Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

 

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE		20-1150104
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE		37067
(Address of principal executive offices)		(Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

As of August 14, 2017, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 

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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3. Quantitative and Qualitative Disclosures about Market Risk			51
Item 4. Controls and Procedures			51
PART II. OTHER INFORMATION			52
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			52
Item 6. Exhibits			52
Signatures			53

 

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PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands)

 

		June 30, 2017				September 30, 2016
ASSETS
Cash and cash equivalents		$	190,880			$	345,685
Accounts receivable, net			373,816				342,368
Inventories			68,823				65,042
Prepaid expenses and other current assets			168,301				143,048
Total current assets			801,820				896,143
Property and equipment, net			936,815				939,784
Goodwill			781,121				767,659
Other intangible assets, net			14,074				16,601
Other assets, net			48,890				49,283
Total assets		$	2,582,720			$	2,669,470
LIABILITIES AND EQUITY
Accounts payable		$	136,088			$	143,415
Salaries and benefits payable			71,032				47,464
Accrued interest payable			10,241				27,831
Medical claims payable			193,068				167,024
Other accrued expenses and current liabilities			144,227				138,996
Current portion of long-term debt, capital leases and other long-term obligations, net			16,567				18,086
Total current liabilities			571,223				542,816
Long-term debt, capital leases and other long-term obligations, net			1,718,681				1,830,840
Deferred income taxes			92,822				91,633
Other long-term liabilities			95,597				90,295
Non-controlling interests with redemption rights			120,777				120,809
Member’s deficit			(37,457	)			(23,247	)
Non-controlling interests			21,077				16,324
Total deficit			(16,380	)			(6,923	)
Total liabilities and equity		$	2,582,720			$	2,669,470

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Revenues
Acute care revenue before provision for bad debts		$	603,422			$	583,595			$	1,805,679			$	1,763,190
Less: Provision for bad debts			(99,199	)			(94,293	)			(298,012	)			(284,989	)
Acute care revenue			504,223				489,302				1,507,667				1,478,201
Premium, service and other revenue			356,130				324,681				1,035,613				959,917
Total revenue			860,353				813,983				2,543,280				2,438,118
Costs and expenses
Salaries and benefits (includes stock-based compensation of $785, $1,877, $3,126 and $5,221, respectively)			260,028				244,923				771,109				742,050
Supplies			88,794				83,895				265,173				252,859
Medical claims			287,972				303,330				839,361				838,067
Rentals and leases			22,357				21,281				66,393				64,581
Other operating expenses			143,284				136,120				422,624				414,007
Medicare and Medicaid EHR incentives			(7	)			(1,267	)			(812	)			(1,757	)
Interest expense, net			33,194				32,828				94,854				99,471
Depreciation and amortization			29,078				26,482				81,575				79,732
Management fees			1,250				1,250				3,750				3,750
Total costs and expenses			865,950				848,842				2,544,027				2,492,760
Loss from continuing operations before gain on disposal of assets and income taxes			(5,597	)			(34,859	)			(747	)			(54,642	)
Gain on disposal of assets, net			398				248				1,331				973
Earnings (loss) from continuing operations before income taxes			(5,199	)			(34,611	)			584				(53,669	)
Income tax expense (benefit)			925				(7,584	)			3,197				(12,961	)
Net loss from continuing operations			(6,124	)			(27,027	)			(2,613	)			(40,708	)
Earnings (loss) from discontinued operations, net of income taxes			(39	)			465				(887	)			(3,421	)
Net loss			(6,163	)			(26,562	)			(3,500	)			(44,129	)
Net earnings attributable to non-controlling interests			(2,758	)			(2,037	)			(10,384	)			(7,440	)
Net loss attributable to IASIS Healthcare LLC		$	(8,921	)		$	(28,599	)		$	(13,884	)		$	(51,569	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(In Thousands)

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Net loss		$	(6,163	)		$	(26,562	)		$	(3,500	)		$	(44,129	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				494				—				1,470
Other comprehensive income before income taxes			—				494				—				1,470
Change in income tax expense			—				(181	)			—				(537	)
Other comprehensive income, net of income taxes			—				313				—				933
Comprehensive loss			(6,163	)			(26,249	)			(3,500	)			(43,196	)
Net earnings attributable to non-controlling interests			(2,758	)			(2,037	)			(10,384	)			(7,440	)
Comprehensive loss attributable to IASIS Healthcare LLC		$	(8,921	)		$	(28,286	)		$	(13,884	)		$	(50,636	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

		Non-controlling Interests with Redemption Rights								Member’s Deficit				Non-controlling Interests				Total Deficit
Balance at September 30, 2016		$	120,809							$	(23,247	)		$	16,324			$	(6,923	)
Net earnings (loss)			6,023								(13,884	)			4,361				(9,523	)
Distributions to non-controlling interests			(6,990	)							—				—				—
Purchase of non-controlling interests			(169	)							—				—				—
Stock-based compensation			—								3,126				—				3,126
Other			(2,202	)							(146	)			392				246
Adjustment to redemption value of non-controlling interests with redemption rights			3,306								(3,306	)			—				(3,306	)
Balance at June 30, 2017		$	120,777							$	(37,457	)		$	21,077			$	(16,380	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

		Nine Months Ended June 30,
		2017				2016
Cash flows from operating activities
Net loss		$	(3,500	)		$	(44,129	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			81,575				79,732
Amortization of loan costs			7,098				5,947
Amortization of deferred gain on sale-leaseback transaction			(1,872	)			(1,872	)
Change in physician minimum revenue guarantees			2,575				2,609
Stock-based compensation			3,126				5,221
Deferred income taxes			1,642				(16,694	)
Gain on disposal of assets, net			(1,331	)			(973	)
Loss from discontinued operations, net			887				3,421
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			(31,615	)			(26,718	)
Inventories, prepaid expenses and other current assets			(30,582	)			35,954
Accounts payable, other accrued expenses and other accrued liabilities			36,065				28,957
Net cash provided by operating activities — continuing operations			64,068				71,455
Net cash provided by (used in) operating activities — discontinued operations			(913	)			2,368
Net cash provided by operating activities			63,155				73,823
Cash flows from investing activities
Purchases of property and equipment			(69,453	)			(94,678	)
Cash paid for acquisitions, net			(18,101	)			(2,311	)
Cash paid related to divestiture			—				(5,869	)
Proceeds from sale of assets			88				643
Change in other assets, net			(460	)			(425	)
Net cash used in investing activities — continuing operations			(87,926	)			(102,640	)
Net cash provided by investing activities — discontinued operations			61				—
Net cash used in investing activities			(87,865	)			(102,640	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(118,478	)			(16,938	)
Payment of debt financing costs			(3,991	)			(5,179	)
Distributions to non-controlling interests			(6,990	)			(8,005	)
Cash paid for the repurchase of non-controlling interests			(169	)			(1,411	)
Other			(467	)			—
Net cash used in financing activities			(130,095	)			(31,533	)
Change in cash and cash equivalents			(154,805	)			(60,350	)
Cash and cash equivalents at beginning of period			345,685				378,513
Cash and cash equivalents at end of period		$	190,880			$	318,163
Supplemental disclosure of cash flow information:
Cash paid for interest		$	109,344			$	110,394
Cash paid for (received from) income taxes, net		$	1,823			$	(9,261	)
Supplemental disclosure of non-cash information:
Financing obligation related to integrated clinical and revenue cycle systems conversion			—			$	23,409

See accompanying notes.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

The unaudited condensed consolidated financial statements as of and for the quarters and nine months ended June 30, 2017 and 2016, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS provides high quality affordable healthcare services primarily in higher growth markets. At June 30, 2017, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,600 licensed beds, several outpatient service facilities and 136 physician clinics.

IASIS’ continuing operations are in various regions including:

 

•

Salt Lake City, Utah;

 

•

Phoenix, Arizona;

 

•

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

 

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West Monroe, Louisiana.

The Company also owns and operates a managed care organization and insurer that manages healthcare services for more than 666,300 members through Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), which includes multiple health plans, accountable care networks and managed care solutions. The Plan is headquartered in Phoenix, Arizona, with offices in Tampa, Florida and Salt Lake City, Utah.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2016, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 21, 2016.

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

On May 18, 2017, Steward Health Care System LLC (“Steward”) and the Company’s parent corporation entered into a definitive merger agreement. The merger is expected to make Steward the largest private for-profit hospital operator in the United States with 36 hospitals across 10 states and managed care operations in Arizona, Utah and Massachusetts. The merger is expected to close in the fourth quarter of 2017, subject to customary regulatory approvals, terms and conditions. Medical Properties Trust, Inc. (“MPT”) has agreed to finance the merger through acquisition of the Company’s hospital real estate, subject to long-term leases and loans with Steward. Under the terms of the merger agreement, cash proceeds paid by MPT and other financing sources will be used to retire the Company’s senior secured term loans and unsecured notes. Remaining cash proceeds will be paid to the Company’s equity holders.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the consolidated financial position and consolidated results of operations of the Company and its affiliates, which are controlled by the Company through the Company’s direct or indirect ownership of a majority interest and rights granted to the Company through certain variable interests. All intercompany balances and transactions have been eliminated in consolidation.

 

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Use of Estimates

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

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs (excluding stock-based compensation costs), which were $24.0 million and $11.5 million for the quarters ended June 30, 2017 and 2016, respectively, and $63.0 million and $36.1 million for the nine months ended June 30, 2017 and 2016, respectively.

Cash and Cash Equivalents

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

Stock-Based Compensation

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

Fair Value of Financial Instruments

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

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

 

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The carrying value and fair value of the Company’s senior secured term loan facility and its 8.375% senior notes due 2019 (the “Senior Notes”) as of June 30, 2017 and September 30, 2016, were as follows (in thousands):

 

		Carrying Amount								Fair Value
		June 30, 2017				September 30, 2016				June 30, 2017				September 30, 2016
Senior secured term loan facility		$	857,316			$	968,138			$	865,335			$	959,004
Senior Notes			848,492				847,916				854,150				771,284

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

Discontinued Operations

In accordance with the provisions of ASC 360, Property, Plant and Equipment (“ASC 360”), the Company has presented the operating results, financial position and cash flows of its previously disposed facilities as discontinued operations, net of income taxes, in the accompanying consolidated financial statements. Such reporting relates to disposals of components meeting the criteria for discontinued operations reporting prior to October 1, 2015, the effective date of Accounting Standards update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment — Reporting Discontinued Operations and Disclosures of Components of an Entity”. ASU 2014-08 changed the criteria for reporting discontinued operations.

Recent Accounting Pronouncements

Newly Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU No. 2015-03. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted ASU No. 2015-03 as of September 30, 2016, which resulted in the presentation of its debt issuance cost within long term debt.

Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU No. 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU No. 2014-09 was originally scheduled to become effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption was not permitted. In July 2015, the FASB decided that a deferral was necessary to provide companies adequate time to effectively implement the new standard. The FASB deferred the effective date by one year, but will permit entities to adopt one year earlier if they so choose. The Company is currently evaluating the effect of the new revenue recognition guidance and intends to adopt such guidance as of October 1, 2018.

 

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In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize lease assets and lease liabilities on the balance sheet, including leases previously classified as operating. In addition, ASU 2016-02 implements changes to the lease classification criteria for lessors and eliminates portions of the previous real estate leasing guidance. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect of the new lease accounting guidance, and believes the primary effect of adopting the new standard will be to record assets and obligations for current operating leases. The Company intends to adopt such guidance as of October 1, 2019.

