LifePoint Hospitals, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-51251
(Exact name of registrant as
specified in its charter)
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Delaware
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20-1538254
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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103 Powell Court, Suite 200
Brentwood, Tennessee
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37027
(Zip Code)
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(Address of Principal Executive
Offices)
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(615) 372-8500
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in the
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of July 31, 2008, the number of outstanding shares of
Common Stock of LifePoint Hospitals, Inc. was 53,242,788.
TABLE OF
CONTENTS
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PART I FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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3
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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50
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Item 4.
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Controls and Procedures
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50
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PART II OTHER INFORMATION
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Item 1.
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Legal Proceedings
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51
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Item 1A.
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Risk Factors
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51
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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51
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Item 4.
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Submission of Matters to a Vote of Security Holders
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52
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Item 6.
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Exhibits
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53
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PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share amounts)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2007
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2008
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2007
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2008
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Revenues
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$
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654.3
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$
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680.8
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$
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1,315.5
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$
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1,380.7
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Salaries and benefits
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257.1
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271.6
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514.0
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547.0
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Supplies
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89.7
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95.3
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182.1
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190.8
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Other operating expenses
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123.0
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126.5
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237.3
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251.8
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Provision for doubtful accounts
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81.2
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76.7
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154.4
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159.4
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Depreciation and amortization
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34.4
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34.2
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66.9
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67.5
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Interest expense, net
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25.4
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22.2
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51.8
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44.7
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Impairment of long-lived assets
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0.3
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0.3
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610.8
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626.8
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1,206.5
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1,261.5
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Income from continuing operations before minority interests and
income taxes
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43.5
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54.0
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109.0
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119.2
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Minority interests in earnings of consolidated entities
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0.8
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0.6
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1.1
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1.3
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Income from continuing operations before income taxes
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42.7
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53.4
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107.9
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117.9
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Provision for income taxes
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18.1
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21.9
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44.6
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46.7
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Income from continuing operations
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24.6
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31.5
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63.3
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71.2
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Discontinued operations, net of income taxes:
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Loss from discontinued operations
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(2.6
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(0.7
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(3.5
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(0.9
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Impairment (charge) adjustment
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(8.5
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(16.4
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2.3
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Loss on sale of hospitals
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(0.1
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)
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(0.3
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(0.2
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)
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(0.3
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(Loss) income from discontinued operations
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(11.2
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(1.0
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(20.1
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1.1
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Net income
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$
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13.4
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$
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30.5
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$
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43.2
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$
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72.3
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Basic earnings (loss) per share:
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Continuing operations
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$
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0.44
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$
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0.60
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$
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1.13
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$
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1.34
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Discontinued operations
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(0.20
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)
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(0.02
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)
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(0.36
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0.02
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Net income
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$
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0.24
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$
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0.58
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$
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0.77
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$
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1.36
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Diluted earnings (loss) per share:
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Continuing operations
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$
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0.43
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$
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0.59
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$
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1.11
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$
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1.31
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Discontinued operations
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(0.20
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)
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(0.02
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(0.35
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)
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0.02
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Net income
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$
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0.23
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$
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0.57
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$
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0.76
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$
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1.33
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Weighted average shares and dilutive securities outstanding:
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Basic
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56.1
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52.2
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56.0
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53.1
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Diluted
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57.2
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53.2
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57.0
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54.2
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See accompanying notes.
3
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
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December 31,
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June 30,
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2007(1)
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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53.1
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$
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24.6
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Accounts receivable, less allowances for doubtful accounts of
$376.3 and $368.8 at December 31, 2007 and June 30,
2008, respectively
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304.5
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309.2
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Inventories
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69.3
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69.7
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Prepaid expenses
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12.4
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17.7
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Income taxes receivable
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27.9
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34.5
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Deferred tax assets
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113.6
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119.3
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Other current assets
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20.6
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10.2
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601.4
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585.2
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Property and equipment:
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Land
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72.8
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72.8
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Buildings and improvements
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1,219.6
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1,251.5
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Equipment
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674.1
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709.8
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Construction in progress (estimated cost to complete and equip
after June 30, 2008 is $137.6)
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34.1
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27.7
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2,000.6
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2,061.8
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Accumulated depreciation
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(582.9
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)
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(643.3
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)
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1,417.7
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1,418.5
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Deferred loan costs, net
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38.6
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34.9
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Intangible assets, net
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52.4
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60.4
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Other
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4.4
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4.4
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Goodwill
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1,512.0
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1,521.0
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$
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3,626.5
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$
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3,624.4
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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95.6
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$
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88.2
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Accrued salaries
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66.7
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72.0
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Other current liabilities
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|
98.7
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85.7
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Current maturities of long-term debt
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0.5
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0.5
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261.5
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246.4
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Long-term debt
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|
1,516.9
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1,523.1
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Deferred income taxes
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113.2
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116.6
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Professional and general liability claims and other liabilities
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120.0
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124.1
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Long-term income tax liability
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55.5
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72.1
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Minority interests in equity of consolidated entities
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15.2
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15.5
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Stockholders equity:
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Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued
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Common stock, $0.01 par value; 90,000,000 shares
authorized; 58,101,477 and 58,553,268 shares issued at
December 31, 2007 and June 30, 2008, respectively
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0.6
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0.6
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Capital in excess of par value
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1,084.9
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1,098.3
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Unearned ESOP compensation
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(3.1
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)
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|
|
(1.5
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)
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Accumulated other comprehensive loss
|
|
|
(19.8
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)
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|
|
(18.8
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)
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Retained earnings
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|
|
522.8
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|
595.1
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Common stock in treasury, at cost, 1,356,487 and
5,339,372 shares at December 31, 2007 and
June 30, 2008, respectively
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(41.2
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)
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|
|
(147.1
|
)
|
|
|
|
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|
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|
|
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|
1,544.2
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|
|
|
1,526.6
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|
|
|
|
|
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|
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$
|
3,626.5
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|
$
|
3,624.4
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(1) |
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Derived from audited consolidated financial statements. |
See accompanying notes.
