When those transactions involve our investments
in unconsolidated affiliates but do not involve a change of
control, the cash flow impact is classified within investing
activities. During the nine months
31
ended September 30, 2011, these transactions resulted in a
net cash outflow of approximately $14.0 million, which is
summarized below:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
January 2011
|
|
Dallas, Texas(1)
|
|
$
|
1.3 million
|
|
January 2011
|
|
Rancho Mirage, California(2)
|
|
|
0.5 million
|
|
January 2011
|
|
Edinburgh, Scotland(3)
|
|
|
1.1 million
|
|
March 2011
|
|
Plano, Texas(4)
|
|
|
1.9 million
|
|
March 2011
|
|
Oklahoma City, Oklahoma(5)
|
|
|
1.2 million
|
|
September 2011
|
|
Various(6)
|
|
|
14.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 million
|
|
Sales
|
|
|
|
|
|
|
September 2011
|
|
Dallas, Texas(7)
|
|
|
1.6 million
|
|
Various
|
|
Various(8)
|
|
|
4.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.3 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
14.0 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents additional capital we contributed to a joint venture
with one of our
not-for-profit
hospital partners, which the joint venture used to acquire an
equity interest in this facility. We already were providing
management services to the facility. The remainder of this
facility is owned by local physicians. |
|
(2) |
|
Acquisition of additional equity interest in a surgical facility
in which we already held an investment. This facility is jointly
owned with physicians and continued to be accounted for under
the equity method. |
|
(3) |
|
Acquisition of a 50% noncontrolling interest in diagnostic and
surgery facility in which we had no previous involvement. |
|
(4) |
|
Represents additional capital we contributed to a joint venture
with one of our
not-for-profit
hospital partners, which the joint venture used to acquire an
equity interest in this facility. The remainder of this facility
is owned by local physicians. We also acquired the right to
manage this facility. |
|
(5) |
|
Represents additional capital we contributed to a facility in
which we hold an equity interest. |
|
(6) |
|
Through negotiations with each facilitys other owners, we
acquired additional ownership in six of Titans facilities.
These facilities are jointly owned with local physicians and one
facility also has a hospital partner. |
|
(7) |
|
A hospital partner obtained ownership in this entity, which is
also owned with local physicians. Additionally, this hospital
partner is a related party. |
|
(8) |
|
Represents the net cash received in various other purchases and
sales of equity interests and contributions of cash to equity
method investees. |
We control and therefore consolidate the results of 61 of our
204 facilities. Similar to our investments in unconsolidated
affiliates, we regularly engage in the purchase and sale of
equity interests in our consolidated subsidiaries that do not
result in a change of control. These transactions are accounted
for as equity transactions, as they are undertaken among us, our
consolidated subsidiaries, and noncontrolling interests. During
the nine months ended September 30, 2011, we purchased and
sold equity interests in various consolidated subsidiaries in
the amounts of $2.5 million and $3.1 million,
respectively. The difference between our carrying amount and the
proceeds received or paid in each transaction is recorded as an
adjustment to our additional paid-in capital. These transactions
resulted in a $14.3 million decrease to our additional
paid-in capital during the nine months ended September 30,
2011.
32
Sources
of Revenue
Revenues primarily include the following:
|
|
|
|
|
net patient service revenues of the facilities that we
consolidate for financial reporting purposes, which are those
facilities in which we have ownership interests of greater than
50% or otherwise maintain effective control.
|
|
|
|
management and contract service revenues, consisting of the fees
that we earn from managing the facilities that we do not
consolidate for financial reporting purposes and the fees we
earn from providing certain consulting and administrative
services to physicians and hospitals. Our consolidated revenues
and expenses do not include the management fees we earn from
operating the facilities that we consolidate for financial
reporting purposes as those fees are charged to subsidiaries and
thus eliminate in consolidation.
|
The following table summarizes our revenues by type and as a
percentage of total revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net patient service revenues
|
|
|
87
|
%
|
|
|
87
|
%
|
|
|
87
|
%
|
|
|
88
|
%
|
Management and contract service revenues
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
11
|
|
Other revenues
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues consist of the revenues earned by
facilities we consolidate for financial reporting purposes. As a
percent of our total revenues, these revenues did not
significantly change compared to prior year periods.
Our management and contract service revenues are earned from the
following types of activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Management of surgical facilities
|
|
$
|
15,212
|
|
|
$
|
13,236
|
|
|
$
|
45,083
|
|
|
$
|
38,855
|
|
Contract services provided to other healthcare providers
|
|
|
2,595
|
|
|
|
2,940
|
|
|
|
7,791
|
|
|
|
8,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and contract service revenues
|
|
$
|
17,807
|
|
|
$
|
16,176
|
|
|
$
|
52,874
|
|
|
$
|
47,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described above, our primary business is the operation of
surgical facilities.
The following table summarizes our revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
United States
|
|
|
82
|
%
|
|
|
82
|
%
|
|
|
82
|
%
|
|
|
82
|
%
|
United Kingdom
|
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Results
of Operations
The following table summarizes certain consolidated statement of
income items expressed as a percentage of revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
USPI
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Equity in earnings of unconsolidated affiliates
|
|
|
12.5
|
|
|
|
12.3
|
|
|
|
12.7
|
|
|
|
11.8
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
(69.8
|
)
|
|
|
(71.9
|
)
|
|
|
(68.0
|
)
|
|
|
(69.2
|
)
|
Depreciation and amortization
|
|
|
(4.8
|
)
|
|
|
(5.3
|
)
|
|
|
(4.9
|
)
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
37.9
|
|
|
|
35.1
|
|
|
|
39.8
|
|
|
|
37.3
|
|
Interest and other expense, net
|
|
|
(10.4
|
)
|
|
|
(11.8
|
)
|
|
|
(11.0
|
)
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
27.5
|
|
|
|
23.3
|
|
|
|
28.8
|
|
|
|
25.2
|
|
Income tax expense
|
|
|
(6.2
|
)
|
|
|
(5.0
|
)
|
|
|
(6.7
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
21.3
|
|
|
|
18.3
|
|
|
|
22.1
|
|
|
|
19.4
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
21.3
|
|
|
|
18.5
|
|
|
|
22.0
|
|
|
|
19.6
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(11.1
|
)
|
|
|
(10.1
|
)
|
|
|
(11.1
|
)
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
|
10.2
|
%
|
|
|
8.4
|
%
|
|
|
10.9
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our business model of partnering with
not-for-profit
hospitals and physicians results in our accounting for 143 of
our surgical facilities under the equity method rather than
consolidating their results. The following table reflects the
summarized results of the unconsolidated facilities that we
account for under the equity method of accounting (amounts are
expressed as a percentage of unconsolidated affiliates
revenues, and reflect 100% of the investees results on an
aggregated basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
USPIs Unconsolidated Affiliates
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses, excluding depreciation and amortization
|
|
|
(70.3
|
)
|
|
|
(70.9
|
)
|
|
|
(70.5
|
)
|
|
|
(70.6
|
)
|
Depreciation and amortization
|
|
|
(4.5
|
)
|
|
|
(4.2
|
)
|
|
|
(4.4
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
25.2
|
|
|
|
24.9
|
|
|
|
25.1
|
|
|
|
25.1
|
|
Interest and other expense, net
|
|
|
(2.4
|
)
|
|
|
(2.0
|
)
|
|
|
(2.3
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
22.8
|
|
|
|
22.9
|
|
|
|
22.8
|
|
|
|
23.0
|
|
Income tax expense
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
22.2
|
%
|
|
|
22.3
|
%
|
|
|
22.3
|
%
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Summary
Our strategy continues to include growing the profits of our
existing facilities, developing new facilities with hospital
partners, and adding other facilities through acquisition. Our
operating results in the three and nine months ended
September 30, 2011 reflect 6% and 7% same store facility
revenue growth as compared to the corresponding periods in 2010,
and our overall business also grew as a result of our operating
30 more facilities in 2011, largely as a result of acquisitions
made during the second half of 2010 and our acquisition of Titan
in September 2011. These growth drivers, together with various
gains, losses and expenses related to our acquisition and
disposal activity, resulted in a 14% and 13% increase in
operating income compared to the three and nine months ended
September 30,
34
2010, respectively. During the first nine months of 2011, we
acquired an equity method investment in a diagnostic and surgery
center in Edinburgh, Scotland and an equity interest in a
surgical facility in the Dallas/Fort Worth area with a
local hospital partner. We have also opened four new facilities
during 2011.