In March 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which affects all entities that issue share-based payment awards to their employees. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences and classification on the balance sheet and statement of cash flows. Portions of the guidance will only impact non-public entities. ASU 2016-09 will become effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the effect of the new share-based payment accounting guidance.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance may have on its consolidated cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other”, which simplifies the subsequent measurement of goodwill for public companies by eliminating step two from the goodwill impairment test. Under the new model, an entity should perform its test for impairment by comparing the fair value of a reporting unit with its carrying amount, and recognize any excess as an impairment charge. The provisions of ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the effect of the new guidance.

2. REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue and Accounts Receivable

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs (Medicare, Medicaid and TRICARE), managed care health plans, including Medicare and Medicaid managed care health plans, commercial insurance companies and employers, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in acute care revenue. Accordingly, the Company records revenue deductions for patient accounts that meet its guidelines for charity care. The Company provides charity care to patients with income levels below 200% of the federal poverty level (“FPL”). Additionally, at all of the Company’s hospitals, a sliding scale of reduced rates is offered to uninsured patients who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL.

 

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

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Medicare			16.9	%			18.3	%			18.2	%			18.7	%
Managed Medicare			11.6				10.4				11.7				10.4
Medicaid and managed Medicaid			9.4				12.1				9.7				12.3
Managed care and other			45.2				43.8				44.6				43.5
Self-pay			16.9				15.4				15.8				15.1
Total			100.0	%			100.0	%			100.0	%			100.0	%

Allowance for Doubtful Accounts

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

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

 

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

 

•

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

 

•

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

 

•

Trending of days revenue in accounts receivable;

 

•

Various allowance coverage statistics; and

 

•

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

At June 30, 2017 and September 30, 2016, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $293.8 million and $279.1 million, respectively. At June 30, 2017 and September 30, 2016, the Company’s allowance for doubtful accounts was $233.8 million and $221.4 million, respectively.

Premium, Service and Other Revenue

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

 

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

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

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

Effective October 1, 2015, Health Choice’s joint venture, Health Choice Integrated Care LLC (“HCIC”) entered into a contract with AHCCCS to operate an integrated acute and behavioral health plan in Northern Arizona. The contract has an initial term of three years and includes two additional two-year renewal options that can be exercised at the discretion of AHCCCS. The contract is terminable by AHCCCS following HCIC’s failure to carry out a material contract term, condition or obligation. As of June 30, 2017, HCIC provided standalone behavioral health benefits to 225,500 plan members, which includes 62,300 Navajo Nation plan members that also receive health plan services through a state of Arizona Tribal Regional Behavioral Health Authority.

On January 1, 2017, Health Choice exited the Arizona marketplace exchange. The Company’s decision to exit the exchange was driven by the instability of the Health Reform marketplace, uncertainty and lack of funding around government premium stabilization programs, and the overall nature of the related regulatory environment.

Health Choice’s health plan contracts require the arrangement of healthcare services for enrolled patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on the actual premium revenue and medical costs and contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs in the 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is either due to or from the state. Adjustments to the estimates of future program settlement amounts are recorded as a component of premium revenue.

During the quarter ended June 30, 2017, AHCCCS completed a review of fiscal 2016 risk factors. The AHCCCS review resulted in a favorable risk adjustment for Health Choice of approximately $13.7 million, which is recorded as a component of premium revenue for the quarter and nine months ended June 30, 2017.

The sources of Health Choice’s premium, service and other revenue by major product line are summarized as follows:

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Medicaid and Exchange plans			88.8	%			86.6	%			88.4	%			86.8	%
MAPD SNP			9.7				10.0				9.5				9.9
Service and other			1.5				3.4				2.1				3.3
Total			100.0	%			100.0	%			100.0	%			100.0	%

 

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3. LONG-TERM DEBT, CAPITAL LEASES AND OTHER LONG-TERM OBLIGATIONS

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

 

		June 30, 2017				September 30, 2016
Senior secured term loan facility		$	857,316			$	968,138
Senior Notes			848,492				847,916
Capital leases and other long-term obligations			39,231				43,685
Deferred issuance costs			(9,791	)			(10,813	)
			1,735,248				1,848,926
Less current maturities			16,567				18,086
		$	1,718,681			$	1,830,840

As of June 30, 2017 and September 30, 2016, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $4.8 million and $1.2 million, respectively, which is net of accumulated amortization of $0.2 million and $3.9 million, respectively. The OID related to the senior secured term loan facility at June 30, 2017, includes the impact of the Company’s refinancing transaction described below. The Senior Notes balance reflects an OID of $1.4 million and $1.9 million, respectively, which is net of accumulated amortization of $4.7 million and $4.2 million, respectively.

As of June 30, 2017 and September 30, 2016, reflecting the adoption of ASU No. 2015-03, deferred issuance costs associated with the senior secured term loans totaled $4.9 million and $3.9 million, respectively, and deferred issuance costs associated with the Senior Notes totaled $4.9 million and $6.9 million, respectively. Deferred issuance costs as of June 30, 2017, include the impact of the Company’s refinancing transaction described below. These deferred issuance costs are amortized to interest expense over the term of their respective agreements.

As of June 30, 2017 and September 30, 2016, capital leases and other long-term obligations includes financing obligations totaling $19.5 million and $20.5 million, respectively, resulting from the Company’s sale-leaseback transactions. Additionally, as of June 30, 2017 and September 30, 2016, capital leases and other long-term obligations includes a financing obligation totaling $11.0 million and $16.2 million, respectively, related to the Company’s current conversion to a new integrated clinical and revenue cycle system.

Senior Secured Credit Facilities

Amended Term Loan Facility

The Company is party to a senior credit agreement (the “Amended and Restated Credit Agreement”) with Wilmington Trust, National Association, as administrative agent, which provides for a $1.025 billion senior secured term loan facility (the “Term Loan Facility”). On May 4, 2017, the Company, Holdings, certain of their subsidiaries, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan”), as the Additional Term B-3 Lender (as defined therein), Wilmington Trust, National Association, as administrative agent, and the other agents named therein entered into an Amendment No. 4 to the Amended and Restated Credit Agreement (“Term Amendment No. 4”). Pursuant to Term Amendment No. 4, all of the then-outstanding term loans under the Amended and Restated Credit Agreement were refinanced with term loans (the “Term B-3 Loans”) maturing on February 17, 2021, subject to, if earlier, a springing maturity date of 91 days prior to the maturity date of the Senior Notes if any of the Senior Notes remains outstanding as of such date. Upon completion of Term Amendment No. 4, the outstanding term loan balance was $864.2 million, which reflected a $100.0 million pay down to certain holders.

The Term Amendment No. 4 provides for a soft call prepayment premium applicable to certain repricing transactions involving the outstanding Term B-3 Loans. The soft call premium equals 1% of the amount of the Term B-3 Loans that are subject to certain repricing transactions occurring on or prior to May 4, 2018.

 

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Borrowings under the Term Amendment No. 4 bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate (determined by reference to The Wall Street Journal) and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 3.00% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 4.00% per annum.

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

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

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Term Loan Facility, cross-defaults, certain bankruptcy events and certain change of control events. In addition, certain of the baskets available to the Company under the negative covenants in its Amended and Restated Credit Agreement are suspended under the Amended and Restated Credit Agreement until such time, if any, as the Company has consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio.

Revolving Credit Facility

The Company is party to a revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan, as administrative agent, which provides for a $207.4 million senior secured revolving credit facility, of which up to $125.0 million may be utilized for the issuance of letters of credit (the “Revolving Credit Facility”). On May 4, 2017, the Company, Holdings, the lenders party to the Revolving Credit Agreement as of such date and the revolver agent entered into an amendment to the Revolving Credit Agreement (“Revolver Amendment No. 1”). Pursuant to Revolver Amendment No. 1, the Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Company’s indenture, dated as of May 3, 2011, by and among IASIS, IAS and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Company’s Senior Notes (the “Indenture”) on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

The Revolving Credit Agreement provides the Company with the right to request additional commitments under the Revolving Credit Facility without the consent of the lenders thereunder, subject to a cap on aggregate commitments of $300.0 million, a pro forma senior secured net leverage ratio (as defined in the Revolving Credit Agreement) of less than or equal to 3.75 to 1.00 and customary conditions precedent.

The Revolving Credit Facility does not require installment payments prior to maturity.

Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan, (2) the federal funds rate plus 0.50% and (3) a LIBOR rate subject to certain adjustments plus 1.00%, in each case, plus a margin of 2.50% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Revolving Credit Facility, the Company is required to pay a commitment fee on the unutilized commitments under the Revolving Credit Facility, as well as pay customary letter of credit fees and agency fees.

 

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

The Revolving Credit Agreement contains restrictive covenants and events of default substantially similar to the restrictive covenants and events of default in the Amended and Restated Credit Agreement; provided, that under the Revolving Credit Agreement, the Company is required to maintain, on a quarterly basis, a maximum senior secured gross leverage ratio (as defined in the Revolving Credit Agreement). In addition, certain of the baskets available to the Company under the negative covenants in the Amended and Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as the Company has consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio (as defined in the Revolving Credit Agreement).

8.375% Senior Notes due 2019

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

At June 30, 2017, the outstanding principal balance of the Senior Notes was $849.9 million. The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes, in whole or in part, at any time, at a price equal to 100.000% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

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

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

4. GOODWILL

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

 

		Acute Care				Health Choice				Total
Balance at September 30, 2016		$	761,731			$	5,928			$	767,659
Increase related to acquisitions			12,883				—				12,883
Adjustments related to acquisitions			579				—				579
Balance at June 30, 2017		$	775,193			$	5,928			$	781,121

5. INCOME TAXES

For the quarter ended June 30, 2017, the Company recorded an income tax expense of $0.9 million, resulting in an effective tax rate of (17.8%), compared to an income tax benefit of $7.6 million, for an effective tax rate of 21.9% in the prior year quarter. For the nine months ended June 30, 2017, the Company recorded income tax expense of $3.2 million, for an effective tax rate of 547.6%, compared to an income tax benefit of $13.0 million, for an effective tax rate of 24.1% in the prior year period. The change in the effective tax rate was primarily attributable to (1) a decrease in the nondeductible health insurer fee, and (2) an increase in the valuation allowance against deferred tax assets, and (3) an increase in net earnings from continuing operations, which altered the rate impact of nondeductible expenses, noncontrolling interests, and state income taxes including the Texas Margins tax.

 

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6. COMMITMENTS AND CONTINGENCIES

Acute Care Revenue

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

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions incidental to the Company’s business, including claims relating to patient treatment and personal injuries. To cover these types of claims and actions, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At June 30, 2017 and September 30, 2016, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $61.0 million and $54.2 million, respectively, with the current portion totaling $17.4 million at both periods.