4
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
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|
|
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|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
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|
June 30,
|
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|
2007
|
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|
2008
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2007
|
|
|
2008
|
|
|
Cash flows from operating activities:
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Net income
|
|
$
|
13.4
|
|
|
$
|
30.5
|
|
|
$
|
43.2
|
|
|
$
|
72.3
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued operations
|
|
|
11.2
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|
|
|
1.0
|
|
|
|
20.1
|
|
|
|
(1.1
|
)
|
Stock-based compensation
|
|
|
3.6
|
|
|
|
5.8
|
|
|
|
7.2
|
|
|
|
12.2
|
|
ESOP expense (non-cash portion)
|
|
|
2.5
|
|
|
|
2.2
|
|
|
|
4.7
|
|
|
|
4.0
|
|
Depreciation and amortization
|
|
|
34.4
|
|
|
|
34.2
|
|
|
|
66.9
|
|
|
|
67.5
|
|
Amortization of physician minimum revenue guarantees
|
|
|
1.2
|
|
|
|
2.2
|
|
|
|
2.1
|
|
|
|
4.3
|
|
Amortization of deferred loan costs
|
|
|
1.7
|
|
|
|
1.9
|
|
|
|
3.0
|
|
|
|
3.7
|
|
Minority interests in earnings of consolidated entities
|
|
|
0.8
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.3
|
|
Deferred income taxes (benefit)
|
|
|
(16.6
|
)
|
|
|
8.3
|
|
|
|
(35.0
|
)
|
|
|
9.6
|
|
Reserve for professional and general liability claims, net
|
|
|
4.6
|
|
|
|
7.3
|
|
|
|
4.1
|
|
|
|
8.4
|
|
Increase (decrease) in cash from operating assets and
liabilities, net of effects from acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
7.0
|
|
|
|
5.9
|
|
|
|
(0.5
|
)
|
|
|
(2.7
|
)
|
Inventories and other current assets
|
|
|
4.0
|
|
|
|
7.7
|
|
|
|
(7.2
|
)
|
|
|
4.5
|
|
Accounts payable and accrued expenses
|
|
|
20.5
|
|
|
|
(7.0
|
)
|
|
|
(12.8
|
)
|
|
|
(3.2
|
)
|
Income taxes payable/receivable
|
|
|
(3.5
|
)
|
|
|
(26.3
|
)
|
|
|
38.7
|
|
|
|
(3.7
|
)
|
Other
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities continuing
operations
|
|
|
84.3
|
|
|
|
74.3
|
|
|
|
135.3
|
|
|
|
179.4
|
|
Net cash (used in) provided by operating activities
discontinued operations
|
|
|
(5.2
|
)
|
|
|
(2.2
|
)
|
|
|
7.6
|
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
79.1
|
|
|
|
72.1
|
|
|
|
142.9
|
|
|
|
173.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(40.6
|
)
|
|
|
(42.3
|
)
|
|
|
(72.6
|
)
|
|
|
(75.7
|
)
|
Acquisition, net of cash acquired
|
|
|
|
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
(9.3
|
)
|
Other
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities continuing
operations
|
|
|
(40.5
|
)
|
|
|
(51.6
|
)
|
|
|
(72.5
|
)
|
|
|
(85.0
|
)
|
Net cash provided by (used in) investing activities
discontinued operations
|
|
|
72.7
|
|
|
|
(3.3
|
)
|
|
|
72.8
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
32.2
|
|
|
|
(54.9
|
)
|
|
|
0.3
|
|
|
|
(88.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
575.0
|
|
|
|
10.4
|
|
|
|
615.0
|
|
|
|
10.4
|
|
Payments of borrowings
|
|
|
(705.1
|
)
|
|
|
|
|
|
|
(757.5
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
11.1
|
|
|
|
0.1
|
|
|
|
12.1
|
|
|
|
0.1
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
(30.5
|
)
|
|
|
|
|
|
|
(118.1
|
)
|
Payment of debt issuance costs
|
|
|
(13.3
|
)
|
|
|
|
|
|
|
(13.3
|
)
|
|
|
|
|
Distributions to minority investors in joint ventures, net of
proceeds
|
|
|
1.9
|
|
|
|
(0.7
|
)
|
|
|
1.7
|
|
|
|
(1.0
|
)
|
Capital lease payments and other
|
|
|
(0.4
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(130.8
|
)
|
|
|
(25.5
|
)
|
|
|
(142.0
|
)
|
|
|
(113.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(19.5
|
)
|
|
|
(8.3
|
)
|
|
|
1.2
|
|
|
|
(28.5
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
32.9
|
|
|
|
32.9
|
|
|
|
12.2
|
|
|
|
53.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
13.4
|
|
|
$
|
24.6
|
|
|
$
|
13.4
|
|
|
$
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
1.4
|
|
|
$
|
24.0
|
|
|
$
|
30.2
|
|
|
$
|
41.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
$
|
0.7
|
|
|
$
|
0.2
|
|
|
$
|
1.4
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
38.1
|
|
|
$
|
40.8
|
|
|
$
|
40.5
|
|
|
$
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Six Months Ended June 30, 2008
Unaudited
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Unearned
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
ESOP
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
|