Continuing a trend experienced in recent quarters, USPIs
revenue growth in the third quarter of 2011 of 6% was
significantly less than our systemwide revenue growth of 12%,
primarily due to our continuing to add more equity method
facilities as compared to consolidated facilities. Our
systemwide revenues include all facilities that we operate;
USPIs revenues only include consolidated facilities, which
represent less than one-third of our facilities. Accounting for
more of our facilities under the equity method is a direct
result of deploying our primary U.S. business strategy of
jointly owning our facilities with prominent local physicians
and a hospital partner. In carrying out this strategy during the
period from January 1, 2010 to September 30, 2011, our
number of equity method facilities increased from 109 to 143
while our consolidated facility count increased from 60 to 61,
driven by our acquisition and disposal activity.
Our net earnings from a facility, whether consolidated or equity
method, are driven by the same factors: the facilitys
underlying profits and revenues and our ownership percentage.
Accordingly, to assess USPIs overall operating results we
often utilize systemwide and same store measures, which include
all facilities. These measures were positive in the first nine
months of 2011, with same store revenues increasing 7% (largely
corresponding to USPIs revenue growth of 6%) and
systemwide revenues increasing 13%, a product of same store
growth plus a net increase of 35 facilities since the beginning
of 2010. U.S. facility operating margins, were slightly
higher in the third quarter of 2011, and remained slightly
higher overall for the nine months ended September 30, 2011
as compared to the first nine months of 2010. Overall, these
operational factors, together with acquisition and disposal
activities, resulted in USPIs operating income margin
increasing to 37.9% for the third quarter of 2011 compared to
35.1% in the third quarter of 2010.
As noted above, operating income increased 14% and 13% for the
three and nine months ended September 30, 2011 as compared
to the corresponding prior year period. Operating income was
significantly impacted by several amounts not directly related
to our facilities operating results in both 2011 and 2010.
Excluding the amounts, shown below, operating income increased
6% and operating income margins were flat, for the three months
ended September 30, 2011, and operating income and
operating income margins increased 8% and 90 basis points,
for the nine months ended September 30, 2011 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
De novo
start-up
losses
|
|
$
|
1.8
|
|
|
$
|
2.9
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Titan acquisition costs
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Net (gain) loss on deconsolidations, disposals and impairments
|
|
|
(1.3
|
)
|
|
|
(3.7
|
)
|
|
|
(0.1
|
)
|
|
|
0.5
|
|
VAT assessment(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Expense related to previous acquisition
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on operating income
|
|
$
|
2.1
|
|
|
$
|
0.9
|
|
|
$
|
6.0
|
|
|
$
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a $1.0 million expense due to the British tax
authority changing its position on a value-added tax (VAT)
refund awarded to our U.K. subsidiary in the second quarter of
2009. We are appealing this decision. |
Our
Business and Key Measures
We operate surgical facilities in partnership with local
physicians and, in the majority of facilities, a
not-for-profit
health system partner. We hold an ownership interest in each
facility, each being operated through
35
a separate legal entity owned by us, the health systems and
physicians. We operate each facility on a
day-to-day
basis through a management services contract. Our sources of
earnings from each facility consist of:
|
|
|
|
|
our share of each facilitys net income or loss, which is
computed by multiplying the facilitys net income or loss
times the percentage of each facilitys equity interests
owned by us; and
|
|
|
|
management services revenues, computed as a percentage of each
facilitys net revenues (usually net of bad debt expense).
|
Our role as an owner and
day-to-day
manager provides us with significant influence over the
operations of each facility. In a growing majority of our
facilities (currently 143 of our 204 facilities), this influence
does not represent control of the facility, so we account for
our investment in the facility under the equity method, i.e., as
an unconsolidated affiliate. We control the remaining 61 of our
facilities and account for these investments as consolidated
subsidiaries.
Our net earnings from a facility are the same under either
method, but the classification of those earnings differs. For
consolidated subsidiaries, our financial statements reflect 100%
of the revenues and expenses of the subsidiaries, after the
elimination of intercompany amounts. The net profit attributable
to owners other than us is classified within net income
attributable to noncontrolling interests.
For unconsolidated affiliates, our consolidated statements of
income reflect our earnings in only two line items:
|
|
|
|
|
equity in earnings of unconsolidated affiliates: our share of
the net income of each facility, which represents the
facilities net income or loss multiplied by the percentage
of the facilitys outstanding equity interests owned by
us; and
|
|
|
|
management and administrative services revenues: income we earn
in exchange for managing the
day-to-day
operations of each facility, usually quantified as a percentage
of each facilitys net revenues less bad debt expense.
|
In summary, USPIs operating income is driven by the
performance of all facilities we operate and by our ownership
interest in those facilities, but USPIs individual revenue
and expense line items only contain consolidated businesses,
which represent less than one-third of our facilities. This
translates to trends in operating income that often do not
correspond with changes in revenues and expenses. The divergence
in these relationships is particularly significant when our
strategy is heavily weighted to unconsolidated affiliates, as it
has been in recent years. Accordingly, we review several types
of information in order to monitor and analyze USPIs
results of operations, including:
|
|
|
|
|
The results of operations of USPIs unconsolidated
affiliates
|
|
|
|
USPIs average ownership share in the facilities we
operate; and
|
|
|
|
Facility operating indicators that include both consolidated and
unconsolidated facilities, such as systemwide revenue growth,
same store revenue growth, and same store operating margins
|
36
Our
Consolidated and Unconsolidated Results
The following table shows USPIs results of operations and
the results of operations of USPIs unconsolidated
affiliates (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Variance to Prior Year
|
|
|
|
USPI as
|
|
|
|
|
|
USPI as
|
|
|
|
|
|
USPI as
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
129,493
|
|
|
$
|
375,568
|
|
|
$
|
123,499
|
|
|
$
|
328,152
|
|
|
$
|
5,994
|
|
|
$
|
47,416
|
|
Management and contract service revenues
|
|
|
17,807
|
|
|
|
|
|
|
|
16,176
|
|
|
|
|
|
|
|
1,631
|
|
|
|
|
|
Other income
|
|
|
2,158
|
|
|
|
3,076
|
|
|
|
1,717
|
|
|
|
1,730
|
|
|
|
441
|
|
|
|
1,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
149,458
|
|
|
|
378,644
|
|
|
|
141,392
|
|
|
|
329,882
|
|
|
|
8,066
|
|
|
|
48,762
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
18,684
|
|
|
|
|
|
|
|
17,247
|
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
41,589
|
|
|
|
89,960
|
|
|
|
39,027
|
|
|
|
77,875
|
|
|
|
2,562
|
|
|
|
12,085
|
|
Medical services and supplies
|
|
|
24,680
|
|
|
|
88,194
|
|
|
|
23,571
|
|
|
|
76,520
|
|
|
|
1,109
|
|
|
|
11,674
|
|
Other operating expenses
|
|
|
24,694
|
|
|
|
79,033
|
|
|
|
27,568
|
|
|
|
69,665
|
|
|
|
(2,874
|
)
|
|
|
9,368
|
|
General and administrative expenses
|
|
|
11,807
|
|
|
|
|
|
|
|
9,626
|
|
|
|
|
|
|
|
2,181
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
2,845
|
|
|
|
8,988
|
|
|
|
1,964
|
|
|
|
8,927
|
|