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

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of June 30, 2017, the Company has provided performance guaranties in the form of a letter of credit totaling $72.0 million for the benefit of AHCCCS, a surety bond for the benefit of AHCCCS totaling $21.3 million and a demand note totaling $12.0 million for the benefit of CMS to support its obligations under the Health Choice contracts to provide and pay for the related healthcare services. The amount of these performance guaranties are generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

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

Other

On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”) with St. Joseph Medical Center (“SJMC”) located in Houston, Texas. The SIA acted to stay the scheduled termination of SJMC’s Medicare Provider Agreement, which resulted from the hospital’s alleged failure to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, the Company retained an independent consultant to assist it in developing and implementing a corrective action plan. The original term of the SIA was eighteen months. CMS and SJMC have amended the SIA to extend its term. The SIA is now scheduled to expire sixty days after CMS provides SJMC with written findings following a full certification survey, which survey may occur sometime between January 1, 2018 and April 30, 2018.

 

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7. SEGMENT INFORMATION

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

 

		For the Quarter Ended June 30, 2017
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	603,422			$	—			$	—			$	603,422
Less: Provision for bad debts			(99,199	)			—				—				(99,199	)
Acute care revenue			504,223				—				—				504,223
Premium, service and other revenue			—				356,130				—				356,130
Revenue between segments			5,006				—				(5,006	)			—
Total revenue			509,229				356,130				(5,006	)			860,353
Salaries and benefits (excludes stock-based compensation)			239,257				19,986				—				259,243
Supplies			88,806				(12	)			—				88,794
Medical claims			—				292,978				(5,006	)			287,972
Rentals and leases			21,356				1,001				—				22,357
Other operating expenses			128,402				14,882				—				143,284
Medicare and Medicaid EHR incentives			(7	)			—				—				(7	)
Adjusted EBITDA(1)			31,415				27,295				—				58,710
Interest expense, net			33,194				—				—				33,194
Depreciation and amortization			27,842				1,236				—				29,078
Stock-based compensation			785				—				—				785
Management fees			1,250				—				—				1,250
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(31,656	)			26,059				—				(5,597	)
Gain on disposal of assets, net			398				—				—				398
Earnings (loss) from continuing operations before income taxes		$	(31,258	)		$	26,059			$	—			$	(5,199	)

 

 

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		For the Quarter Ended June 30, 2016
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	583,595			$	—			$	—			$	583,595
Less: Provision for bad debts			(94,293	)			—				—				(94,293	)
Acute care revenue			489,302				—				—				489,302
Premium, service and other revenue			—				324,681				—				324,681
Revenue between segments			4,399				—				(4,399	)			—
Total revenue			493,701				324,681				(4,399	)			813,983
Salaries and benefits (excludes stock-based compensation)			223,180				19,866				—				243,046
Supplies			83,614				281				—				83,895
Medical claims			—				307,729				(4,399	)			303,330
Rentals and leases			20,282				999				—				21,281
Other operating expenses			117,805				18,315				—				136,120
Medicare and Medicaid EHR incentives			(1,267	)			—				—				(1,267	)
Adjusted EBITDA(1)			50,087				(22,509	)			—				27,578
Interest expense, net			32,828				—				—				32,828
Depreciation and amortization			25,042				1,440				—				26,482
Stock-based compensation			1,877				—				—				1,877
Management fees			1,250				—				—				1,250
Loss from continuing operations before gain on disposal of assets and income taxes			(10,910	)			(23,949	)			—				(34,859	)
Gain on disposal of assets, net			248				—				—				248
Loss from continuing operations before income taxes		$	(10,662	)		$	(23,949	)		$	—			$	(34,611	)

 

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		For the Nine Months Ended June 30, 2017
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,805,679			$	—			$	—			$	1,805,679
Less: Provision for bad debts			(298,012	)			—				—				(298,012	)
Acute care revenue			1,507,667				—				—				1,507,667
Premium, service and other revenue			—				1,035,613				—				1,035,613
Revenue between segments			15,095				—				(15,095	)			—
Total revenue			1,522,762				1,035,613				(15,095	)			2,543,280
Salaries and benefits (excludes stock-based compensation)			705,510				62,473				—				767,983
Supplies			264,961				212				—				265,173
Medical claims			—				854,456				(15,095	)			839,361
Rentals and leases			63,345				3,048				—				66,393
Other operating expenses			373,834				48,790				—				422,624
Medicare and Medicaid EHR incentives			(812	)			—				—				(812	)
Adjusted EBITDA(1)			115,924				66,634				—				182,558
Interest expense, net			94,854				—				—				94,854
Depreciation and amortization			77,605				3,970				—				81,575
Stock-based compensation			3,126				—				—				3,126
Management fees			3,750				—				—				3,750
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(63,411	)			62,664				—				(747	)
Gain on disposal of assets, net			1,331				—				—				1,331
Earnings (loss) from continuing operations before income taxes		$	(62,080	)		$	62,664			$	—			$	584
Segment assets		$	2,043,718			$	539,002							$	2,582,720
Capital expenditures		$	67,936			$	1,517							$	69,453
Goodwill		$	775,193			$	5,928							$	781,121

 

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		For the Nine Months Ended June 30, 2016
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,763,190			$	—			$	—			$	1,763,190
Less: Provision for bad debts			(284,989	)			—				—				(284,989	)
Acute care revenue			1,478,201				—				—				1,478,201
Premium, service and other revenue			—				959,917				—				959,917
Revenue between segments			12,857				—				(12,857	)			—
Total revenue			1,491,058				959,917				(12,857	)			2,438,118
Salaries and benefits (excludes stock-based compensation)			681,546				55,283				—				736,829
Supplies			251,951				908				—				252,859
Medical claims			—				850,924				(12,857	)			838,067
Rentals and leases			61,651				2,930				—				64,581
Other operating expenses			360,607				53,400				—				414,007
Medicare and Medicaid EHR incentives			(1,757	)			—				—				(1,757	)
Adjusted EBITDA(1)			137,060				(3,528	)			—				133,532
Interest expense, net			99,471				—				—				99,471
Depreciation and amortization			75,777				3,955				—				79,732
Stock-based compensation			5,221				—				—				5,221
Management fees			3,750				—				—				3,750
Loss from continuing operations before gain on disposal of assets and income taxes			(47,159	)			(7,483	)			—				(54,642	)
Gain on disposal of assets, net			973				—				—				973
Loss from continuing operations before income taxes		$	(46,186	)		$	(7,483	)		$	—			$	(53,669	)
Segment assets		$	2,236,718			$	473,529							$	2,710,247
Capital expenditures		$	93,023			$	1,655							$	94,678
Goodwill		$	815,675			$	5,757							$	821,432

 

(1)

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

 

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8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing 100% owned existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health Choice. In addition, the Senior Notes are not guaranteed by the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized condensed consolidating balance sheets at June 30, 2017 and September 30, 2016, condensed consolidating statements of operations for the quarters and nine months ended June 30, 2017 and 2016, condensed consolidating statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2017 and 2016, and condensed consolidating statements of cash flows for the nine months ended June 30, 2017 and 2016, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

 

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

June 30, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	79,769			$	111,111			$	—			$	190,880
Accounts receivable, net			—				62,875				310,941				—				373,816
Inventories			—				16,685				52,138				—				68,823
Deferred income taxes			—				—				—				—				—
Prepaid expenses and other current assets			—				50,604				117,697				—				168,301
Total current assets			—				209,933				591,887				—				801,820
Property and equipment, net			—				339,043				597,772				—				936,815
Intercompany			—				(187,968	)			187,968				—				—
Net investment in and advances to subsidiaries			1,752,401				—				—				(1,752,401	)			—
Goodwill			5,240				42,874				733,007				—				781,121
Other intangible assets, net			—				7,324				6,750				—				14,074
Other assets, net			3,982				29,295				15,613				—				48,890
Total assets		$	1,761,623			$	440,501			$	2,132,997			$	(1,752,401	)		$	2,582,720
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	45,409			$	90,679			$	—			$	136,088
Salaries and benefits payable			—				30,041				40,991				—				71,032
Accrued interest payable			10,241				(3,218	)			3,218				—				10,241
Medical claims payable			—				—				193,068				—				193,068
Other accrued expenses and current liabilities			—				73,761				70,466				—				144,227
Current portion of long-term debt, capital leases and other long-term obligations, net			8,643				7,924				28,906				(28,906	)			16,567
Total current liabilities			18,884				153,917				427,328				(28,906	)			571,223
Long-term debt, capital leases and other long-term obligations, net			1,687,374				31,307				584,529				(584,529	)			1,718,681
Deferred income taxes			92,822				—				—				—				92,822
Other long-term liabilities			—				94,601				996				—				95,597
Total liabilities			1,799,080				279,825				1,012,853				(613,435	)			2,478,323
Non-controlling interests with redemption rights			—				120,777				—				—				120,777
Equity
Member’s equity (deficit)			(37,457	)			31,138				1,107,828				(1,138,966	)			(37,457	)
Non-controlling interests			—				8,761				12,316				—				21,077
Total equity (deficit)			(37,457	)			39,899				1,120,144				(1,138,966	)			(16,380	)
Total liabilities and equity		$	1,761,623			$	440,501			$	2,132,997			$	(1,752,401	)		$	2,582,720

 

 

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

September 30, 2016

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	258,811			$	86,874			$	—			$	345,685
Accounts receivable, net			—				53,502				288,866				—				342,368
Inventories			—				15,268				49,774				—				65,042
Prepaid expenses and other current assets			—				33,286				109,762				—				143,048
Total current assets			—				360,867				535,276				—				896,143
Property and equipment, net			—				323,373				616,411				—				939,784
Intercompany			—				(230,667	)			230,667				—				—
Net investment in and advances to subsidiaries			1,891,422				—				—				(1,891,422	)			—
Goodwill			5,240				32,072				730,347				—				767,659
Other intangible assets, net			—				7,601				9,000				—				16,601
Other assets, net			4,796				28,347				16,140				—				49,283
Total assets		$	1,901,458			$	521,593			$	2,137,841			$	(1,891,422	)		$	2,669,470
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	49,925			$	93,490			$	—			$	143,415
Salaries and benefits payable			—				19,738				27,726				—				47,464
Accrued interest payable			27,831				(3,220	)			3,220				—				27,831
Medical claims payable			—				—				167,024				—				167,024
Other accrued expenses and current liabilities			—				56,376				82,620				—				138,996
Current portion of long-term debt, capital leases and other long-term obligations, net			10,071				8,015				29,075				(29,075	)			18,086
Total current liabilities			37,902				130,834				403,155				(29,075	)			542,816
Long-term debt, capital leases and other long-term obligations, net			1,795,170				35,670				611,424				(611,424	)			1,830,840
Deferred income taxes			91,633				—				—				—				91,633
Other long-term liabilities			—				89,285				1,010				—				90,295
Total liabilities			1,924,705				255,789				1,015,589				(640,499	)			2,555,584
Non-controlling interests with redemption rights			—				120,809				—				—				120,809
Equity
Member’s equity (deficit)			(23,247	)			136,613				1,114,310				(1,250,923	)			(23,247	)
Non-controlling interests			—				8,382				7,942				—				16,324
Total equity (deficit)			(23,247	)			144,995				1,122,252				(1,250,923	)			(6,923	)
Total liabilities and equity		$	1,901,458			$	521,593			$	2,137,841			$	(1,891,422	)		$	2,669,470

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2017 (unaudited)

(In thousands)

 