56.7
|
|
|
$
|
0.6
|
|
|
$
|
1,084.9
|
|
|
$
|
(3.1
|
)
|
|
$
|
(19.8
|
)
|
|
$
|
522.8
|
|
|
$
|
(41.2
|
)
|
|
$
|
1,544.2
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.3
|
|
|
|
|
|
|
|
72.3
|
|
Net change in fair value of interest rate swap, net of tax
provision of $0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
Exercise of stock options, including tax benefits and other
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
Stock activity in connection with employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Stock-based compensation
|
|
|
0.4
|
|
|
|
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.2
|
|
Purchases of treasury stock, at cost
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105.9
|
)
|
|
|
(105.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
53.2
|
|
|
$
|
0.6
|
|
|
$
|
1,098.3
|
|
|
$
|
(1.5
|
)
|
|
$
|
(18.8
|
)
|
|
$
|
595.1
|
|
|
$
|
(147.1
|
)
|
|
$
|
1,526.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
Unaudited
|
|
Note 1.
|
Basis of
Presentation
|
LifePoint Hospitals, Inc., a Delaware corporation, acting
through its subsidiaries, operates general acute care hospitals
in non-urban communities in the United States. Unless the
context otherwise requires, LifePoint and its subsidiaries are
referred to herein as LifePoint, the
Company, we, our or
us. At June 30, 2008, our subsidiaries owned or
leased 48 hospitals, having a total of 5,637 licensed beds, and
serving non-urban communities in 17 states.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP) for interim financial information and with
the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) and disclosures considered necessary for
a fair presentation have been included. Operating results for
the three and six months ended June 30, 2008 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2008. For further information,
refer to the consolidated financial statements and notes thereto
included in the Companys 2007 Annual Report on
Form 10-K.
The majority of the Companys expenses are cost of
revenue items. Costs that could be classified as
general and administrative by the Company would
include LifePoint corporate overhead costs, which were
$21.0 million and $23.3 million for the three months
ended June 30, 2007 and 2008, respectively, and
$41.8 million and $47.5 million for the six months
ended June 30, 2007 and 2008, respectively.
Certain prior year statements of cash flow amounts have been
reclassified to conform to the current year presentation for
distributions to minority investors in joint ventures, net of
proceeds. Previously, the Company classified distributions to
minority investors in joint ventures, net of proceeds, as an
other investing activity. Effective April 1, 2008, the
Company reclassified its distributions to minority investors in
joint ventures, net of proceeds, as a financing activity as the
Company has determined this to be a more appropriate
categorization of this type of activity. This reclassification
has had no impact on the Companys total assets,
liabilities, stockholders equity, net income or cash flows.
In November 2007, the Companys Board of Directors
authorized the repurchase of up to $150.0 million of
outstanding shares of the Companys common stock either in
the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints and other
factors. The Company is not obligated to repurchase any specific
number of shares under the program. The program expires on
November 26, 2008, but may be extended, suspended or
discontinued at any time prior to the expiration date. The
Company repurchased approximately 0.9 million and
3.9 million shares for an aggregate purchase price,
including commissions, of approximately $28.3 million and
$103.7 million at an average purchase price of $31.25 and
$26.57 per share during the three and six months ended
June 30, 2008, respectively. As of June 30, 2008, the
Company had repurchased in the aggregate, approximately
5.3 million shares at an aggregate purchase price,
including commissions, of approximately $144.9 million.
These shares have been designated by the Company as treasury
stock.
The Company redeems shares from employees upon vesting of the
Companys Amended and Restated 1998 Long-Term Incentive
Plan (the LTIP) stock awards for minimum statutory
tax withholding purposes. The Company redeemed 77,532 of the
261,977 vested LTIP shares for an aggregate price of
approximately $2.2 million during the three months ended
June 30, 2008. These shares have been designated by the
Company as treasury stock.