|
|
881
|
|
|
|
61
|
|
Net (gain) loss on deconsolidations, disposals and impairments
|
|
|
(1,271
|
)
|
|
|
(100
|
)
|
|
|
(57
|
)
|
|
|
1,042
|
|
|
|
(1,214
|
)
|
|
|
(1,142
|
)
|
Depreciation and amortization
|
|
|
7,169
|
|
|
|
17,286
|
|
|
|
7,342
|
|
|
|
13,813
|
|
|
|
(173
|
)
|
|
|
3,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
111,513
|
|
|
|
283,361
|
|
|
|
109,041
|
|
|
|
247,842
|
|
|
|
2,472
|
|
|
|
35,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
56,629
|
|
|
|
95,283
|
|
|
|
49,598
|
|
|
|
82,040
|
|
|
|
7,031
|
|
|
|
13,243
|
|
Interest income
|
|
|
167
|
|
|
|
97
|
|
|
|
211
|
|
|
|
88
|
|
|
|
(44
|
)
|
|
|
9
|
|
Interest expense
|
|
|
(15,674
|
)
|
|
|
(8,980
|
)
|
|
|
(17,205
|
)
|
|
|
(6,519
|
)
|
|
|
1,531
|
|
|
|
(2,461
|
)
|
Other
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
367
|
|
|
|
(7
|
)
|
|
|
(362
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(15,502
|
)
|
|
|
(8,884
|
)
|
|
|
(16,627
|
)
|
|
|
(6,438
|
)
|
|
|
1,125
|
|
|
|
(2,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
41,127
|
|
|
|
86,399
|
|
|
|
32,971
|
|
|
|
75,602
|
|
|
|
8,156
|
|
|
|
10,797
|
|
Income tax expense
|
|
|
(9,253
|
)
|
|
|
(2,219
|
)
|
|
|
(7,095
|
)
|
|
|
(1,993
|
)
|
|
|
(2,158
|
)
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
31,874
|
|
|
|
84,180
|
|
|
|
25,876
|
|
|
|
73,609
|
|
|
|
5,998
|
|
|
|
10,571
|
|
Discontinued operations, net of tax
|
|
|
10
|
|
|
|
|
|
|
|
281
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
31,884
|
|
|
$
|
84,180
|
|
|
|
26,157
|
|
|
$
|
73,609
|
|
|
|
5,727
|
|
|
$
|
10,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(16,598
|
)
|
|
|
|
|
|
|
(14,309
|
)
|
|
|
|
|
|
|
(2,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
15,286
|
|
|
|
|
|
|
$
|
11,848
|
|
|
|
|
|
|
$
|
3,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
$
|
18,684
|
|
|
|
|
|
|
$
|
17,247
|
|
|
|
|
|
|
$
|
1,437
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Variance to Prior Year
|
|
|
|
USPI as
|
|
|
|
|
|
USPI as
|
|
|
|
|
|
USPI as
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
388,141
|
|
|
$
|
1,093,113
|
|
|
$
|
370,184
|
|
|
$
|
946,521
|
|
|
$
|
17,957
|
|
|
$
|
146,592
|
|
Management and contract service revenues
|
|
|
52,874
|
|
|
|
|
|
|
|
47,136
|
|
|
|
|
|
|
|
5,738
|
|
|
|
|
|
Other income
|
|
|
6,583
|
|
|
|
7,884
|
|
|
|
5,134
|
|
|
|
4,899
|
|
|
|
1,449
|
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
447,598
|
|
|
|
1,100,997
|
|
|
|
422,454
|
|
|
|
951,420
|
|
|
|
25,144
|
|
|
|
149,577
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
56,718
|
|
|
|
|
|
|
|
49,754
|
|
|
|
|
|
|
|
6,964
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
122,060
|
|
|
|
263,513
|
|
|
|
113,707
|
|
|
|
224,641
|
|
|
|
8,353
|
|
|
|
38,872
|
|
Medical services and supplies
|
|
|
73,857
|
|
|
|
256,077
|
|
|
|
71,878
|
|
|
|
222,362
|
|
|
|
1,979
|
|
|
|
33,715
|
|
Other operating expenses
|
|
|
72,405
|
|
|
|
230,608
|
|
|
|
72,847
|
|
|
|
200,652
|
|
|
|
(442
|
)
|
|
|
29,956
|
|
General and administrative expenses
|
|
|
32,700
|
|
|
|
|
|
|
|
27,295
|
|
|
|
|
|
|
|
5,405
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
6,878
|
|
|
|
26,178
|
|
|
|
6,271
|
|
|
|
23,403
|
|
|
|
607
|
|
|
|
2,775
|
|
Net (gain) loss on deconsolidations, disposals and impairments
|
|
|
(3,749
|
)
|
|
|
(479
|
)
|
|
|
536
|
|
|
|
937
|
|
|
|
(4,285
|
)
|
|
|
(1,416
|
)
|
Depreciation and amortization
|
|
|
22,042
|
|
|
|
48,743
|
|
|
|
22,128
|
|
|
|
40,636
|
|
|
|
(86
|
)
|
|
|
8,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
326,193
|
|
|
|
824,640
|
|
|
|
314,662
|
|
|
|
712,631
|
|
|
|
11,531
|
|
|
|
112,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
178,123
|
|
|
|
276,357
|
|
|
|
157,546
|
|
|
|
238,789
|
|
|
|
20,577
|
|
|
|
37,568
|
|
Interest income
|
|
|
531
|
|
|
|
285
|
|
|
|
653
|
|
|
|
281
|
|
|
|
(122
|
)
|
|
|
4
|
|
Interest expense
|
|
|
(49,815
|
)
|
|
|
(24,996
|
)
|
|
|
(52,669
|
)
|
|
|
(19,371
|
)
|
|
|
2,854
|
|
|
|
(5,625
|
)
|
Other
|
|
|
(114
|
)
|
|
|
10
|
|
|
|
723
|
|
|
|
(328
|
)
|
|
|
(837
|
)
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(49,398
|
)
|
|
|
(24,701
|
)
|
|
|
(51,293
|
)
|
|
|
(19,418
|
)
|
|
|
1,895
|
|
|
|
(5,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
128,725
|
|
|
|
251,656
|
|
|
|
106,253
|
|
|
|
219,371
|
|
|
|
22,472
|
|
|
|
32,285
|
|
Income tax expense
|
|
|
(29,821
|
)
|
|
|
(5,917
|
)
|
|
|
(24,238
|
)
|
|
|
(5,149
|
)
|
|
|
(5,583
|
)
|
|
|
(768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
98,904
|
|
|
|
245,739
|
|
|
|
82,015
|
|
|
|
214,222
|
|
|
|
16,889
|
|
|
|
31,517
|
|
Discontinued operations, net of tax
|
|
|
(519
|
)
|
|
|
|
|
|
|
810
|
|
|
|
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
98,385
|
|
|
$
|
245,739
|
|
|
|
82,825
|
|
|
$
|
214,222
|
|
|
|
15,560
|
|
|
$
|
31,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(49,592
|
)
|
|
|
|
|
|
|
(43,079
|
)
|
|
|
|
|
|
|
(6,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
48,793
|
|
|
|
|
|
|
$
|
39,746
|
|
|
|
|
|
|
$
|
9,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
$
|
56,718
|
|
|
|
|
|
|
$
|
49,754
|
|
|
|
|
|
|
$
|
6,964
|
|
38
The following table provides other information regarding our
unconsolidated affiliates (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Long-term debt
|
|
$
|
443,043
|
|
|
$
|
290,230
|
|
|
$
|
443,043
|
|
|
$
|
290,230
|
|
USPIs imputed weighted average ownership percentage based
on affiliates pre-tax income(1)
|
|
|
21.6
|
%
|
|
|
22.8
|
%
|
|
|
22.5
|
%
|
|
|
22.7
|
%
|
USPIs imputed weighted average ownership percentage based
on affiliates debt(2)
|
|
|
26.0
|
%
|
|
|
25.3
|
%
|
|
|
26.0
|
%
|
|
|
25.3
|
%
|
Unconsolidated facilities operated at period end
|
|
|
143
|
|
|
|
114
|
|
|
|
143
|
|
|
|
114
|
|
|
|
|
(1) |
|
Our weighted average percentage ownership in our unconsolidated
affiliates is calculated as USPIs equity in earnings of
unconsolidated affiliates divided by the total pre-tax income of
unconsolidated affiliates for each respective period. This is a
non-GAAP measure but management believes it provides further
useful information about USPIs involvement in equity
method investments. |
|
(2) |
|
Our weighted average percentage ownership in our unconsolidated
affiliates is calculated as the total debt of each
unconsolidated affiliate, multiplied by the percentage ownership
USPI held in the affiliate as of the end of each respective
period, divided by the total debt of all of the unconsolidated
affiliates as of the end of each respective period. This is a
non-GAAP measure but management believes it provides further
useful information about USPIs involvement in equity
method investments. |
As shown above, USPIs net patient service revenues for the
three and nine months ended September 30, 2011 increased
$6.0 million and $18.0 million, respectively, compared
to the corresponding prior year periods. The net patient service
revenues of USPIs unconsolidated affiliates increased
$47.4 million and $146.6 million for the three and
nine months ended September 30, 2011, respectively, as
compared to the corresponding prior year periods. These
variances are analyzed more extensively below under
Revenues, but in general they reflect the fact that
the revenues of our unconsolidated facilities, which largely
represent the facilities we operate under our primary business
model of partnering with physicians and a hospital partner, are
growing at a faster rate than the revenues of our consolidated
facilities. In addition to the underlying growth rates at these
facilities, we continue to shift more of our facilities into our
primary business model, which usually moves them from the
consolidated to the unconsolidated group. Once netted with
expenses, these increased revenues at our unconsolidated
affiliates, resulted in their earning $31.5 million more in
net income on
year-to-date
basis than in the corresponding prior year period. Our share of
that increase, aggregated based on our ownership level in each
facility, was $7.0 million, and is classified within equity
in earnings of unconsolidated affiliates in our consolidated
statement of income.