						Subsidiary				Subsidiary								Condensed
		Parent Issuer				Guarantors				Non - Guarantors				Eliminations				Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	130,511			$	477,917			$	(5,006	)		$	603,422
Less: Provision for bad debts			—				(9,880	)			(89,319	)			—				(99,199	)
Acute care revenue			—				120,631				388,598				(5,006	)			504,223
Premium, service and other revenue			—				—				356,130				—				356,130
Total revenue			—				120,631				744,728				(5,006	)			860,353
Costs and expenses
Salaries and benefits			785				88,178				171,065				—				260,028
Supplies			—				21,141				67,653				—				88,794
Medical claims			—				—				292,978				(5,006	)			287,972
Rentals and leases			—				5,679				16,678				—				22,357
Other operating expenses			—				32,225				111,059				—				143,284
Medicare and Medicaid EHR incentives			—				1				(8	)			—				(7	)
Interest expense, net			33,194				—				12,604				(12,604	)			33,194
Depreciation and amortization			—				12,295				16,783				—				29,078
Management fees			1,250				(8,184	)			8,184				—				1,250
Equity in earnings of affiliates			(14,608	)			—				—				14,608				—
Total costs and expenses			20,621				151,335				696,996				(3,002	)			865,950
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(20,621	)			(30,704	)			47,732				(2,004	)			(5,597	)
Gain (loss) on disposal of assets, net			—				449				(51	)			—				398
Earnings (loss) from continuing operations before income taxes			(20,621	)			(30,255	)			47,681				(2,004	)			(5,199	)
Income tax expense			925				—				—				—				925
Net earnings (loss) from continuing operations			(21,546	)			(30,255	)			47,681				(2,004	)			(6,124	)
Gain (loss) from discontinued operations, net of income taxes			21				(60	)			—				—				(39	)
Net earnings (loss)			(21,525	)			(30,315	)			47,681				(2,004	)			(6,163	)
Net earnings attributable to non-controlling interests			—				(1,291	)			(1,467	)			—				(2,758	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(21,525	)		$	(31,606	)		$	46,214			$	(2,004	)		$	(8,921	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	134,410			$	453,584			$	(4,399	)		$	583,595
Less: Provision for bad debts			—				(13,298	)			(80,995	)			—				(94,293	)
Acute care revenue			—				121,112				372,589				(4,399	)			489,302
Premium, service and other revenue			—				—				324,681				—				324,681
Total revenue			—				121,112				697,270				(4,399	)			813,983
Costs and expenses
Salaries and benefits			1,877				76,493				166,553				—				244,923
Supplies			—				20,972				62,923				—				83,895
Medical claims			—				—				307,729				(4,399	)			303,330
Rentals and leases			—				5,124				16,157				—				21,281
Other operating expenses			—				21,800				114,320				—				136,120
Medicare and Medicaid EHR incentives			—				(346	)			(921	)			—				(1,267	)
Interest expense, net			32,828				—				12,204				(12,204	)			32,828
Depreciation and amortization			—				9,607				16,875				—				26,482
Management fees			1,250				(7,863	)			7,863				—				1,250
Equity in earnings of affiliates			12,266				—				—				(12,266	)			—
Total costs and expenses			48,221				125,787				703,703				(28,869	)			848,842
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(48,221	)			(4,675	)			(6,433	)			24,470				(34,859	)
Gain on disposal of assets, net			—				246				2				—				248
Earnings (loss) from continuing operations before income taxes			(48,221	)			(4,429	)			(6,431	)			24,470				(34,611	)
Income tax benefit			(7,584	)			—				—				—				(7,584	)
Net earnings (loss) from continuing operations			(40,637	)			(4,429	)			(6,431	)			24,470				(27,027	)
Earnings (loss) from discontinued operations, net of income taxes			(166	)			631				—				—				465
Net earnings (loss)			(40,803	)			(3,798	)			(6,431	)			24,470				(26,562	)
Net earnings attributable to non-controlling interests			—				(2,037	)			—				—				(2,037	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(40,803	)		$	(5,835	)		$	(6,431	)		$	24,470			$	(28,599	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Nine Months Ended June 30, 2017 (unaudited)

(In thousands)

 

						Subsidiary				Subsidiary								Condensed
		Parent Issuer				Guarantors				Non - Guarantors				Eliminations				Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	393,777			$	1,426,997			$	(15,095	)		$	1,805,679
Less: Provision for bad debts			—				(35,521	)			(262,491	)			—				(298,012	)
Acute care revenue			—				358,256				1,164,506				(15,095	)			1,507,667
Premium, service and other revenue			—				—				1,035,613				—				1,035,613
Total revenues			—				358,256				2,200,119				(15,095	)			2,543,280
Costs and expenses
Salaries and benefits			3,126				255,104				512,879				—				771,109
Supplies			—				64,135				201,038				—				265,173
Medical claims			—				—				854,456				(15,095	)			839,361
Rentals and leases			—				16,600				49,793				—				66,393
Other operating expenses			—				98,812				323,812				—				422,624
Medicare and Medicaid EHR incentives			—				(54	)			(758	)			—				(812	)
Interest expense, net			94,854				—				35,003				(35,003	)			94,854
Depreciation and amortization			—				30,222				51,353				—				81,575
Management fees			3,750				(24,426	)			24,426				—				3,750
Equity in earnings of affiliates			(55,562	)			—				—				55,562				—
Total costs and expenses			46,168				440,393				2,052,002				5,464				2,544,027
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(46,168	)			(82,137	)			148,117				(20,559	)			(747	)
Gain (loss) on disposal of assets, net			—				1,348				(17	)			—				1,331
Earnings (loss) from continuing operations before income taxes			(46,168	)			(80,789	)			148,100				(20,559	)			584
Income tax expense			3,197				—				—				—				3,197
Net earnings (loss) from continuing operations			(49,365	)			(80,789	)			148,100				(20,559	)			(2,613	)
Earnings (loss) from discontinued operations, net of income taxes			478				(1,365	)			—				—				(887	)
Net earnings (loss)			(48,887	)			(82,154	)			148,100				(20,559	)			(3,500	)
Net earnings attributable to non-controlling interests			—				(6,009	)			(4,375	)			—				(10,384	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(48,887	)		$	(88,163	)		$	143,725			$	(20,559	)		$	(13,884	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	400,618			$	1,375,429			$	(12,857	)		$	1,763,190
Less: Provision for bad debts			—				(38,987	)			(246,002	)			—				(284,989	)
Acute care revenue			—				361,631				1,129,427				(12,857	)			1,478,201
Premium, service and other revenue			—				—				959,917				—				959,917
Total revenue			—				361,631				2,089,344				(12,857	)			2,438,118
Costs and expenses
Salaries and benefits			5,221				236,656				500,173				—				742,050
Supplies			—				62,684				190,175				—				252,859
Medical claims			—				—				850,924				(12,857	)			838,067
Rentals and leases			—				15,658				48,923				—				64,581
Other operating expenses			—				85,026				328,981				—				414,007
Medicare and Medicaid EHR incentives			—				(845	)			(912	)			—				(1,757	)
Interest expense, net			99,471				—				34,790				(34,790	)			99,471
Depreciation and amortization			—				28,955				50,777				—				79,732
Management fees			3,750				(23,561	)			23,561				—				3,750
Equity in earnings of affiliates			(5,406	)			—				—				5,406				—
Total costs and expenses			103,036				404,573				2,027,392				(42,241	)			2,492,760
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(103,036	)			(42,942	)			61,952				29,384				(54,642	)
Gain on disposal of assets, net			—				604				369				—				973
Earnings (loss) from continuing operations before income taxes			(103,036	)			(42,338	)			62,321				29,384				(53,669	)
Income tax expense (benefit)			(14,747	)			—				1,786				—				(12,961	)
Net earnings (loss) from continuing operations			(88,289	)			(42,338	)			60,535				29,384				(40,708	)
Earnings (loss) from discontinued operations, net of income taxes			1,930				(5,351	)			—				—				(3,421	)
Net earnings (loss)			(86,359	)			(47,689	)			60,535				29,384				(44,129	)
Net earnings attributable to non-controlling interests			—				(7,440	)			—				—				(7,440	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(86,359	)		$	(55,129	)		$	60,535			$	29,384			$	(51,569	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2017 (unaudited)

(In thousands)

 

						Subsidiary				Subsidiary								Condensed
		Parent Issuer				Guarantors				Non - Guarantors				Eliminations				Consolidated
Net earnings (loss)		$	(21,525	)		$	(30,315	)		$	47,681			$	(2,004	)		$	(6,163	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				—				—				—				—
Other comprehensive income before income taxes			—				—				—				—				—
Change in income tax expense			—				—				—				—				—
Other comprehensive income, net of income taxes			—				—				—				—				—
Comprehensive income (loss)			(21,525	)			(30,315	)			47,681				(2,004	)			(6,163	)
Net earnings attributable to non-controlling interests			—				(1,291	)			(1,467	)			—				(2,758	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(21,525	)		$	(31,606	)		$	46,214			$	(2,004	)		$	(8,921	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(40,803	)		$	(3,798	)		$	(6,431	)		$	24,470			$	(26,562	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			494				—				—				—				494
Other comprehensive income before income taxes			494				—				—				—				494
Change in income tax expense			(181	)			—				—				—				(181	)
Other comprehensive income, net of income taxes			313				—				—				—				313
Comprehensive income (loss)			(40,490	)			(3,798	)			(6,431	)			24,470				(26,249	)
Net earnings attributable to non-controlling interests			—				(2,037	)			—				—				(2,037	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(40,490	)		$	(5,835	)		$	(6,431	)		$	24,470			$	(28,286	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(48,887	)		$	(82,154	)		$	148,100			$	(20,559	)		$	(3,500	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				—				—				—				—
Other comprehensive income before income taxes			—				—				—				—				—
Change in income tax benefit			—				—				—				—				—
Other comprehensive income, net of income taxes			—				—				—				—				—
Comprehensive income (loss)			(48,887	)			(82,154	)			148,100				(20,559	)			(3,500	)
Net earnings attributable to non-controlling interests			—				(6,009	)			(4,375	)			—				(10,384	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(48,887	)		$	(88,163	)		$	143,725			$	(20,559	)		$	(13,884	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(86,359	)		$	(47,689	)		$	60,535			$	29,384			$	(44,129	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			1,470				—				—				—				1,470
Other comprehensive income before income taxes			1,470				—				—				—				1,470
Change in income tax expense			(537	)			—				—				—				(537	)
Other comprehensive income, net of income taxes			933				—				—				—				933
Comprehensive income (loss)			(85,426	)			(47,689	)			60,535				29,384				(43,196	)
Net earnings attributable to non-controlling interests			—				(7,440	)			—				—				(7,440	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(85,426	)		$	(55,129	)		$	60,535			$	29,384			$	(50,636	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(48,887	)		$	(82,154	)		$	148,100			$	(20,559	)		$	(3,500	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				30,222				51,353				—				81,575
Amortization of loan costs			7,098				—				—				—				7,098
Amortization of deferred gain on sale-leaseback transaction			(1,872	)			—				—				—				(1,872	)
Change in physician minimum revenue guarantees			—				109				2,466				—				2,575
Stock-based compensation			3,126				—				—				—				3,126
Deferred income taxes			1,642				—				—				—				1,642
Gain on disposal of assets, net			—				(1,280	)			(51	)			—				(1,331	)
Loss (gain) from discontinued operations, net			(478	)			1,365				—				—				887
Equity in earnings of affiliates			(55,562	)			—				—				55,562				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				16,712				(48,327	)			—				(31,615	)
Inventories, prepaid expenses and other current assets			—				(70,899	)			40,317				—				(30,582	)
Accounts payable, other accrued expenses and other accrued liabilities			(17,590	)			56,300				(2,645	)			—				36,065
Net cash provided by (used in) operating activities — continuing operations			(112,523	)			(49,625	)			191,213				35,003				64,068
Net cash used in operating activities — discontinued operations			—				(913	)			—				—				(913	)
Net cash provided by (used in) operating activities			(112,523	)			(50,538	)			191,213				35,003				63,155
Cash flows from investing activities
Purchases of property and equipment			—				(40,954	)			(28,499	)			—				(69,453	)
Cash paid for acquisitions, net			—				(14,317	)			(3,784	)			—				(18,101	)
Proceeds from sale of assets			—				19				69				—				88
Change in other assets, net			—				(1,031	)			571				—				(460	)
Net cash used in investing activities — continuing operations			—				(56,283	)			(31,643	)			—				(87,926	)
Net cash provided by investing activities — discontinued operations			—				61				—				—				61
Net cash used in investing activities			—				(56,222	)			(31,643	)			—				(87,865	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(116,744	)			(1,028	)			(706	)			—				(118,478	)
Debt financing costs incurred			(3,991	)			—				—				—				(3,991	)
Distributions to non-controlling interests			—				(4,775	)			(2,215	)			—				(6.990	)
Cash paid for the repurchase of non-controlling interests			—				(169	)			—				—				(169	)
Other			—				(467	)			—				—				(467	)
Change in intercompany balances with affiliates, net			233,258				(65,843	)			(132,412	)			(35,003	)			—
Net cash provided by (used in) financing activities			112,523				(72,282	)			(135,333	)			(35,003	)			(130,095	)
Change in cash and cash equivalents			—				(179,042	)			24,237				—				(154,805	)
Cash and cash equivalents at beginning of period			—				258,811				86,874				—				345,685
Cash and cash equivalents at end of period		$	—			$	79,769			$	111,111			$	—			$	190,880