7
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3.
|
Stock-Based
Compensation
|
The Company issues stock options and other stock-based awards to
key employees and directors under various stockholder-approved
stock-based compensation plans. The Company currently has the
following four types of stock-based awards outstanding under
these plans: stock options; nonvested stock; restricted stock
units; and deferred stock units. The Company accounts for its
stock-based awards in accordance with the provisions of
Statements of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment
(SFAS No. 123(R)). Under
SFAS No. 123(R), the Company recognizes compensation
expense based on the grant date fair value estimated in
accordance with the standard.
Stock
Options
The Company estimated the fair value of stock options granted
during the three and six months ended June 30, 2007 and
2008 using the Hull-White II (HW-II) lattice
option valuation model and a single option award approach. The
Company is amortizing the fair value on a straight-line basis
over the requisite service period of the awards, which is the
vesting period of three years. The Company granted stock options
to purchase 609,525 and 1,091,500 shares of the
Companys common stock to certain key employees during the
six months ended June 30, 2007 and 2008, respectively. The
stock options that were granted during the six months ended
June 30, 2007 and 2008 become vested with respect to
one-third of the shares on each anniversary of the grant date,
conditioned on continued employment.
In addition, during the six months ended June 30, 2007, the
Company granted performance-based stock options to certain
senior executives to acquire up to an aggregate of
760,000 shares of the Companys common stock. These
stock options were subject to forfeiture unless certain targeted
levels of diluted earnings per share were achieved for the year
ended December 31, 2007. Depending on the level of diluted
earnings per share achieved during 2007, the senior executives
would forfeit zero to 100% of these stock options. The stock
options that would not have been forfeited at year end would
have vested ratably beginning one year from the date of the
grant to three years after the date of the grant. Through
June 30, 2007, for purposes of accounting for the expense
of these stock options, the Company assumed a target level of
diluted earnings per share that resulted in the recognition of
stock compensation expense assuming earned options to acquire an
aggregate of 380,000 shares and forfeited options for the
remaining 380,000 shares. At September 30, 2007, the
Company projected that the required target level of diluted
earnings per share was not going to be met and reversed the
previously recognized stock compensation expense associated with
these stock options. The target level of diluted earnings per
share was ultimately not met during 2007 and all of the 760,000
performance-based stock options were cancelled.
8
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the weighted average assumptions the
Company used to develop the fair value estimates under its HW-II
option valuation model and the resulting estimates of
weighted-average fair value per share for stock options granted
during the periods presented:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2007
|
|
2008
|
|
Expected volatility
|
|
25.4%
|
|
32.0%
|
Risk free interest rate (range)
|
|
4.48% 5.21%
|
|
1.07% 3.74%
|
Expected dividends
|
|
|
|
|
Average expected term (years)
|
|
5.1
|
|
5.3
|
Fair value per share for stock options granted
|
|
$10.38
|
|
$8.08
|
The Company received $11.1 million and $0.1 million in
cash from stock option exercises for the three months ended
June 30, 2007 and 2008, respectively, and
$12.1 million and $0.1 million for the six months
ended June 30, 2007 and 2008, respectively. The Company
recognized actual tax benefits for the tax deductions from stock
option exercises of $1.0 million for the three and six
months ended June 30, 2007. There was a nominal amount of
cash received and tax benefits realized from stock option
exercises for the three and six months ended June 30, 2008.
As of June 30, 2008, there was $11.2 million of total
estimated unrecognized compensation cost related to stock option
compensation arrangements. Total estimated unrecognized
compensation cost will be adjusted for future changes in
estimated forfeitures. The Company expects to recognize that
cost over a weighted average period of 1.5 years.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of the Companys common stock on the day
prior to the grant date. The nonvested stock requires no payment
from employees and directors, and stock-based compensation
expense is recorded equally over the vesting periods (three to
five years).
The Company granted 427,345 and 462,742 shares of nonvested
stock awards to certain key employees during the six months
ended June 30, 2007 and 2008, respectively. These nonvested
stock awards cliff-vest three years from the grant date. The
weighted-average fair market value at the date of grant of the
427,345 and 462,742 shares of nonvested stock awards was
$36.84 and $25.86 per share, respectively.
Of the nonvested stock awards granted during the six months
ended June 30, 2007 and 2008, 190,000 and
247,500 shares, respectively, are performance-based. In
addition to requiring continuing service of an employee, the
vesting of these nonvested stock awards is contingent upon the
satisfaction of certain financial goals specifically related to
the achievement of specified annual net revenues and other
earnings targets. If these goals are achieved, the nonvested
stock awards will cliff-vest three years after the grant date.
The fair value for each of these performance-based nonvested
stock awards was determined based on the closing price of the
Companys common stock on the day prior to the grant date
and assumes that the performance goals will be achieved. If
these performance goals are not met, no compensation expense
will be recognized, and any previously recognized compensation
expense will be reversed.