Our
Ownership Interests in the Facilities We Operate
Our earnings are predominantly driven by our investments in the
facilities we operate, so we focus on those businesses
growth rates together with the percentage ownership interest we
hold in them to help us understand our results of operations.
Our average ownership interest in the U.S. surgical
facilities we operate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
Unconsolidated (equity method)(1)
|
|
|
22.5
|
%
|
|
|
21.7
|
%
|
|
|
22.7
|
%
|
Consolidated facilities(2)
|
|
|
44.9
|
%
|
|
|
46.7
|
%
|
|
|
47.5
|
%
|
Total(3)
|
|
|
28.4
|
%
|
|
|
28.2
|
%
|
|
|
29.4
|
%
|
|
|
|
(1) |
|
Computed for unconsolidated facilities by dividing (a) our
total equity in earnings of unconsolidated affiliates by
(b) the aggregate pre-tax income of U.S. surgical
facilities we account for under the equity method. |
39
|
|
|
(2) |
|
Computed for consolidated facilities by dividing (a) the
aggregate net income of U.S. surgical facilities we operate less
our total noncontrolling interests in income of consolidated
subsidiaries by (b) the aggregate net income of our
consolidated U.S. surgical facilities. |
|
(3) |
|
Computed in total by dividing our share of the facilities
net income, defined as the sum of (a) in footnotes
(1) and (2), by the aggregate net income of our U.S.
surgical facilities, defined as the sum of (b) in footnotes
(1) and (2). |
Our average ownership interest for each group of facilities is
determined by many factors, including the ownership levels we
negotiate in our acquisition and development activities, the
relative performance of facilities in which we own percentages
higher or lower than average, and other factors. As described
earlier, our increased focus on partnering our facilities with
not-for-profit
health systems in addition to physicians generally leads to our
accounting for more facilities under the equity method
(unconsolidated) as reflected in our number of unconsolidated
facilities increasing by 34 from January 1, 2010 to
September 30, 2011, while our number of consolidated
facilities increased by five. We generally have a lower
ownership percentage in an equity method facility as compared to
a consolidated facility.
Revenues
Our consolidated net revenues increased 6% during both the three
and nine months ended September 30, 2011, respectively, as
compared to the corresponding prior year periods. The table
below quantifies several significant items impacting year over
year growth.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2011
|
|
|
|
USPI as Reported
|
|
|
Unconsolidated
|
|
|
|
Under GAAP
|
|
|
Affiliates
|
|
|
Total revenues, three months ended September 30, 2010
|
|
$
|
141,392
|
|
|
$
|
329,882
|
|
Add: Revenue from acquired facilities
|
|
|
4,255
|
|
|
|
22,303
|
|
Less: Revenue of disposed facilities
|
|
|
|
|
|
|
(3,237
|
)
|
Less: Revenue of deconsolidated facilities
|
|
|
(3,411
|
)
|
|
|
3,411
|
|
Impact of exchange rate
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted base period
|
|
|
143,172
|
|
|
|
352,359
|
|
Increase from operations
|
|
|
4,469
|
|
|
|
22,501
|
|
Non-facility based revenue
|
|
|
1,817
|
|
|
|
3,784
|
|
|
|
|
|
|
|
|
|
|
Total revenues, three months ended September 30, 2011
|
|
$
|
149,458
|
|
|
$
|
378,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2011
|
|
|
|
USPI as Reported
|
|
|
Unconsolidated
|
|
|
|
Under GAAP
|
|
|
Affiliates
|
|
|
Total revenues, nine months ended September 30, 2010
|
|
$
|
422,454
|
|
|
$
|
951,420
|
|
Add: Revenue from acquired facilities
|
|
|
10,615
|
|
|
|
62,443
|
|
Less: Revenue of disposed facilities
|
|
|
|
|
|
|
(6,628
|
)
|
Less: Revenue of deconsolidated facilities
|
|
|
(9,747
|
)
|
|
|
9,747
|
|
Impact of exchange rate
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted base period
|
|
|
427,218
|
|
|
|
1,016,982
|
|
Increase from operations
|
|
|
12,402
|
|
|
|
75,318
|
|
Non-facility based revenue
|
|
|
7,978
|
|
|
|
8,697
|
|
|
|
|
|
|
|
|
|
|
Total revenues, nine months ended September 30, 2011
|
|
$
|
447,598
|
|
|
$
|
1,100,997
|
|
|
|
|
|
|
|
|
|
|
40
As shown above, the most significant sources of revenue growth
were from operational growth and acquisitions, with more
acquisitions and other growth in the revenues of our
unconsolidated facilities as compared to our consolidated
facilities.
Facility
Growth
Our systemwide revenues grew 12% and 13% in the three and nine
months ended September 30, 2011 as compared to the
corresponding prior year period. This growth is comprised of a
6% and 7% increase in the three and nine months ended
September 30, 2011, respectively, in the net revenues of
our same store facilities, which are those facilities we
operated in both periods, and revenues of newly acquired
facilities.
Year-to-date
same store growth continues to be driven most heavily by an
increase in the average complexity of our cases, which has
resulted in higher average revenues per case, and also by a 1%
increase in the number of cases performed at our
U.S. facilities. Our U.K. facilities admissions decreased
due largely to fewer referrals from the National Health Service
(NHS) and a decrease in self-pay business, but the overall
impact on revenues was more than offset by a shift to
higher-paying cases and a stronger British pound. The self-pay
business is generally considered more susceptible to changes in
general economic conditions, as the cost is borne entirely by
the patient rather than shared with private insurers or borne by
the NHS.
The following table summarizes our same store facility revenue
growth rates, as compared to the three and nine months ended
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
United States facilities:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
6
|
%
|
|
|
7
|
%
|
Surgical cases
|
|
|
|
%
|
|
|
1
|
%
|
Net revenue per case(1)
|
|
|
6
|
%
|
|
|
6
|
%
|
United Kingdom facilities:
|
|
|
|
|
|
|
|
|
Adjusted admissions
|
|
|
|
%
|
|
|
(3
|
)%
|
Net revenue using actual exchange rates
|
|
|
8
|
%
|
|
|
8
|
%
|
Net revenue using constant exchange rates(2)
|
|
|
4
|
%
|
|
|
3
|
%
|
All same store facilities:
|
|
|
|
|
|
|
|
|
Net revenue using actual exchange rates
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
|
(1) |
|
Our overall domestic same store growth in net revenue per case
for the three and nine months ended September 30, 2011, was
favorably impacted by the 5% and 7% growth, respectively, at our
thirteen same store hospitals, which on average perform more
complex cases and thus earn a higher average net revenue per
case than ambulatory surgery centers. The net revenue per case
growth at our ambulatory surgery centers was 4% during the third
quarter of 2011. |
|
(2) |
|
Calculated using 2011 exchange rates for both periods. Although
this computation represents a non-GAAP measure, we believe that
using a constant currency translation rate more accurately
reflects the trend of the business. |
Joint
Ventures With
Not-For-Profit
Hospitals
The addition of new facilities continues to be more heavily
weighted to U.S. surgical facilities with a hospital
partner, both as we initiate joint venture agreements with new
systems and as we add facilities to our existing arrangements.
Facilities have been added to hospital joint ventures both
through construction of new facilities (denovos) and through our
contribution of our equity interests in existing facilities into
a hospital joint venture structure, effectively creating
three-way joint ventures by sharing our ownership in these
facilities with a hospital partner while leaving the existing
physician ownership intact.