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(86,359	)		$	(47,689	)		$	60,535			$	29,384			$	(44,129	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				28,955				50,777				—				79,732
Amortization of loan costs			5,947				—				—				—				5,947
Amortization of deferred gain on sale-leaseback transaction			(1,872	)			—				—				—				(1,872	)
Change in physician minimum revenue guarantees			—				63				2,546				—				2,609
Stock-based compensation			5,221				—				—				—				5,221
Deferred income taxes			(16,694	)			—				—				—				(16,694	)
Gain on disposal of assets, net			—				(604	)			(369	)			—				(973	)
Loss (earnings) from discontinued operations, net			(1,930	)			5,351				—				—				3,421
Equity in earnings of affiliates			(5,406	)			—				—				5,406				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				(5,085	)			(21,633	)			—				(26,718	)
Inventories, prepaid expenses and other current assets			—				10,003				25,951				—				35,954
Accounts payable, other accrued expenses and other accrued liabilities			(18,838	)			(9,243	)			57,038				—				28,957
Net cash provided by (used in) operating activities —   continuing operations			(119,931	)			(18,249	)			174,845				34,790				71,455
Net cash provided by operating activities —   discontinued operations			—				2,368				—				—				2,368
Net cash provided by (used in) operating activities			(119,931	)			(15,881	)			174,845				34,790				73,823
Cash flows from investing activities
Purchases of property and equipment			—				(63,145	)			(31,533	)			—				(94,678	)
Cash paid for acquisitions, net			—				—				(2,311	)			—				(2,311	)
Cash paid related to divestitures			—				(5,869	)			—				—				(5,869	)
Proceeds from sale of assets			—				596				47				—				643
Change in other assets, net			—				(1,807	)			1,382				—				(425	)
Net cash used in investing activities			—				(70,225	)			(32,415	)			—				(102,640	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(15,341	)			(744	)			(853	)			—				(16,938	)
Payment of debt financing costs			(5,179	)			—				—				—				(5,179	)
Distributions to non-controlling interests			—				—				(8,005	)			—				(8,005	)
Cash paid for the repurchase of non-controlling interests			—				—				(1,411	)			—				(1,411	)
Change in intercompany balances with affiliates, net			140,451				(26,359	)			(79,302	)			(34,790	)			—
Net cash provided by (used in) financing activities			119,931				(27,103	)			(89,571	)			(34,790	)			(31,533	)
Change in cash and cash equivalents			—				(113,209	)			52,859				—				(60,350	)
Cash and cash equivalents at beginning of period			—				340,052				38,461				—				378,513
Cash and cash equivalents at end of period		$	—			$	226,843			$	91,320			$	—			$	318,163

 

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Data for the quarters and nine months ended June 30, 2017 and 2016 have been derived from our unaudited condensed consolidated financial statements. In this Report, unless otherwise stated or indicated by context, references to the “Company,” “IASIS,” “we,” “our” or “us” refer to IASIS Healthcare LLC and its affiliates. Unless the context otherwise implies, the term “affiliates” means direct and indirect subsidiaries of IASIS Healthcare LLC and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of IASIS and the term “employees” refers to employees of affiliates of IASIS. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “continue,” “initiative,” or “anticipates” or similar expressions that concern our prospects, objectives, strategies, plans or intentions. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. While we believe our assumptions are reasonable, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond the control of the Company. These factors include, but are not limited to:

 

•

the possibility of significant modifications to, or efforts to repeal the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), changes to its implementation and/or its interpretation, including those resulting from following the 2016 federal elections, the possible enactment of additional federal or state healthcare reforms and the outcome of court challenges to such laws;

 

•

potential health reform initiatives and changes to federal, state, or local laws and regulations affecting the healthcare industry;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

the effects of any inability to retain and negotiate reasonable contracts with managed care plans as a result of consolidation among managed care organizations or otherwise;

 

•

if insured patients switch from traditional commercial insurance plans to health insurance exchange (“Exchange”) plans;

 

•

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

 

•

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

 

•

controls imposed by Medicare and third-party payors to reduce admissions and length of stay that negatively impact healthcare provider reimbursement;

 

•

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

 

•

the generally competitive nature of the healthcare industry;

 

•

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

 

•

a failure of our information systems or breach of our cybersecurity protections;

 

•

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

 

•

challenges associated with the implementation of electronic health records (“EHRs”) and coding systems;

 

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•

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

 

•

reliance upon services provided by third-party vendors;

 

•

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

 

•

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

 

•

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

 

•

risks associated with environmental, health and safety laws;

 

•

risks associated with labor laws;

 

•

potential adverse accounting impacts associated with goodwill carrying value;

 

•

our dependence upon the services of key executive management personnel;

 

•

our ability to maintain adequate internal controls over our financial and management systems;

 

•

risks related to our indebtedness and capital structure;

 

•

the occurrence of any event, change or other circumstances that could delay the closing of the pending Steward transaction;

 

•

the possibility of non-consummation of the pending Steward transaction, or delay of such consummation, due to failure to satisfy any of the conditions to the Steward Health merger agreement, or delay in obtaining necessary regulatory approvals;

 

•

other risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, filed with the SEC on December 21, 2016 (our “2016 Form 10-K”), and in our other public filings with the SEC.

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

EXECUTIVE OVERVIEW

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our business consists of two operating segments: (i) our acute care operations, which, as of June 30, 2017, included 17 acute care hospitals, one behavioral hospital and multiple other access points, including 136 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and (ii) our managed care operations, comprised of our diversified and growing risk platform, Health Choice, which operates managed Medicaid and Medicare health plans, as well as accountable care networks in conjunction with our acute care facilities.

Acute Care Operations

As of June 30, 2017, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,600 licensed beds, several outpatient service facilities and 136 physician clinics.

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

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

 

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Managed Care Operations

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

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

As of June 30, 2017, Health Choice’s related entities managed healthcare services for 666,300 covered lives through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These include 281,800 managed Medicaid lives served primarily through Health Choice’s core health plan business in Arizona, 228,600 plan members associated with Health Choice Integrated Care (“HCIC”) (which includes 62,300 Navajo Nation plan members that also receive health plan services through a state of Arizona Tribal Regional Behavioral Health Authority), 9,800 Medicare Advantage members eligible for both Medicare and Medicaid (“Duals”), 94,600 MSO lives and 83,600 lives attributed to our accountable care networks from multiple payors whose care is managed by our network providers, of which 29,000 lives are members in Health Choice’s managed Medicaid and Exchange plans.

Recent Developments

Steward Transaction. On May 18, 2017, Steward Health Care System LLC (“Steward”) and the Company’s parent corporation entered into a definitive merger agreement. The merger is expected to make Steward the largest private for-profit hospital operator in the United States with 36 hospitals across 10 states and managed care operations in Arizona, Utah and Massachusetts. The merger is expected to close in the fourth quarter of 2017, subject to customary regulatory approvals, terms and conditions. Medical Properties Trust, Inc. (“MPT”) has agreed to finance the merger through acquisition of the Company’s hospital real estate, subject to long-term leases and loans with Steward. Under the terms of the merger agreement, cash proceeds paid by MPT and other financing sources will be used to retire the Company’s senior secured term loans and unsecured notes. Remaining cash proceeds will be paid to the Company’s equity holders.

Health Choice Exits Arizona Marketplace Exchange Business. As of January 1, 2017, Health Choice exited the Arizona marketplace exchange. Our decision to exit the exchange was driven by the instability of the Health Reform marketplace, uncertainty and lack of funding around government premium stabilization programs and the overall nature of the related regulatory environment.

Utah Market Acquisitions. In January of 2017, we acquired the assets of two imaging centers in our Salt Lake market from a leading local radiology group. This followed our acquisition, in October 2016, of Riverwoods Surgery Center in Provo, Utah. These acquisitions continue our expansion in the Salt Lake market, which has included investments in a free-standing emergency department, urgent care centers, on-site care centers and other patient access points.

Term Loan Amendment. We are party to a senior credit agreement (the “Amended and Restated Credit Agreement”). On May 4, 2017, we entered into amendment No. 4 to the Amended and Restated Credit Agreement (“Amendment No. 4”). Pursuant to Amendment No. 4, all of the then-outstanding term loans under the Amended and Restated Credit Agreement were refinanced with term loans (the “Term B-3 Loans”) maturing on February 17, 2021, subject to a springing maturity date of 91 days prior to the maturity date of the Senior Notes if any such notes remain outstanding as of such date.

Revolver Amendment. We are party to a revolving credit agreement (the “Revolving Credit Agreement”). On May 4, 2017, we entered into an amendment to the Revolving Credit Agreement (“Revolver Amendment No. 1”). Pursuant to Revolver Amendment No. 1, the Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under our indenture, dated as of May 3, 2011, by and among IASIS, IAS and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to our Senior Notes (the “Indenture”) on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

 

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Revenue and Volume Trends

Total revenue for the quarter ended June 30, 2017, increased 5.7% to $860.4 million, compared to $814.0 million in the same prior year quarter. Total revenue for the nine months ended June 30, 2017, increased 4.3% to $2.54 billion, compared to $2.44 billion in the same prior year period. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium, service and other revenue. Acute care revenue contributed $14.9 million to the increase in total revenue for the quarter ended June 30, 2017, compared to the same prior year quarter, while premium, service and other revenue of our risk platform contributed $31.5 million to the increase in total revenue compared to the same prior year quarter. Acute care revenue contributed $29.5 million to the increase in total revenue for the nine months ended June 30, 2017, compared to the same prior year period, while premium, service and other revenue of our risk platform contributed $75.7 million to the increase in total revenue compared to the same prior year period.