9
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On February 18, 2008, pursuant to the Outside Directors
Stock and Incentive Compensation Plan (ODSICP), the
Companys Board of Directors, upon recommendation of the
Compensation Committee of the Board of Directors, approved the
grant of 3,500 restricted stock unit awards to Gregory T. Bier,
who was appointed to the Companys Board of Directors on
this same date. On May 14, 2008, pursuant to the ODSICP,
the Companys Board of Directors, upon recommendation of
the Compensation Committee of the Board of Directors, approved
the grant of 3,500 restricted stock unit awards to each of the
seven non-management members of the Board of Directors. The
24,500 restricted stock unit awards granted on May 14, 2008
will be fully vested and no longer subject to forfeiture on
November 15, 2008. The non-employee directors receipt
of shares of common stock pursuant to the restricted stock unit
award is deferred until the first business day following the
earliest to occur of (i) the third anniversary of the date
of grant, or (ii) the date the non-employee director ceases
to be a member of the Companys Board of Directors.
Effective May 13, 2008, upon stockholders approval,
the Company amended both its LTIP and Management Stock Purchase
Plan (MSPP). The amendments increased the shares
available for grant by an additional 2,100,000 shares and
75,000 shares under the LTIP and MSPP, respectively.
Additionally, the amendment of the LTIP increased the limits on
grants of restricted shares, performance shares and other
full-value awards by 700,000 shares.
As of June 30, 2008, there was $22.4 million of total
estimated unrecognized compensation cost related to nonvested
stock compensation arrangements granted under both the LTIP and
ODSICP. Total estimated unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures. The
Company expects to recognize that cost over a weighted average
period of 1.9 years.
Summary
The following table summarizes the Companys total
stock-based compensation expense as well as the total recognized
tax benefits related thereto (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Nonvested stock
|
|
$
|
1.7
|
|
|
$
|
4.0
|
|
|
$
|
3.9
|
|
|
$
|
8.3
|
|
Stock options
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3.6
|
|
|
$
|
5.8
|
|
|
$
|
7.2
|
|
|
$
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits on stock-based compensation expense
|
|
$
|
1.5
|
|
|
$
|
2.5
|
|
|
$
|
2.9
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not capitalize any stock-based compensation cost
for the three or six months ended June 30, 2007 and 2008.
As of June 30, 2008, there was $33.6 million of total
estimated unrecognized compensation cost related to all of the
Companys stock compensation arrangements. Total estimated
unrecognized compensation cost may be adjusted for future
changes in estimated forfeitures. The Company expects to
recognize that cost over a weighted-average period of
1.8 years.
10
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Earnings
(Loss) Per Share
|
The following table sets forth the computation of basic and
diluted earnings (loss) per share (in millions, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings (loss) per
share income from continuing operations
|
|
$
|
24.6
|
|
|
$
|
31.5
|
|
|
$
|
63.3
|
|
|
$
|
71.2
|
|
(Loss) income from discontinued operations, net of income taxes
|
|
|
(11.2
|
)
|
|
|
(1.0
|
)
|
|
|
(20.1
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.4
|
|
|
$
|
30.5
|
|
|
$
|
43.2
|
|
|
$
|
72.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share
weighted average shares outstanding
|
|
|
56.1
|
|
|
|
52.2
|
|
|
|
56.0
|
|
|
|
53.1
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock benefit plans
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share
weighted average shares
|
|
|
57.2
|
|
|
|
53.2
|
|
|
|
57.0
|
|
|
|
54.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.44
|
|
|
$
|
0.60
|
|
|
$
|
1.13
|
|
|
$
|
1.34
|
|
Discontinued operations
|
|
|
(0.20
|
)
|
|
|
(0.02
|
)
|
|
|
(0.36
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.24
|
|
|
$
|
0.58
|
|
|
$
|
0.77
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.43
|
|
|
$
|
0.59
|
|
|
$
|
1.11
|
|
|
$
|
1.31
|
|
Discontinued operations
|
|
|
(0.20
|
)
|
|
|
(0.02
|
)
|
|
|
(0.35
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.23
|
|
|
$
|
0.57
|
|
|
$
|
0.76
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys
31/2% Convertible
Senior Subordinated Notes due May 15, 2014 (the
31/2% Notes)
and
31/4% Convertible
Senior Subordinated Debentures due August 15, 2025 (the
31/4% Debentures)
are included in the calculation of diluted earnings per share
whether or not the contingent requirements have been met for
conversion using the treasury stock method if the conversion
price of $51.79 and $61.22, respectively, is less than the
average market price of the Companys common stock for the
period. Upon conversion, the par value is settled in cash, and
only the conversion premium is settled in shares of the
Companys common stock. The impact of the
31/4% Debentures
and
31/2% Notes
has been excluded because the effects would have been
anti-dilutive for the three and six months ended June 30,
2007 and 2008.