41
Consistent with this strategy, our net overall number of
facilities increased by 30 from September 30, 2010 to
September 30, 2011, while the net increase in facilities
partnered with
not-for-profit
hospitals and local physicians increased by 21. Both facilities
that are under construction at September 30, 2011 also
involve a hospital partner. We continue to explore affiliating
more facilities with hospital partners, especially for
facilities in markets where we already operate other facilities
with a hospital partner. The following table summarizes the
facilities we operated as of September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
United States facilities(1):
|
|
|
|
|
|
|
|
|
With a hospital partner
|
|
|
138
|
|
|
|
117
|
|
Without a hospital partner
|
|
|
61
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total U.S. facilities
|
|
|
199
|
|
|
|
170
|
|
United Kingdom facilities
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total facilities operated
|
|
|
204
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Change from September 30, 2010:
|
|
|
|
|
|
|
|
|
De novo (newly constructed)
|
|
|
4
|
|
|
|
|
|
Acquisition
|
|
|
36
|
|
|
|
|
|
Disposals(2)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in number of facilities
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At September 30, 2011, physicians own a portion of all but
two of these facilities. |
|
(2) |
|
We sold our ownership interests in facilities in Orlando,
Florida; Templeton, California; Houston, Texas; Richmond,
Virginia; Flint, Michigan; Fort Worth, Texas; Cleveland,
Ohio and Lawton, Oklahoma. We merged two of our surgery centers
into one location in the Dallas, Texas area. |
Facility
Operating Margins
Same store U.S. facility operating margins increased
40 basis points for the nine months ended
September 30, 2011 as compared to the corresponding prior
year period. The increase was due to slightly higher case
volumes, more complex cases, and improvement in the management
of operating expenses. Continuing a trend we have experienced in
recent years, the
year-over-year
change in the operating margins of facilities partnered with a
not-for-profit
healthcare system was more favorable than the change experienced
by the facilities that do not have a hospital partner. The
facilities partnered with a health system are, on average,
younger than our other facilities. Younger facilities
margins grow more rapidly on average than more mature
facilities, which generally have higher margins but with less
growth. The pattern of our acquisition and development activity
can also affect this relationship over time.
Our U.K. facilities, which comprise five of our 204 facilities
at September 30, 2011, experienced a decrease in overall
facility margins in the three and nine months ended
September 30, 2011 as compared to the prior year period,
largely due to the reduction in NHS and self-pay business
described above.
42
The following table summarizes the
year-over-year
changes in our same store facility operating margins (see
footnote 1 below), comparing the three and nine months ended
September 30, 2011 to the three and nine months ended
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
September 30,
|
|
|
Increase
|
|
|
|
2011
|
|
|
(Decrease)
|
|
|
2011
|
|
|
(Decrease)
|
|
|
United States facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a hospital partner
|
|
|
26.0
|
%
|
|
|
100
|
bps
|
|
|
25.7
|
%
|
|
|
80
|
bps
|
Without a hospital partner
|
|
|
30.2
|
%
|
|
|
(220
|
) bps
|
|
|
31.7
|
%
|
|
|
(130
|
) bps
|
Total U.S. facilities
|
|
|
26.7
|
%
|
|
|
40
|
bps
|
|
|
26.7
|
%
|
|
|
40
|
bps
|
United Kingdom facilities(2)
|
|
|
16.9
|
%
|
|
|
(480
|
) bps
|
|
|
20.1
|
%
|
|
|
(340
|
) bps
|
|
|
|
(1) |
|
Operating margin is calculated as operating income divided by
total revenues. This table aggregates all of the same store
facilities we operate using 100% of their results. This does not
represent the overall margin for USPIs operations in
either the U.S. or the U.K. because we have a variety of
ownership levels in the facilities we operate, and facilities
open for less than a year are excluded from same store
calculations. |
|
(2) |
|
Calculated using 2011 exchange rates for both periods. Although
this computation represents a non-GAAP measure, we believe that
using a constant currency translation rate more accurately
reflects the trend of the business. In addition, the
$1.0 million unfavorable impact of a payment of value-added
tax in the first quarter of 2010 has been excluded from U.K.
same store facility operating margins. |
Three
Months Ended September 30, 2011 Compared to Three Months
Ended September 30, 2010
As discussed more fully in Revenues, our
consolidated revenues increased by $8.1 million, or 5.7%,
to $149.5 million for the three months ended
September 30, 2011 from $141.4 million for the three
months ended September 30, 2010. A portion of the increase,
approximately $4.5 million, was driven by operations
resulting from higher net revenue per case. Acquisitions of
facilities increased revenues $4.3 million. Other factors,
including the favorable impact of a weaker U.S. dollar, and
a decrease in revenues resulting from our selling a portion of
our interest in two facilities (causing us to deconsolidate
them), drove the remaining net increase in revenues.
Equity in earnings of unconsolidated affiliates increased by
$1.4 million, or 8.3%, to $18.7 million for the three
months ended September 30, 2011 from $17.2 million for
the three months ended September 30, 2010. This increase in
equity in earnings was primarily driven by acquisitions of
equity method investments in facilities and deconsolidations of
facilities we already operated, which together increased equity
in earnings by $1.8 million. Other factors included
$1.4 million from growth in our existing facilities and
start-up
losses of $1.8 million from recently opened facilities. The
number of facilities we account for under the equity method
increased by 29 from September 30, 2010 to
September 30, 2011.
Depreciation and amortization was $7.2 million and
$7.3 million for the three months ended September 30,
2011 and September 30, 2010, respectively. Depreciation and
amortization, as a percentage of revenues, decreased slightly to
4.8% for the three months ended September 30, 2011 from
5.3% for the three months ended September 30, 2010.
Operating income increased $7.0 million, or 14.2%, to
$56.6 million for the three months ended September 30,
2011 from $49.6 million for the three months ended
September 30, 2010, and increased as a percentage of
revenues to 37.9% from 35.1%, respectively. As further discussed
in the Executive Summary, operating income was
significantly impacted during 2011 and 2010 by several items the
largest of which are Titan transaction costs and de novo
start-up
losses during the three months ended September 30, 2011 and
a $6.0 million expense related to a previous acquisition
for the three months ended September 30, 2010. Excluding
these items, operating income increased 6% and operating margins
were flat for the three months ended September 30, 2011 as
compared to prior year. The increase was driven by the increases
in revenues of our facilities and equity in earnings of
unconsolidated affiliates described above, offset by increases
in transaction related costs.
43
Interest expense, net of interest income, decreased
$1.5 million to $15.5 million for the three months
ended September 30, 2011 as compared to $17.0 million
for the three months ended September 30, 2010. The decrease
is primarily due to the expiration of the U.S. interest
rate swap in July 2011.
Provision for income taxes was $9.3 million for the three
months ended September 30, 2011 compared to
$7.1 million for the three months ended September 30,
2010. Our effective tax rates (based on pretax earnings
attributable to USPIs stockholder) were 37.7% and 38.0%
for the three months ended September 30, 2011 and 2010,
respectively.
The increase in revenues of our consolidated facilities, as
described above, drove an increase in our consolidated
subsidiaries net income. As most of our consolidated
businesses include owners besides us, an increase in the
earnings of these businesses resulted in an increase in net
income attributable to noncontrolling interests.
Overall, while our facilities average operating income margin
increased slightly in the third quarter of 2011 as compared to
the third quarter of 2010, the increase in revenues at these
facilities described, together with earnings from acquired
facilities and a gain from consolidating one facility, resulted
in higher net income attributable to USPIs common
stockholder during the third quarter of 2011 as compared to the
third quarter of 2010.
Nine
Months Ended September 30, 2011 Compared to Nine Months
Ended September 30, 2010
As discussed more fully in Revenues, our
consolidated revenues increased by $25.1 million, or 6.0%,
to $447.6 million for the nine months ended
September 30, 2011 from $422.5 million for the nine
months ended September 30, 2010. A portion of the increase,
approximately $12.4 million, was driven by operations
resulting from case growth and higher net revenue per case.
Acquisitions of facilities increased revenues
$10.6 million. Other factors, including the favorable
impact of a weaker U.S. dollar, and a decrease in revenues
resulting from our selling a portion of our interest in two
facilities (causing us to deconsolidate them), drove the
remaining net increase in revenues.