Acute Care Revenue

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

For the quarter ended June 30, 2017, admissions increased 1.3% and adjusted admissions increased 0.1%, both compared to the same prior year quarter. For the nine months ended June 30, 2017, admissions increased 0.9% and adjusted admissions increased 0.2%, both compared to the same prior year period.

For the quarter and nine months ended June 30, 2017, total surgeries increased 6.1% and 5.2%, respectively, compared to the same prior year periods.

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

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Medicare			23.1	%			26.2	%			24.7	%			26.3	%
Managed Medicare			17.5				15.8				17.4				15.6
Medicaid and managed Medicaid			19.5				20.8				19.9				21.1
Managed care and other			34.1				31.9				32.6				31.8
Self-pay			5.8				5.3				5.4				5.2
Total			100.0	%			100.0	%			100.0	%			100.0	%

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

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Medicare			16.9	%			18.3	%			18.2	%			18.7	%
Managed Medicare			11.6				10.4				11.7				10.4
Medicaid and managed Medicaid			9.4				12.1				9.7				12.3
Managed care and other			45.2				43.8				44.6				43.5
Self-pay			16.9				15.4				15.8				15.1
Total			100.0	%			100.0	%			100.0	%			100.0	%

See “Item 1 — Business — Sources of Revenue — Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our 2016 Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed

 

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care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also discussed in such Annual Report on Form 10-K.

Premium, Service and Other Revenue

Premium, service and other revenue generated by our managed care operations represented 41.4% and 40.7% of our total revenue for the quarter and nine months ended June 30, 2017, respectively, compared to 39.9% and 39.4% in the same prior year periods. The increase in the percentage of revenue derived from our managed care operations was due primarily to a 3.1% rate increase at our Arizona Medicaid program, as well as a 2.0% increase in total lives served, excluding our Arizona marketplace exchange business, which we exited as of January 1, 2017. During the quarter ended June 30, 2017, AHCCCS completed a review of fiscal 2016 risk factors. The AHCCCS review resulted in a favorable risk adjustment for Health Choice of approximately $13.7 million, which is recorded as a component of premium revenue for the quarter and nine months ended June 30, 2017.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through its contracts with AHCCCS, the state agency that administers Arizona’s Medicaid program. These contracts require Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is determined either due to or from the state. Adjustments to the estimates of future program settlement amounts are recorded as a component of premium revenue.

Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNPs”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

Industry Trends and Other Items Impacting Our Company

The following section discusses updates to trends discussed in our 2016 Form 10-K that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

Healthcare Reform

In recent years, Congress and certain state governments have passed a large number of laws and regulations intended to result in major changes within the healthcare system. The Health Reform Law, the most prominent of these efforts, changed how healthcare services are covered, delivered and reimbursed through expanded health insurance coverage, reduced growth in Medicare program spending and the establishment of programs that tie reimbursement to care quality and value. However, there is substantial uncertainty regarding the ongoing effects of the Health Reform Law because of efforts to repeal or significantly change its implementation or its interpretation. For example, President Donald Trump has signed an executive order that directs agencies to minimize “economic and regulatory burdens” of the Health Reform Law, although it is unclear how this will be implemented. It is difficult to predict whether, when or how the Health Reform Law may be changed, what alternative provisions, if any, will be enacted, the timing of the implementation of any alternative provisions and the impact of alternative provision on providers and other healthcare industry participants. Since the implementation of the Health Reform Law began, as a result of significant items impacting reimbursement for our services, including reductions in Medicaid disproportionate share payments, Medicare reimbursement rate reductions, and provider tax assessments in the state of Arizona, we have not seen significant benefit to our earnings. However, while we are unable to predict the full impact of any potential modification or repeal of the Health Reform Law or the implementation thereof on our acute care operations business and/or our managed care operation business, if the Health Reform Law is repealed or significantly modified, such repeal or modification could have a materially adverse impact on our business strategies, prospects, operation results or financial condition.

 

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State Medicaid Budgets

In recent years, the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. Some of the states in which we operate are responding to these budget concerns by decreasing funding for Medicaid and other healthcare programs or by making structural changes that result in a reduction in hospital reimbursement, as well as by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver, since extended through December 31, 2017, that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs, including amounts recognized under the Texas Medicaid Disproportionate Share Hospital program (“Texas Medicaid DSH”) for the quarters and nine months ended June 30, 2017 and 2016, respectively, was $30.6 million and $94.6 million, respectively, compared to $24.9 million and $83.4 million in the same prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination is controlled primarily by public hospitals or local government entities that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at the THHSC to administer the programs, have historically resulted in a delay in related reimbursements. As of June 30, 2017 and September 30, 2016, we had $43.6 million and $29.4 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $0.1 million payable and $3.6 million receivable, respectively, of amounts outstanding under Texas Medicaid DSH.

Arizona

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that had previously been eliminated. As a result of the Medicaid expansion and of the Plan’s increase in total coverage area under its most recent AHCCCS contract, enrollment under Health Choice’s Medicaid product line increased 6.5% for the quarter ended June 30, 2017, compared to the same prior year quarter. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and nine months ended June 30, 2017, we incurred $2.2 million and $6.7 million, respectively, in provider fee assessments compared to $2.1 million and $6.4 million in the same prior year periods.

Further, while the Arizona legislature approved an expansion of Medicaid in 2013 which became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. On August 26, 2015, the Arizona State Superior Court upheld the legality of the provider fee, thus preserving the existing funding for Medicaid expansion in Arizona. The plaintiffs are appealing this decision. A successful appeal, invalidating the provider fee used to help fund Arizona’s Medicaid expansion, may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals, therefore, adversely affecting our operations in Arizona.

Uncompensated Care

Uncompensated care represents discounts provided to the uninsured, bad debts and charity care, associated with the acute care services we deliver to the communities we serve. During the quarter and nine months ended June 30, 2017, our uncompensated care as a percentage of acute care revenue was 20.5% and 20.8%, respectively, compared to 20.8% and 20.6% in the same prior year periods. During the quarter ended June 30, 2017, our self-pay admissions represented 6.6% of our total admissions, compared to 6.2% in the same prior year quarter. During the nine months ended June 30, 2017, our self-pay admissions represented 6.3% of our total admissions, compared to 6.2% in the same prior year period.

 

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If we were to experience continued growth in uninsured and under-insured volume and revenue, our uncompensated care may continue to increase and our results of operations would continue to be adversely affected.

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

 

		June 30, 2017				September 30, 2016
Insured receivables			81.8	%			81.2	%
Uninsured receivables			18.2				18.8
Total			100.0	%			100.0	%

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

 

		June 30, 2017				September 30, 2016
0 to 90 days			64.8	%			63.3	%
91 to 180 days			18.4				19.0
Over 180 days			16.8				17.7
Total			100.0	%			100.0	%

Regulatory Matter

On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”) with St. Joseph Medical Center (“SJMC”) located in Houston, Texas. The SIA acted to stay the scheduled termination of SJMC’s Medicare Provider Agreement, which resulted from the hospital’s alleged failure to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, the Company retained an independent consultant to assist it in developing and implementing a corrective action plan. The original term of the SIA was eighteen months. CMS and SJMC have amended the SIA to extend its term. The SIA is now scheduled to expire sixty days after CMS provides SJMC with written findings following a full certification survey, which survey may occur sometime between January 1, 2018 and April 30, 2018.

Critical Accounting Policies and Estimates

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2016 Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2016.

 

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SELECTED OPERATING DATA

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

 

		Quarter Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
Acute care operations (1)
Number of hospital facilities at end of period			18				18				18				18
Licensed beds at end of period			3,600				3,661				3,600				3,661
Average length of stay (days) (2)			5.0				5.0				5.0				5.0
Occupancy rates (average beds in service)			47.5	%			47.3	%			48.1	%			47.6	%
Admissions (3)			25,394				25,062				77,145				76,470
Adjusted admissions (4)			48,948				48,876				146,513				146,171
Patient days (5)			126,247				124,878				383,318				378,874
Adjusted patient days (4)			243,346				243,538				727,994				724,213
Surgeries			17,120				17,285				54,511				51,809
Emergency room visits			106,653				107,409				320,569				323,768
Net patient revenue per adjusted admission (6)		$	10,214			$	9,918			$	10,205			$	10,024
Outpatient revenue as a % of gross patient revenue			48.1	%			48.7	%			47.3	%			47.7	%
Managed care operations
Health plan lives (7)			517,100				513,300				517,100				513,300
MSO lives (8)			94,600				99,300				94,600				99,300
Accountable care network lives (9)			54,600				53,100				54,600				53,100
Total lives			666,300				665,700				666,300				665,700
Medical loss ratio (10)			83.5	%			98.2	%			84.2	%			91.7	%

 

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

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

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

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

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

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

(7)	Represents total lives enrolled across all health plan product lines.

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

(9)

Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks. This excludes 29,000 and 27,300 attributed Health Choice plan member lives as of June 30, 2017 and 2016, respectively.

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

 

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RESULTS OF OPERATIONS SUMMARY

Consolidated

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

 

		Quarter Ended								Quarter Ended								Nine Months Ended								Nine Months Ended
		June 30, 2017								June 30, 2016								June 30, 2017								June 30, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Revenue
Acute care revenue before provision for bad debts		$	603,422							$	583,595							$	1,805,679							$	1,763,190
Less: Provision for bad debts			(99,199	)							(94,293	)							(298,012	)							(284,989	)
Acute care revenue			504,223				58.6	%			489,302				60.1	%			1,507,667				59.3	%			1,478,201				60.6	%
Premium, service and other revenue			356,130				41.4	%			324,681				39.9	%			1,035,613				40.7	%			959,917				39.4	%
Total revenue			860,353				100.0	%			813,983				100.0	%			2,543,280				100.0	%			2,438,118				100.0	%
Costs and expenses
Salaries and benefits			260,028				30.2	%			244,923				30.1	%			771,109				30.3	%			742,050				30.4	%
Supplies			88,794				10.3	%			83,895				10.3	%			265,173				10.4	%			252,859				10.4	%
Medical claims			287,972				33.5	%			303,330				37.3	%			839,361				33.0	%			838,067				34.4	%
Rentals and leases			22,357				2.6	%			21,281				2.6	%			66,393				2.6	%			64,581				2.6	%
Other operating expenses			143,284				16.7	%			136,120				16.7	%			422,624				16.6	%			414,007				17.0	%
Medicare and Medicaid EHR incentives			(7	)			(0.0	%)			(1,267	)			(0.2	%)			(812	)			(0.0	%)			(1,757	)			(0.1	%)
Interest expense, net			33,194				3.9	%			32,828				4.0	%			94,854				3.7	%			99,471				4.1	%
Depreciation and amortization			29,078				3.4	%			26,482				3.3	%			81,575				3.2	%			79,732				3.3	%
Management fees			1,250				0.1	%			1,250				0.2	%			3,750				0.1	%			3,750				0.2	%
Total and expenses			865,950				100.7	%			848,842				104.3	%			2,544,027				100.0	%			2,492,760				102.2	%
Loss from continuing operations before gain on disposal of assets and income taxes			(5,597	)			(0.7	%)			(34,859	)			(4.3	%)			(747	)			(0.0	%)			(54,642	)			(2.2	%)
Gain on disposal of assets, net			398				0.0	%			248				0.0	%			1,331				0.1	%			973				0.0	%
Earnings (loss) from continuing operations before income taxes			(5,199	)			(0.6	%)			(34,611	)			(4.3	%)			584				0.0	%			(53,669	)			(2.2	%)
Income tax expense (benefit)			925				0.1	%			(7,584	)			(0.9	%)			3,197				0.1	%			(12,961	)			(0.5	%)
Net loss from continuing operations			(6,124	)			(0.7	%)			(27,027	)			(3.3	%)			(2,613	)			(0.1	%)			(40,708	)			(1.7	%)
Earnings (loss) from discontinued operations, net of income taxes			(39	)			(0.0	%)			465				0.1	%			(887	)			(0.0	%)			(3,421	)			(0.1	%)
Net loss			(6,163	)			(0.7	%)			(26,562	)			(3.3	%)			(3,500	)			(0.1	%)			(44,129	)			(1.8	%)
Net earnings attributable to non-controlling interests			(2,758	)			(0.3	%)			(2,037	)			(0.3	%)			(10,384	)			(0.4	%)			(7,440	)			(0.2	%)
Net loss attributable to IASIS Healthcare LLC		$	(8,921	)			(1.0	%)		$	(28,599	)			(3.5	%)		$	(13,884	)			(0.5	%)		$	(51,569	)			(2.1	%)