11
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Goodwill
and Intangible Assets
|
Goodwill
Effective June 1, 2008, the Company acquired Surgery Center
of Dodge City, LLC (the Dodge City Surgery Center),
an ambulatory surgery center located in Dodge City, Kansas, for
approximately $8.9 million plus working capital and assumed
capital leases of $0.8 million. Preliminary goodwill
recognized in connection with the acquisition of the Dodge City
Surgery Center totaled approximately $9.0 million. In
addition, the Company entered into non-competition agreements
with certain of the Dodge City Surgery Centers physicians.
As the Company is currently in the process of determining the
value of these non-competition agreements, the Company has not
allocated any portion of the purchase price of the Dodge City
Surgery Center to these non-competition agreements. The impact
of assigning value to these non-competition agreements will
result in a reduction to the previously recognized goodwill. The
purchase price allocation for the Dodge City Surgery Center has
been prepared on a preliminary basis and is subject to change as
new facts and circumstances emerge.
The Company evaluates its goodwill for impairment annually, or
more frequently if circumstances indicate potential impairment,
in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. The Company performed its most
recent annual goodwill impairment test as of October 1,
2007 and did not incur an impairment charge.
Contract-Based
Physician Minimum Revenue Guarantees
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements, or physician
minimum revenue guarantees, with various physicians
practicing in the communities it serves. In consideration for a
physician relocating to one of its communities and agreeing to
engage in private practice for the benefit of the community, the
Company may advance certain amounts of money to the physician to
assist in establishing his or her practice.
The Company accounts for contract-based physician minimum
revenue guarantees in accordance with Financial Accounting
Standards Board (the FASB) Staff Position
(FSP)
No. 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners
(FSP
FIN 45-3).
Under FSP
FIN 45-3,
the Company records a contract-based intangible asset and a
related guarantee liability for new physician minimum revenue
guarantees and amortizes the contract-based intangible asset to
other operating expenses, in the accompanying condensed
consolidated statements of operations, over the period of the
physician contract, which is typically five years. As of
December 31, 2007 and June 30, 2008, the
Companys liability balance for contract-based physician
minimum revenue guarantees was $15.3 million and
$19.4 million, respectively, which is included in other
current liabilities in the accompanying condensed consolidated
balance sheets.
Non-Competition
Agreements
The Company has entered into non-competition agreements, and
these non-competition agreements are amortized on a
straight-line basis over the term of the agreements.
Certificates
of Need
The construction of new facilities, the acquisition or expansion
of existing facilities and the addition of new services and
certain equipment at the Companys facilities may be
subject to state laws that require prior approval by state
regulatory agencies. These certificates of need laws generally
require that a state agency determine the public need and give
approval prior to the construction or acquisition of facilities
or the addition of new services. The Company operates hospitals
in certain states that have adopted certificate of need laws. If
the Company fails to obtain necessary state approval, the
Company will not be able to expand its facilities,
12
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
complete acquisitions or add new services at its facilities in
these states. These intangible assets have been determined to
have indefinite lives and, accordingly, are not amortized.
Summary
of Intangible Assets
The following table provides information regarding the
Companys intangible assets, which are included in the
accompanying condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
Class of Intangible Asset
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-based physician minimum revenue guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
44.0
|
|
|
$
|
(8.8
|
)
|
|
$
|
35.2
|
|
Additions, net of terminations
|
|
|
11.6
|
|
|
|
1.3
|
|
|
|
12.9
|
|
Amortization expense
|
|
|
|
|
|
|
(4.3
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
55.6
|
|
|
$
|
(11.8
|
)
|
|
$
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
17.3
|
|
|
$
|
(7.0
|
)
|
|
$
|
10.3
|
|
Amortization expense
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
17.3
|
|
|
$
|
(7.6
|
)
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of need:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 and June 30, 2008
|
|
$
|
6.9
|
|
|
$
|
|
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
68.2
|
|
|
$
|
(15.8
|
)
|
|
$
|
52.4
|
|
Additions, net of terminations
|
|
|
11.6
|
|
|
|
1.3
|
|
|
|
12.9
|
|
Amortization expense
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
79.8
|
|
|
$
|
(19.4
|
)
|
|
$
|
60.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Discontinued
Operations
|
Impact
of Discontinued Operations
Effective April 1, 2008, the existing lease agreement of
Colorado River Medical Center (Colorado River), a 25
bed facility located in Needles, California, was terminated, as
discussed in detail within this note.
Effective July 1, 2007, the Company sold Coastal Carolina
Medical Center (Coastal), a 41 bed facility located
in Hardeeville, South Carolina, to Tenet Healthcare Corporation
(Tenet) for approximately $35.0 million, plus
working capital, as discussed in detail within this note.
Effective May 1, 2007, the Company sold St. Josephs
Hospital, a 325 bed facility located in Parkersburg, West
Virginia, to Signature Hospital, LLC for approximately
$68.5 million, plus working capital.