Equity in earnings of unconsolidated affiliates increased by
$7.0 million, or 14.0% to $56.7 million for the nine
months ended September 30, 2011 from $49.8 million for
the nine months ended September 30, 2010. This increase in
equity in earnings was primarily driven by acquisitions of
equity method investments in facilities and deconsolidations of
facilities we already operated, which together increased equity
in earnings by $4.9 million. Other factors included
$4.7 million from growth in our existing facilities and
start-up
losses of $2.8 million from recently opened facilities. The
number of facilities we account for under the equity method
increased by 29 from September 30, 2010 to
September 30, 2011.
Depreciation and amortization decreased $0.1 million to
$22.0 million for the nine months ended September 30,
2011 from $22.1 million for the nine months ended
September 30, 2010. Depreciation and amortization, as a
percentage of revenues, decreased slightly to 4.9% for the nine
months ended September 30, 2011 from 5.3% for the nine
months ended September 30, 2010.
Operating income increased $20.6 million, or 13.1%, to
$178.1 million for the nine months ended September 30,
2011 from $157.5 million for the nine months ended
September 30, 2010, and increased as a percentage of
revenues to 39.8% from 37.3%, respectively. As further discussed
in the Executive Summary, operating income was
significantly impacted during 2011 and 2010 by several items the
largest of which are Titan transaction costs and de novo
start-up
losses during the nine months ended September 30, 2011 and
a $6.0 million expense related to a previous acquisition
for the nine months ended September 30, 2010. Excluding
these items, operating income increased 8% and operating margins
improved 90 basis points for the nine months ended
September 30, 2011 as compared to prior year. These
increases were driven by the increases in revenues of our
facilities and equity in earnings of unconsolidated affiliates
described above, offset by increases in transaction related
costs.
Interest expense, net of interest income, decreased
$2.7 million to $49.3 million for the nine months
ended September 30, 2011 from $52.0 million for the
nine months ended September 30, 2010. The decrease is
primarily due the expiration of the U.S. interest rate swap
in July 2011 and to a $0.8 million interest expense related
to a VAT assessment, whereas in the first quarter of 2010, we
recorded a $0.8 million expense as the British tax
authority reclaimed the amount.
44
Provision for income taxes was $29.8 million for the nine
months ended September 30, 2011 compared to
$24.2 million for the nine months ended September 30,
2010. Our effective tax rates (based on pretax earnings
attributable to USPIs stockholder) were 37.7% and 38.4%
for the nine months ended September 30, 2011 and 2010,
respectively.
The increase in revenues of our consolidated facilities, as
described above, drove an increase in our consolidated
subsidiaries net income. As most of our consolidated
businesses include owners besides us, an increase in the
earnings of these businesses resulted in an increase in net
income attributable to noncontrolling interests.
Overall, our facilities average operating income margin
increased during the nine months ended September 30, 2011
as compared to the corresponding prior year period, so the
increase in revenues at these facilities described, together
with earnings from acquired facilities and gains from selling
interests in five facilities, gain on consolidation of two
facilities and the $1.8 million prior year expense related
to the VAT assessment by the British tax authority, resulted in
higher net income attributable to USPIs common stockholder
during 2011 as compared to the corresponding period in 2010.
Liquidity
and Capital Resources
Cash
Flows
During the nine months ended September 30, 2011, the
Company generated $140.4 million of cash flows from
operating activities as compared to $137.8 million during
the nine months ended September 30, 2010. Cash flows from
operating activities increased $2.6 million, or 1.9%, from
the prior year period, primarily as a result of our 19% growth
in net income being mostly offset by increased federal tax
payments. Our federal tax payments in the first half of 2010
were lower due to our still having significant net operating
loss carryforwards to apply.
During the nine months ended September 30, 2011, our net
cash used in investing activities was $75.3 million. We
spent $65.3 million acquiring businesses or other equity
investments and received proceeds of $13.3 million from
sales and partial sales of these types of investments. In
addition, we invested $27.3 million for purchases of
property and equipment, which includes $5.3 million of
equipment acquired under capital lease arrangements.
Approximately $15.4 million of property and equipment
purchases were related to ongoing development projects, and the
remaining $11.9 million represented purchases of equipment
at existing facilities. Net cash used in financing activities
for the nine months ended September 30, 2011 totaled
$69.3 million and resulted primarily from net payments on
long-term debt of $32.8 million, distributions to
noncontrolling interests of $50.7 million, partially offset
by a net increase in cash held on behalf of noncontrolling
interests of $13.6 million.
Cash and cash equivalents were $55.9 million at
September 30, 2011 as compared to $60.3 million at
December 31, 2010, and the net working capital deficit was
$112.1 million at September 30, 2011 as compared to
$100.2 million at December 31, 2010. The overall
negative working capital position at September 30, 2011 and
December 31, 2010 is primarily the result of
$129.8 million and $116.1 million due to affiliates,
respectively, associated with our practice of holding our
unconsolidated facilities cash. As discussed below, we
have sufficient availability under our credit facility, together
with our operating cash flows, to service our obligations.
Debt
We intend to fund our ongoing capital and working capital
requirements through a combination of cash flows from operations
and borrowings under our $85.0 million revolving credit
facility. We believe that funds generated by operations and
funds available under the revolving credit facility will be
sufficient to meet working capital requirements over at least
the next 12 months. However, in the future, we may have to
incur additional debt or issue additional debt or equity
securities from time to time. We may be unable to obtain
sufficient financing on satisfactory terms or at all.
We and our subsidiaries, affiliates (subject to certain
limitations imposed by existing indebtedness), or significant
stockholders, in their sole discretion, may from time to time,
purchase, redeem, exchange or retire any of our outstanding debt
in privately negotiated or open market purchases, or otherwise.
Such transactions will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other
factors.
45
Senior
secured credit facility
The senior secured credit facility (credit facility) provides
for borrowings of up to $615.0 million (with a
$150.0 million accordion feature described below),
consisting of (1) an $85.0 million revolving credit
facility with a maturity of six years, including a
$20.0 million letter of credit
sub-facility,
and a $20.0 million swing-line loan
sub-facility;
and (2) a $530.0 million term loan facility (including
a $100.0 million delayed draw facility) with a maturity of
seven years. We have utilized the availability under the
$530.0 million term loan facility and are making scheduled
quarterly principal payments. The term loans require principal
payments in the amount of $4.3 million per annum in equal
quarterly installments and $0.2 million per quarter with
respect to the delayed draw facility, with the remaining balance
maturing in 2014. No principal payments are required on the
revolving credit facility until its maturity in 2013.
We may request additional tranches of term loans or additional
commitments to the revolving credit facility in an aggregate
amount not exceeding $150.0 million, subject to certain
conditions. Interest rates on the credit facility are based on
LIBOR plus a margin of 2.00% to 2.25%. Additionally, we
currently pay quarterly commitment fees of 0.50% per annum on
the daily-unused commitment of the revolving credit facility. We
also currently pay a quarterly participation fee of 2.13% per
annum related to outstanding letters of credit. At
September 30, 2011, we had $504.5 million of debt
outstanding under the credit facility at a weighted average
interest rate of approximately 2.2%. At September 30, 2011,
we had $83.4 million available for borrowing under the
revolving credit facility, representing the facilitys
$85.0 million capacity, net of $1.6 million of
outstanding letters of credit. On October 31, 2011, we borrowed
$16.0 million on our revolving credit facility to fund expected
acquisitions.
The credit facility is guaranteed by USPI Holdings, Inc. and its
current and future direct and indirect wholly-owned domestic
subsidiaries, subject to certain exceptions, and borrowings
under the credit facility are secured by a first priority
security interest in all real and personal property of these
subsidiaries, as well as a first priority pledge of our capital
stock, the capital stock of each of our wholly owned domestic
subsidiaries and 65% of the capital stock of certain of our
wholly-owned foreign subsidiaries. Additionally, the credit
facility contains various restrictive covenants, including
financial covenants that limit our ability and the ability of
our subsidiaries to borrow money or guarantee other
indebtedness, grant liens, make investments, sell assets, pay
dividends, enter into sale-leaseback transactions or issue and
sell capital stock. We believe we were in compliance with these
covenants as of September 30, 2011.