 

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Acute Care Operations

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

 

		Quarter Ended June 30, 2017								Quarter Ended June 30, 2016								Nine Months Ended June 30, 2017								Nine Months Ended June 30, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Acute care revenue
Acute care revenue before provision for bad debts		$	603,422							$	583,595							$	1,805,679							$	1,763,190
Less: Provision for bad debts			(99,199	)							(94,293	)							(298,012	)							(284,989	)
Acute care revenue			504,223				99.0	%			489,302				99.1	%			1,507,667				99.0	%			1,478,201				99.1	%
Revenue between segments (1)			5,006				1.0	%			4,399				0.9	%			15,095				1.0	%			12,857				0.9	%
Total acute care revenue			509,229				100.0	%			493,701				100.0	%			1,522,762				100.0	%			1,491,058				100.0	%
Costs and expenses
Salaries and benefits			240,042				47.1	%			225,057				45.6	%			708,636				46.5	%			686,767				46.1	%
Supplies			88,806				17.4	%			83,614				16.9	%			264,961				17.4	%			251,951				16.9	%
Rentals and leases			21,356				4.2	%			20,282				4.1	%			63,345				4.2	%			61,651				4.1	%
Other operating expenses			128,402				25.2	%			117,805				23.9	%			373,834				24.5	%			360,607				24.2	%
Medicare and Medicaid EHR incentives			(7	)			(0.0	%)			(1,267	)			(0.3	%)			(812	)			(0.1	%)			(1,757	)			(0.1	%)
Interest expense, net			33,194				6.5	%			32,828				6.6	%			94,854				6.2	%			99,471				6.7	%
Depreciation and amortization			27,842				5.5	%			25,042				5.1	%			77,605				5.1	%			75,777				5.1	%
Management fees			1,250				0.2	%			1,250				0.2	%			3,750				0.2	%			3,750				0.3	%
Total costs and expenses			540,885				106.2	%			504,611				102.2	%			1,586,173				104.2	%			1,538,217				103.2	%
Loss from continuing operations before gain on disposal of assets and income taxes			(31,656	)			(6.2	%)			(10,910	)			(2.2	%)			(63,411	)			(4.2	%)			(47,159	)			(3.2	%)
Gain on disposal of assets, net			398				0.1	%			248				0.1	%			1,331				0.1	%			973				0.1	%
Loss from continuing operations before income taxes		$	(31,258	)			(6.1	%)		$	(10,662	)			(2.2	%)		$	(62,080	)			(4.1	%)		$	(46,186	)			(3.1	%)

 

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

 

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Quarters Ended June 30, 2017 and 2016

Total acute care revenue — Total acute care revenue for the quarter ended June 30, 2017, was $509.2 million, an increase of $15.5 million or 3.1% compared to $493.7 million in the same prior year quarter. The increase in total acute care revenue during the quarter ended June 30, 2017, is comprised primarily of an increase in adjusted admissions of 0.1% and an increase in net patient revenue per adjusted admission of 3.0% compared to the same prior year quarter.

The provision for bad debts for the quarter ended June 30, 2017, was $99.2 million, an increase of $4.9 million or 5.2% compared to $94.3 million in the same prior year quarter. The increase in the provision for bad debts is due primarily to the growth of Exchange and managed care plans with higher deductibles and co-pays and the decrease in collections of such higher patient related balances, as well as an increase in the acuity levels of the uninsured patients treated in our emergency room.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in a decrease in total acute care revenue for the quarter ended June 30, 2017 of $0.3 million, and an increase in total acute care revenue for the quarter ended June 30, 2016 of $0.6 million.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2017, was $240.0 million, or 47.1% of total acute care revenue, compared to $225.1 million, or 45.6% of total acute care revenue in the same prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 47.0% for the quarter ended June 30, 2017, compared to 45.2% in the same prior year quarter. The increase in salaries and benefits expense as a percentage of total acute care revenue is due primarily to an increase in contract labor, employee orientation costs and an incentive compensation accrual.

Supplies — Supplies expense for the quarter ended June 30, 2017, was $88.8 million, or 17.4% of total acute care revenue, compared to $83.6 million, or 16.9% of total acute care revenue in the same prior year quarter. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in the utilization of higher cost implants and other supplies associated with the growth in certain orthopedic surgical procedures, as well as an increase in specialty pharmacy costs.

Other operating expenses — Other operating expenses for the quarter ended June 30, 2017, were $128.4 million, or 25.2% of total acute care revenue, compared to $117.8 million, or 23.9% of total acute care revenue in the same prior year quarter. The quarter ended June 30, 2017 was negatively impacted by approximately $3.0 million in costs related to the pending merger with Steward.

Nine months ended June 30, 2017 and 2016

Total acute care revenue — Total acute care revenue for the nine months ended June 30, 2017, was $1.81 billion, an increase of $42.5 million or 2.4% compared to $1.76 billion in the same prior year period. The increase in total acute care revenue is comprised primarily of an increase in adjusted admissions of 0.2% and an increase in net patient revenue per adjusted admission of 1.8% compared to the same prior year period.

The provision for bad debts for the nine months ended June 30, 2017, was $298.0 million, an increase of $13.0 million or 4.6% compared to $285.0 million in the same prior year period. The increase in the provision for bad debts is due primarily to the growth of Exchange and managed care plans with higher deductibles and co-pays and the decrease in collections of such higher patient related balances, as well as an increase in the acuity levels of the uninsured patients treated in our emergency room.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the nine months ended June 30, 2017 and 2016, of $0.9 million and $2.9 million, respectively.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2017, was $708.6 million, or 46.5% of total acute care revenue, compared to $686.8 million, or 46.1% of total acute care revenue in the same prior year period. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 46.4% for the nine months ended June 30, 2017, compared to 45.7% in the same prior year period. The increase in salaries and benefits expense as a percentage of total acute care revenue is due primarily to an increase in contract labor, employee orientation costs and an incentive compensation accrual.

Supplies — Supplies expense for the nine months ended June 30, 2017, was $265.0 million, or 17.4% of total acute care revenue, compared to $252.0 million, or 16.9% of total acute care revenue in the same prior year period. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in the utilization of high cost implants and other supplies associated with the growth in certain orthopedic surgical procedures.

Other operating expenses — Other operating expenses for the nine months ended June 30, 2017, were $373.8 million, or 24.5% of total acute care revenue, compared to $360.6 million, or 24.2% of total acute care revenue in the same prior year period.

 

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Managed Care Operations

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

 

		Quarter Ended June 30, 2017								Quarter Ended June 30, 2016								Nine Months Ended June 30, 2017								Nine Months Ended June 30, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Premium, service and other revenue
Premium revenue		$	350,722				98.5	%		$	313,507				96.6	%		$	1,014,346				97.9	%		$	927,966				96.7	%
Service and other revenue			5,408				1.5	%			11,174				3.4	%			21,267				2.1	%			31,951				3.3	%
Premium, service and other revenue			356,130				100.0	%			324,681				100.0	%			1,035,613				100.0	%			959,917				100.0	%
Costs and expenses
Salaries and benefits			19,986				5.6	%			19,866				6.2	%			62,473				6.0	%			55,283				5.8	%
Supplies			(12	)			0.0	%			281				0.1	%			212				0.0	%			908				0.1	%
Medical claims (1)			292,978				82.3	%			307,729				94.8	%			854,456				82.5	%			850,924				88.6	%
Rentals and leases			1,001				0.3	%			999				0.3	%			3,048				0.3	%			2,930				0.3	%
Other operating expenses			14,882				4.2	%			18,315				5.6	%			48,790				4.7	%			53,400				5.6	%
Depreciation and amortization			1,236				0.3	%			1,440				0.4	%			3,970				0.4	%			3,955				0.4	%
Total costs and expenses			330,071				92.7	%			348,630				107.4	%			972,949				93.9	%			967,400				100.8	%
Earnings (loss) before income taxes		$	26,059				7.3	%		$	(23,949	)			(7.4	%)		$	62,664				6.1	%		$	(7,483	)			(0.8	%)

 

(1)	Medical claims paid to our hospitals of $5.0 million and $4.4 million for the quarters ended June 30, 2017 and 2016, respectively, and $15.1 million and $12.9 million for the nine months ended June 30, 2017 and 2016, respectively, are eliminated in our consolidated results.

Quarters Ended June 30, 2017 and 2016

Premium revenue — Premium revenue was $350.7 million for the quarter ended June 30, 2017, an increase of $37.2 million or 11.9%, compared to $313.5 million in the same prior year quarter. The increase in premium revenue was driven primarily by risk adjustment revenue totaling $13.7 million recorded during the quarter, a 3.1% capitation rate increase at our Arizona Medicaid plan, effective October 1, 2016, and a 2.0% growth in associated total covered lives, excluding our Arizona marketplace exchange business, which we exited effective January 1, 2017.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2017, was $20.0 million, or 5.6% of premium, service and other revenue, compared to $19.9 million, or 6.2% of premium, service and other revenue in the same prior year quarter.

Medical claims — Medical claims expense was $293.0 million for the quarter ended June 30, 2017, compared to $307.7 million in the same prior year quarter. Medical claims expense as a percentage of premium revenue, or medical loss ratio (“MLR”), related to our health plan products was 83.5% for the quarter ended June 30, 2017, compared to 98.2% in the same prior year quarter. The improvement in our MLR is a result of a 3.1% rate increase at our Arizona Medicaid plan effective October 1, 2016, operational improvements implemented during the fourth quarter of our fiscal 2016, favorable development of prior period medical claims and an increase in risk adjustment revenue of $13.7 million recorded during the quarter ended June 30, 2017.

Other operating expenses — Other operating expenses for the quarter ended June 30, 2017, were $14.9 million, or 4.2% of premium, service and other revenue, compared to $18.3 million, or 5.6% of premium, service and other revenue in the same prior year quarter.