Effective January 1, 2007, the Company sold Saint Francis
Hospital, a 155 bed facility located in Charleston, West
Virginia, to the Herbert J. Thomas Memorial Hospital Association
for approximately $37.5 million, plus working capital.
13
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of operations, net of income taxes, of the
Companys sold hospitals are reflected in the accompanying
condensed consolidated financial statements as discontinued
operations in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
The Company allocated to discontinued operations interest
expense of $0.8 million and $2.5 million for the three
and six months ended June 30, 2007, respectively, and
$0.1 million for the six months ended June 30, 2008.
For those disposed assets that were part of an acquisition group
for which specifically identifiable debt was incurred, the
allocation of interest expense to discontinued operations was
based on the ratio of the disposed net assets to the sum of
total net assets of the acquisition group plus the debt that was
incurred. For those asset acquisitions for which specifically
identifiable debt was not incurred, the allocation of interest
expense to discontinued operations was based on the ratio of
disposed net assets to the sum of total net assets of the
Company plus the Companys total outstanding debt.
The revenues and loss before income taxes, excluding impairment
(charge) adjustment and loss on sale of hospitals, of
discontinued operations were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
18.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
55.9
|
|
|
$
|
1.0
|
|
Loss before income taxes
|
|
|
(4.2
|
)
|
|
|
(0.9
|
)
|
|
|
(5.4
|
)
|
|
|
(1.2
|
)
|
Impairment
Colorado River
In March 2007, the Company, through its indirect subsidiary,
Principal-Needles, Inc. (PNI), signed a letter of
intent with the Board of Trustees of Needles Desert Communities
Hospital (the Board of Trustees) to transfer to the
Board of Trustees substantially all of the operating assets and
net working capital of Colorado River plus $1.5 million in
cash, which approximated the net present value of future lease
payments due under the lease agreement between PNI and the Board
of Trustees in consideration for the termination of the existing
operating lease agreement. Subsequently, in December 2007, the
Company entered into a definitive agreement with the Board of
Trustees that terminated the existing lease agreement effective
April 1, 2008, on which date the Company transferred
Colorado River to the Board of Trustees. In connection with the
signing of the letter of intent in March 2007 and the
termination of the lease agreement effective April 1, 2008,
the Company recognized an impairment charge of $0.7 million
and $8.6 million, net of income taxes, or $0.01 and $0.15
loss per diluted share, for the three and six months ended
June 30, 2007, respectively, and an impairment adjustment
of $2.3 million, net of income taxes, or $0.04 earnings per
diluted share, for the six months ended June 30, 2008. The
impairment charge relates to goodwill impairment, the property
and equipment and net working capital that was originally to be
transferred to the Board of Trustees, for which the Company
anticipated receiving no consideration. The impairment
adjustment relates to the reversal of a portion of the
previously recognized impairment charge for certain net working
capital components that were ultimately excluded from the assets
transferred effective April 1, 2008.
14
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the components of Colorado
Rivers impairment (charge) adjustment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Property and equipment
|
|
$
|
(1.1
|
)
|
|
$
|
|
|
|
$
|
(4.5
|
)
|
|
$
|
|
|
Net working capital
|
|
|
|
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
3.6
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(12.5
|
)
|
|
|
3.6
|
|
Income tax benefit (provision)
|
|
|
0.4
|
|
|
|
|
|
|
|
3.9
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
|
|
|
$
|
(8.6
|
)
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Coastal
Effective July 1, 2007, the Company completed the sale of
Coastal to Tenet. In connection with the execution of the
definitive agreement with Tenet, during the three and six months
ended June 30, 2007, the Company recognized an impairment
charge of $7.8 million, net of income taxes, or $0.14 loss
per diluted share.
The following table sets forth the components of Coastals
impairment charge (in millions) during the three and six months
ended June 30, 2007:
|
|
|
|
|
Goodwill
|
|
$
|
(7.2
|
)
|
Intangible assets
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
(7.6
|
)
|
Income tax provision
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
$
|
(7.8
|
)
|
|
|
|
|
|
|
|
Note 7.
|
Interest
Rate Swap
|
On June 1, 2006, the Company entered into an interest rate
swap agreement with Citibank as counterparty. The interest rate
swap agreement, as amended, was effective as of
November 30, 2006 and has a maturity date of May 30,
2011. The Company entered into the interest rate swap agreement
to mitigate the floating interest rate risk on a portion of its
outstanding variable rate borrowings. The interest rate swap
agreement requires the Company to make quarterly fixed rate
payments to Citibank calculated on a notional amount as set
forth in the table below at an annual fixed rate of 5.585% while
Citibank is obligated to make quarterly floating payments to the
Company based on the three-month LIBOR on the same referenced
notional amount. Notwithstanding the terms of the interest rate
swap transaction, the Company is ultimately obligated for all
amounts due and payable under the Credit Agreement, as amended
and restated, supplemented or otherwise modified from time to
time (the Credit Agreement), entered into on
April 15, 2005, with Citicorp North America, Inc.