Senior
subordinated notes
Also in connection with the merger, we issued
$240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes (together, the Notes), all due in
2017. Interest on the Notes is payable on May 1 and November 1
of each year, which commenced on November 1, 2007. All
interest payments on the senior subordinated notes are payable
in cash. The initial interest payment on the toggle notes was
payable in cash. For any interest period after November 1,
2007 through November 1, 2012, we may pay interest on the
toggle notes (i) in cash, (ii) by increasing the
principal amount of the outstanding toggle notes or by issuing
payment-in-kind
notes (PIK Interest) or (iii) by paying interest on half
the principal amount of the toggle notes in cash and half in PIK
Interest. PIK Interest is paid at 10% and cash interest is paid
at
91/4%
per annum. To date, we have paid all interest payments in cash.
At September 30, 2011, we had $437.5 million of Notes
outstanding. The Notes are unsecured senior subordinated
obligations of our company; however, the Notes are guaranteed by
all of our current and future direct and indirect wholly-owned
domestic subsidiaries. Additionally, the Notes contain various
restrictive covenants, including financial covenants that limit
our ability and the ability of our subsidiaries to borrow money
or guarantee other indebtedness, grant liens, make investments,
sell assets, pay dividends, enter into sale-leaseback
transactions or issue and sell capital stock. We believe we were
in compliance with these covenants as of September 30, 2011.
United
Kingdom borrowings
In April 2007, we entered into an amended and restated credit
agreement, which covered our existing overdraft facility and
term loan facility (Term Loan A). This agreement provides a
total overdraft facility of £2.0 million, and an
additional Term Loan B facility of £10 million, which
was drawn in April 2007. In March 2008, we further amended our
U.K. Agreement to provide for a £2.0 million Term Loan
C facility. We borrowed the entire
46
£2.0 million in March 2008 to acquire property
adjacent to one of our hospitals in London. In September 2011,
we renewed our overdraft facility and added a new
£10.0 million revolving credit facility to assist in
funding the expansion of Holly House hospital. Under the
renewal, we must pay a commitment fee of 0.5% per annum on the
unused portion of the overdraft facility and 1.10% per annum on
the unused revolving credit facility each quarter. Excluding
availability on the overdraft facility and revolving credit
facility, no additional borrowings can be made under the Term
Loan A, B or C facilities. At September 30, 2011, we had
£32.6 million ($50.9 million) outstanding under
the U.K. credit facility, including £2.8 million
($4.3 million) on the revolving credit facility at a
weighted average interest rate of approximately 2.7%.
Interest on the borrowings is based on a three-month or
six-month LIBOR, or other rate as the bank may agree, plus a
margin of 1.25% to 1.50%. Quarterly principal payments are
required on the Term Loan A, which began in June 2007, and
approximate $4.7 million in the first and second year,
$6.2 million in the third and fourth year;
$7.8 million in the fifth year, with the remainder due in
the sixth year after the April 2007 closing. The Term Loan B
does not require any principal payments prior to maturity and
matures in 2013. The Term Loan C requires quarterly principal
payments of approximately £0.1 million
($0.2 million), which began in June 2008 and continue
through its maturity date of February 2013 when the final
payment of £0.5 million ($0.8 million) is due. No
principal payments are due on the revolving credit facility
until its maturity in February 2013. The borrowings are
guaranteed by certain of our subsidiaries in the United Kingdom
with a security interest in various assets, and a pledge of the
capital stock of the U.K. borrowers and the capital stock of
certain guarantor subsidiaries. The Agreement contains various
restrictive covenants, including financial covenants that limit
our ability and the ability of certain U.K. subsidiaries to
borrow money or guarantee other indebtedness, grant liens on our
assets, make investments, use assets as security in other
transactions, pay dividends, enter into leases or sell assets or
capital stock. We believe we were in compliance with these
covenants as of September 30, 2011.
We also have the ability to borrow under a capital asset finance
facility in the U.K. of up to £2.5 million
($3.9 million). We borrowed against the facility in June
2010 and November 2010 and have £1.2 million
($1.8 million) outstanding at September 30, 2011. The
terms of the borrowings require monthly principal and interest
payments over 48 months. We have pledged capital assets as
collateral against these borrowings.
Contractual
Cash Obligations
Our contractual cash obligations as of September 30, 2011
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Within
|
|
|
Years
|
|
|
Years
|
|
|
Beyond
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1 Year
|
|
|
2 and 3
|
|
|
4 and 5
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility(1)
|
|
$
|
504,496
|
|
|
$
|
5,170
|
|
|
$
|
499,326
|
|
|
$
|
|
|
|
$
|
|
|
Senior subordinated notes, due 2017(1)
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Senior subordinated toggle notes, due 2017(1)
|
|
|
197,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,515
|
|
U.K. credit facility(1)
|
|
|
50,912
|
|
|
|
10,168
|
|
|
|
40,744
|
|
|
|
|
|
|
|
|
|
Other debt at operating subsidiaries(1)
|
|
|
25,904
|
|
|
|
5,997
|
|
|
|
9,499
|
|
|
|
4,972
|
|
|
|
5,436
|
|
Interest on long-term debt obligations(2)
|
|
|
257,422
|
|
|
|
52,647
|
|
|
|
97,780
|
|
|
|
79,926
|
|
|
|
27,069
|
|
Capitalized lease obligations(3)
|
|
|
38,034
|
|
|
|
4,768
|
|
|
|
9,499
|
|
|
|
5,932
|
|
|
|
17,835
|
|
Operating lease obligations
|
|
|
87,188
|
|
|
|
14,853
|
|
|
|
23,899
|
|
|
|
16,713
|
|
|
|
31,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,401,471
|
|
|
$
|
93,603
|
|
|
$
|
680,747
|
|
|
$
|
107,543
|
|
|
$
|
519,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Scheduled principal payments |
|
(2) |
|
Represents interest due on long-term debt obligations. For
variable rate debt, the interest is calculated using the
September 30, 2011 rates applicable to each debt instrument
and also gives effect to the interest rate swap designated in a
cash flow hedging relationship against a portion of the U.K.
credit facility. |
47
|
|
|
(3) |
|
Includes related principal and interest. |
Debt
at Operating Subsidiaries
Our operating subsidiaries, many of which have noncontrolling
investors who share in the cash flow of these entities, have
debt consisting primarily of capitalized lease obligations. This
debt is generally non-recourse to USPI, the parent company, and
is generally secured by the assets of those operating entities.
The total amount of these obligations, which was approximately
$47.3 million at September 30, 2011, is included in
our consolidated balance sheet because the borrower or obligated
entity meets the requirements for consolidated financial
reporting. Our average percentage ownership, weighted based on
the individual subsidiarys amount of debt and capitalized
lease obligations, of these consolidated subsidiaries was 45% at
September 30, 2011. Similar to our consolidated facilities,
our unconsolidated facilities have debts, including capitalized
lease obligations, that are generally non-recourse to USPI. With
respect to our unconsolidated facilities, these debts are not
included in our consolidated financial statements. At
September 30, 2011, the total debt on the balance sheets of
our unconsolidated affiliates was approximately
$443.0 million. Our average percentage ownership, weighted
based on the individual affiliates amount of debt, of
these unconsolidated affiliates was 26% at September 30,
2011. USPI or one of its wholly owned subsidiaries had
collectively guaranteed $43.9 million of the
$443.0 million in total debt of our unconsolidated
affiliates as of September 30, 2011. In addition, our
unconsolidated affiliates have obligations under operating
leases, of which USPI or a wholly owned subsidiary had
guaranteed $13.1 million as of September 30, 2011. Of
the total $57.0 million of guarantees related to
unconsolidated affiliates, approximately $8.9 million
represents guarantees of obligations of four facilities which
have been sold. We have full recourse to the buyers with respect
to the $8.9 million related to the sold facilities. Some of
the facilities we are currently developing will be accounted for
under the equity method. As these facilities become operational,
they will have debt and lease obligations.
In connection with our acquisition of equity interests in a
surgery center in 2007, we had the option to purchase additional
ownership in the facility during a specified time period in the
purchase agreement. If we did not exercise the purchase option,
we were required to pay an option termination fee, which was
equal to the lesser of an EBITDA calculation, as specified in
the purchase agreement, or $2.5 million. We elected to
purchase only a portion of the ownership as stated in the
agreement and therefore paid a $1.5 million termination fee
in 2009. The parties agreed to another purchase option that can
be exercised at any time during the 60 day period following
September 30, 2011 or the remaining $1.0 million
option termination fee would be required to be paid.