 

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Nine months ended June 30, 2017 and 2016

Premium revenue — Premium revenue was $1.01 billion for the nine months ended June 30, 2017, an increase of $86.3 million or 9.3%, compared to $928.0 million in the same prior year period. The increase in premium revenue was driven primarily by a 3.1% capitation rate increase at our Arizona Medicaid plan, effective October 1, 2016, as well as a 2.0% growth in associated total covered lives, excluding our Arizona marketplace exchange business, which we exited effective January 1, 2017.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2017, was $62.5 million, or 6.0% of premium, service and other revenue, compared to $55.3 million, or 5.8% of premium, service and other revenue in the same prior year period.

Medical claims — Medical claims expense was $854.5 million for the nine months ended June 30, 2017, compared to $850.9 million in the same prior year period. Medical claims expense as a percentage of premium revenue, or MLR, related to our health plan products was 84.2% for the nine months ended June 30, 2017, compared to 91.7% in the same prior year period. The improvement in our MLR is a result of a 3.1% rate increase at our Arizona Medicaid plan effective October 1, 2016 as well as from operational improvements implemented during the fourth quarter of our fiscal 2016 and favorable medical claims development.

Other operating expenses — Other operating expenses for the nine months ended June 30, 2017, were $48.8 million, or 4.7% of premium, service and other revenue, compared to $53.4 million, or 5.6% of premium, service and other revenue in the same prior year period.

LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Nine Months Ended June 30, 2017 and 2016

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

 

		Nine Months Ended June 30,
		2017				2016
Cash flows from operating activities		$	63,155			$	73,823
Cash flows from investing activities		$	(87,865	)		$	(102,640	)
Cash flows from financing activities		$	(130,095	)		$	(31,533	)

Operating Activities

Cash flows provided by operating activities were $63.2 million for the nine months ended June 30, 2017, compared to cash flows provided by operating activities of $73.8 million in the same prior year period. The prior year nine months ended June 30, 2016, was positively impacted by the receipt of $9.3 million related to income tax refunds.

At June 30, 2017, we had $230.6 million in net working capital, compared to $353.3 million at September 30, 2016. Net accounts receivable increased $31.4 million to $373.8 million at June 30, 2017, from $342.4 million at September 30, 2016.

Investing Activities

Cash flows used in investing activities were $87.9 million for the nine months ended June 30, 2017, compared to $102.6 million in the same prior year period. Included in investing activities for the nine months ended June 30, 2016, was the impact of a final working capital settlement associated with the sale of our Nevada operations that resulted in a cash outflow totaling $5.6 million. Additionally, included in investing activities for the nine months ended June 30, 2016, was $17.0 million related to our ongoing conversion to a new integrated clinical and revenue cycle system.

Financing Activities

Cash flows used in financing activities were $130.1 million for the nine months ended June 30, 2017, compared to $31.5 million in the same prior year period. Included in financing activities for the nine months ended June 30, 2017, was the impact of a $100.0 million principal payment on our Term Loan Facility. Distributions to non-controlling interests were $7.0 million for the nine months ended June 30, 2017, compared to $8.0 million in the same prior year period. During the nine months ended June 30, 2016, we made financing obligation payments totaling $7.0 million related to our ongoing conversion to a new integrated clinical and revenue cycle system and $5.2 million in payments associated with the extension of our revolving credit facility in February 2016.

 

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Capital Resources

As of June 30, 2017, we had the following debt arrangements:

 

•

up to $1.232 billion senior secured credit facilities, which includes both the Amended and Restated Credit Agreement and the Revolving Credit Agreement (collectively, the “Senior Secured Credit Facilities”); and

 

•

$849.9 million in 8.375% senior notes due 2019 (the “Senior Notes”).

At June 30, 2017, amounts outstanding under our Senior Secured Credit Facilities consisted of $862.1 million in term loans. In addition, we had $94.4 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.5% for both the quarter and nine months ended June 30, 2017.

Amended Term Loan Facility

We are a party the Amended and Restated Credit Agreement, dated as of May 3, 2011 (as amended) with Wilmington Trust, National Association, as administrative agent, which provides for a $1.025 billion senior secured term loan facility (the “Term Loan Facility”). On May 4, 2017, we, IAS, certain of their subsidiaries, the lenders party thereto, JPMorgan Chase Bank, N.A., as the Additional Term B-3 Lender (as defined therein), Wilmington Trust, National Association, as administrative agent, and the other agents named therein entered into an Amendment No. 4 to the Amended and Restated Credit Agreement (“Term Amendment No. 4”). Pursuant to Term Amendment No. 4, all of the then-outstanding term loans under the Amended and Restated Credit Agreement were refinanced with term loans (the “Term B-3 Loans”) maturing on February 17, 2021, subject to, if earlier, a springing maturity date of 91 days prior to the maturity date of the Senior Notes if any of the Senior Notes remains outstanding as of such date. Upon completion of Term Amendment No. 4, the outstanding term loan balance was $864.2 million, which reflected a $100.0 million pay down to certain holders.

The Term Amendment No. 4 provides for a soft call prepayment premium applicable to certain repricing transactions involving the outstanding Term B-3 Loans. The soft call premium equals 1% of the amount of the Term B-3 Loans that are subject to certain repricing transactions occurring on or prior to May 4, 2018.

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate (determined by reference to The Wall Street Journal) and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 3.00% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 4.00% per annum.

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

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

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Term Loan Facility, cross-defaults, certain bankruptcy events and certain change of control events. In addition, certain of the baskets available to us under the negative covenants in our Amended and Restated Credit Agreement are suspended under the Amended and Restated Credit Agreement until such time, if any, as we have consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio.

 

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Revolving Credit Facility

We are a party to the “Revolving Credit Agreement, dated as of February 17, 2016 (as amended), with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which provides for a $207.4 million senior secured revolving credit facility, of which up to $125.0 million may be utilized for the issuance of letters of credit (the “Revolving Credit Facility”). On May 4, 2017, we, IAS, the lenders party to the Revolving Credit Agreement as of such date and the revolver agent entered into an amendment to the Revolving Credit Agreement (“Revolver Amendment No. 1”). Pursuant to Revolver Amendment No. 1, the Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under our Indenture on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

The Revolving Credit Agreement provides us with the right to request additional commitments under the Revolving Credit Facility without the consent of the lenders thereunder, subject to a cap on aggregate commitments of $300.0 million, a pro forma senior secured net leverage ratio (as defined in the Revolving Credit Agreement) of less than or equal to 3.75 to 1.00 and customary conditions precedent.

The Revolving Credit Facility does not require installment payments prior to maturity.

Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at our option, either (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan, (2) the federal funds rate plus 0.50% and (3) a LIBOR rate subject to certain adjustments plus 1.00%, in each case, plus a margin of 2.50% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee on the unutilized commitments under the Revolving Credit Facility, as well as pay customary letter of credit fees and agency fees.

The Revolving Credit Facility is unconditionally guaranteed by the Guarantors and is required to be guaranteed by all of our future material wholly-owned subsidiaries, subject to certain exceptions. All obligations under the Revolving Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Guarantors, including (1) a pledge of 100% of our equity interests and the equity interests held by us and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of our material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Revolving Credit Agreement contains restrictive covenants and events of default substantially similar to the restrictive covenants and events of default in the Amended and Restated Credit Agreement; provided, that under the Revolving Credit Agreement, we are required to maintain, on a quarterly basis, a maximum senior secured gross leverage ratio (as defined in the Revolving Credit Agreement). In addition, certain of the baskets available to us under the negative covenants in the Amended and Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as we have consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio (as defined in the Revolving Credit Agreement).

8.375% Senior Notes due 2019

We, together with our wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”) issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to the Indenture. The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries.

At June 30, 2017, the outstanding principal balance of the Senior Notes was $849.9 million. The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes in whole or in part, at any time at a price equal to 102.094% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions. Each subsequent year the redemption price declines 2.094 percentage points until 2017, at which point and thereafter the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

 

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

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

Credit Ratings

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

 

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

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available.

Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors” in our 2016 Form 10-K.

Including available cash at June 30, 2017, we have available liquidity as follows (in millions):

 

Cash and cash equivalents		$	190.9
Available capacity under our senior secured revolving credit facility			113.0
Net available liquidity at June 30, 2017		$	303.9

Net available liquidity assumes 100% participation from all lenders currently committed under our Revolving Credit Facility. In addition to our available liquidity, we expect to generate sufficient operating cash flows in fiscal 2017.

The Amended and Restated Credit Agreement requires us to prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions unless such proceeds are reinvested within 12 months in existing facilities or 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). The Indenture similarly requires us to make prepayments with net cash proceeds of certain asset dispositions unless such proceeds have been either reinvested or used to prepay our obligations under the Term Loan Facility within 365 days (an additional 180 days exists if there is a binding commitment for such investment).

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

 

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We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond two years. In addition, we cannot assure you that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see Item 1A. “Risk Factors” in our 2016 Form 10-K.

We and our subsidiaries, affiliates, IAS and/or significant stockholders of IAS may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see Item 1A. “Risk Factors” in our 2016 Form 10-K.

We do not have any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Seasonality

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2017, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $862.1 million term loan; and (ii) a $207.4 million revolving credit facility.

While changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next 12 month period given the 1.25% LIBOR floor that exists in our Term Loan Facility, and given that we currently have no outstanding borrowings under our Revolving Credit Facility.

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

Item 4. Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.

 

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Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2017, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors disclosed in our 2016 Form 10-K, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our 2016 Form 10-K.

Item 6. Exhibits

 

(a)	List of Exhibits:

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		IASIS HEALTHCARE LLC
Date: August 14, 2017		By:		/s/ John M. Doyle
				John M. Doyle
				Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
10.1		Amendment No. 4, dated as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation and the other guarantors party thereto, the lenders party thereto, Wilmington Trust, National Association, as administrative agent, and JPMorgan Chase Bank, N.A., as the Additional Term B-3 Lender (as defined therein) and attached thereto as Exhibit A, the Amended and Restated Credit Agreement, dated as of May 3, 2011 as amended as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation, Wilmington Trust, National Association, as administrative agent and collateral agent, and each lender from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on May 8, 2017 (Comm. File No. 333-117362)).
10.2		Amendment No. 1, dated as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation and the other guarantors party thereto, the lenders as of the date thereof and JPMorgan Chase Bank, N.A., as administrative agent, and attached thereto as Exhibit A, the Revolving Credit Agreement, dated as of February 17, 2016 as amended as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation, JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and L/C Issuer and each lender from time to time party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on May 8, 2017 (Comm. File No. 333-117362).
10.3		Real Property Asset Purchase Agreement dated as of May 18, 2017 by and among IASIS Healthcare Corporation and certain affiliated selling entities, on the one hand, and certain purchasing entities affiliated with Medical Properties Trust, Inc., on the other hand.
31.1		Certification of Principal Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from our quarterly report on Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 14, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at June 30, 2017 and September 30, 2016, (ii) the condensed consolidated statements of operations for the quarters and nine months ended June 30, 2017 and 2016, (iii) the condensed consolidated statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2017 and 2016, (iv) the condensed consolidated statement of equity, (v) the condensed consolidated statements of cash flows for the nine months ended June 30, 2017 and 2016, and (vi) the notes to the condensed consolidated financial statements (tagged as blocks of text). (1)

 

(1)

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

 

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