Our U.K. subsidiary has expanded our Parkside hospital, already
our largest facility. Located outside London in the Wimbledon
area, this facilitys expansion cost approximately
£11.1 million ($17.3 million). The expansion of
the outpatient clinic was completed in August 2010 and the
refurbishment of a portion of the hospital was completed in the
second quarter of 2011. A £17.0 million
($26.6 million) refurbishment and extension program has
begun at our Holly House hospital and is due to be completed by
late 2012. This expansion will provide three new operating
rooms, an endoscopy suite, ten additional patient rooms, an
eight bed day unit and six additional physician offices.
Related
Party Transactions
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in our company, in the amount of
$0.5 million and $1.5 million for both the three month
and nine months ended September 30, 2011 and 2010,
respectively. Such amounts accrue at an annual rate of
$2.0 million. We pay $1.0 million in cash per year
with the unpaid balance due and payable upon a change in
control. At September 30, 2011, we had approximately
$5.0 million accrued related to such management fee, of
which $0.5 million is included in other current liabilities
and $4.5 million is included in other long-term liabilities
in the accompanying consolidated balance sheet.
In September 2011, Baylor Health Care System (Baylor) acquired
ownership in a facility from us for $1.6 million.
Baylors Chief Executive Officer is a member of our board
of directors. We believe that the sales price was the same as if
it had been negotiated on an arms length basis, and the
price equaled the value assigned by an external appraiser who
valued the business immediately prior to the sale.
48
|
|
ITEM 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows due to
adverse changes in interest rates and other relevant market
risks. Our primary market risk is a change in interest rates
associated with variable-rate borrowings. Historically, we have
not held or issued derivative financial instruments other than
the use of
variable-to-fixed
interest rate swaps for portions of our borrowings under credit
facilities with commercial lenders as required by credit
agreements. We do not use derivative instruments for speculative
purposes. The interest rate swaps serve to stabilize our cash
flow and expense but ultimately may cost more or less in
interest than if we had carried all of our debt at a variable
rate over the swap term.
As further discussed in Note 6 to the accompanying
consolidated financial statements, in order to manage interest
rate risk related to a portion of our variable-rate U.K. debt,
on February 29, 2008, we entered into an interest rate swap
agreement for a notional amount of £20.0 million. The
interest rate swap required us to pay 4.99% and we received
interest at a variable rate of three-month GBP-LIBOR. The
interest rate swap matured in March 2011.
We entered into a new interest swap effective March 31,
2011 for a notional amount of £18.0 million
($28.1 million). The interest rate swap requires us to pay
1.45% and to receive interest at a variable rate of three-month
GBP-LIBOR (currently 0.95%), and is reset quarterly. No
collateral is required under the interest rate swap agreement.
As of September 30, 2011, the rate under our swap agreement
was unfavorable compared to the market. The swap matures in June
2012.
At September 30, 2011, the fair value of U.K. interest rate
swap was a current liability of approximately $0.1 million.
The estimated fair value of the interest rate swap was
determined using present value models of the contractual
payments. Inputs to the model were based on prevailing LIBOR
market data and incorporate credit data that measure
nonperformance risk. The estimated fair value represents the
theoretical exit cost we would have to pay to transfer the
obligation to a market participant with similar credit risk.
Our financing arrangements with many commercial lenders are
based on the spread over Prime or LIBOR. At September 30,
2011, $691.5 million of our outstanding debt was in fixed
rate instruments and the remaining $327.3 million was in
variable rate instruments. Accordingly, a hypothetical
100 basis point increase in market interest rates would
result in additional annual expense of approximately
$3.3 million.
Our United Kingdom revenues are a significant portion of our
total revenues. We are exposed to risks associated with
operating internationally, including foreign currency exchange
risk and taxes and regulatory changes. Our United Kingdom
facilities operate in a natural hedge to a large extent because
both expenses and revenues are denominated in the local
currency. Additionally, our borrowings in the United Kingdom are
currently denominated in the local currency. Historically, the
cash generated from our operations in the United Kingdom has
been utilized within that country to finance development and
acquisition activity as well as for repayment of debt
denominated in the local currency. Accordingly, we have not
generally utilized financial instruments to hedge our foreign
currency exchange risk.
|
|
ITEM 4.
|
Controls
and Procedures
|
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined by applicable SEC
rules) as of the end of the period covered by this Quarterly
Report on
Form 10-Q.
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of
such period, the Companys disclosure controls and
procedures are effective in bringing to their attention on a
timely basis material information relating to the Company
(including its consolidated subsidiaries) required to be
included in the Companys periodic filings with the SEC.
There have been no significant changes in the Companys
internal controls over financial reporting (as defined by
applicable SEC rules) that occurred during the Companys
fiscal quarter ended September 30, 2011 that have
materially affected or are reasonably likely to materially
affect the Companys internal controls over financial
reporting.
49
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
Legal
Proceedings
|
From time to time the Company may be named as a party to legal
claims and proceedings in the ordinary course of business. The
Companys management is not aware of any claims or
proceedings that might have a material adverse impact on the
Company.
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (previously
filed as an exhibit to the Companys Registration Statement
on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
3.2
|
|
Amended and Restated Bylaws (previously filed as an exhibit to
the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
4.1
|
|
Indenture governing
87/8% Senior
Subordinated Notes due 2017 and
91/4%/10% Senior
Subordinated Toggle Notes due 2017, among the Company, the
Guarantors named therein and U.S. Bank National Association, as
trustee (previously filed as an exhibit to the Companys
Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
4.2
|
|
Form of
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinate Toggle Note due 2017 (previously filed as an exhibit
to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1*
|
|
Certification of Chief Executive Officer pursuant
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
101**
|
|
The following materials from the Companys Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets at September 30, 2011 and December 31,
2010, (ii) Consolidated Statements of Income for the three
and nine months ended September 30, 2011 and 2010,
(iii) Consolidated Statements of Cash Flows for the nine
months ended September 30, 2011 and 2010,
(iv) Consolidated Statements of Comprehensive Income for
the three and nine months ended September 30, 2011 and
2010, (v) Consolidated Statement of Changes in Equity for
the three and nine months ended September 30, 2011 and 2010
and (iv) Notes to Consolidated Financial Statements.
|
|
|
|
** |
|
Pursuant to Rule 406T of
Regulation S-T,
the Interactive Data Files on Exhibit 101 hereto are deemed
not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, are deemed not filed for purposes of
Section 18 of the Securities and Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those
sections. |
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
United Surgical Partners International, Inc.
Mark A. Kopser
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 1, 2011
|
|
|
|
By:
|
/s/ J.
Anthony Martin
|
J. Anthony Martin
Vice President, Corporate Controller,
and Chief Accounting Officer
(Principal Accounting Officer)
51
Exhibit Index
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (previously
filed as an exhibit to the Companys Registration Statement
on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
3.2
|
|
Amended and Restated Bylaws (previously filed as an exhibit to
the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
4.1
|
|
Indenture governing
87/8% Senior
Subordinated Notes due 2017 and
91/4%/10% Senior
Subordinated Toggle Notes due 2017, among the Company, the
Guarantors named therein and U.S. Bank National Association, as
trustee (previously filed as an exhibit to the Companys
Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
4.2
|
|
Form of
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinate Toggle Note due 2017 (previously filed as an exhibit
to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1*
|
|
Certification of Chief Executive Officer pursuant
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
101**
|
|
The following materials from the Companys Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets at September 30, 2011 and December 31,
2010, (ii) Consolidated Statements of Income for the three
and nine months ended September 30, 2011 and 2010,
(iii) Consolidated Statements of Cash Flows for the nine
months ended September 30, 2011 and 2010,
(iv) Consolidated Statements of Comprehensive Income for
the three and nine months ended September 30, 2011 and
2010, (v) Consolidated Statement of Changes in Equity for
the three and nine months ended September 30, 2011 and 2010
and (iv) Notes to Consolidated Financial Statements.
|
|
|
|
** |
|
Pursuant to Rule 406T of
Regulation S-T,
the Interactive Data Files on Exhibit 101 hereto are deemed
not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of
1933, as amended, are deemed not filed for purposes of
Section 18 of the Securities and Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those
sections. |
52