(CITI), as administrative agent and the lenders
party thereto, Bank of America, N.A., CIBC World Markets Corp.,
SunTrust Bank and UBS Securities LLC, as co-syndication agents
and Citigroup Global Markets Inc., as sole lead arranger and
sole book runner.
15
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
Notional Amount
|
|
Date Range
|
|
(In millions)
|
|
|
November 30, 2006 to November 30, 2007
|
|
$
|
900.0
|
|
November 30, 2007 to November 28, 2008
|
|
$
|
750.0
|
|
November 28, 2008 to November 30, 2009
|
|
$
|
600.0
|
|
November 30, 2009 to November 30, 2010
|
|
$
|
450.0
|
|
November 30, 2010 to May 30, 2011
|
|
$
|
300.0
|
|
On January 1, 2008, the Company adopted the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), with respect to the
valuation of its interest rate swap agreement. The Company did
not adopt the provisions of SFAS No. 157 as it relates
to nonfinancial assets pursuant to FSP
FAS 157-2,
Effective Date of FASB Statement No. 157.
SFAS No. 157 clarifies how companies are required to
use a fair value measure for recognition and disclosure by
establishing a common definition of fair value, a framework for
measuring fair value, and expanding disclosures about fair value
measurements. The adoption of SFAS No. 157 did not
have a material impact on the Companys results of
operations or financial position.
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
The Company determines the fair value of its interest rate swap
based on the amount at which it could be settled, which is
referred to in SFAS No. 157 as the exit price. This
price is based upon observable market assumptions and
appropriate valuation adjustments for credit risk. The Company
has categorized its interest rate swap as Level 2 under
SFAS No. 157.
The interest rate swap agreement exposes the Company to credit
risk in the event of non-performance by Citibank. However, the
Company does not anticipate non-performance by Citibank. The
Company does not hold or issue derivative financial instruments
for trading purposes. The fair value of the Companys
interest rate swap at December 31, 2007 and June 30,
2008 reflects a liability balance of approximately
$31.0 million and $30.5 million, respectively, and is
included in professional and general liability claims and other
liabilities in the accompanying condensed consolidated balance
sheets. The interest rate swap reflects a liability balance as
of December 31, 2007 and June 30, 2008 because of
decreases in market interest rates since inception.
The Company has designated the interest rate swap as a cash flow
hedge instrument. The Company assesses the effectiveness of this
cash flow hedge instrument on a quarterly basis. The Company
completed its assessments of the cash flow hedge instrument at
quarterly intervals during the six months ended June 30,
2008, and determined the hedge to be partially ineffective in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133). Because the notional
amount of the interest rate swap in effect at the quarterly
assessment intervals during the six months ended June 30,
2008 exceeded the Companys outstanding borrowings under
its variable rate debt Credit Agreement, a portion of the cash
flow hedge instrument was determined to be ineffective. The
Company recognized an increase in interest expense of
approximately $0.6 million related to the ineffective
portion of the Companys cash flow hedge during the six
months ended June 30, 2008.
16
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Recently
Issued Accounting Pronouncements
|
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) retains the purchase method of
accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are
recognized in the purchase accounting as well as requiring the
expensing of acquisition-related costs as incurred.
Additionally, SFAS No. 141(R) provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Furthermore,
this standard requires any adjustments to acquired deferred tax
assets and liabilities occurring after the related allocation
period to be made through earnings for both acquisitions
occurring prior and subsequent to the effective date of this
standard. SFAS No. 141(R) is effective for fiscal
years beginning on or after December 15, 2008. Earlier
adoption is prohibited. While the Company is currently assessing
the impact that SFAS No. 141(R) will have on its
results of operations or financial position, the Company will be
required to expense costs related to any future acquisitions
beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
amends Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements
(ARB No. 51), to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.
SFAS No. 160 clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated
financial statements. Additionally, SFAS No. 160
changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the
noncontrolling interest.
SFAS No. 160 requires expanded disclosures in the
consolidated financial statements that clearly identify and
distinguish between the interests of the parents owners
and the interests of the noncontrolling owners of a subsidiary,
including a reconciliation of the beginning and ending balances
of the equity attributable to the parent and the noncontrolling
owners and a schedule showing the effects of changes in a
parents ownership interest in a subsidiary on the equity
attributable to the parent. SFAS No. 160 does not
change ARB No. 51s provisions related to
consolidation purposes or consolidation policy, or the
requirement that a parent consolidate all entities in which it
has a controlling financial interest. SFAS No. 160
does, however, amend certain of ARB No. 51s
consolidation procedures to make them consistent with the
requirements of SFAS No. 141(R) as well as to provide
definitions for certain terms and to clarify some terminology.
In addition to the amendments to ARB No. 51,
SFAS No. 160 amends SFAS No. 128,
Earnings per Share, so that the calculation of
earnings per share amounts in consolidated financial statements
will continue to be based on amounts attributable to the parent.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. Earlier adoption is
prohibited. SFAS No. 160 must be applied prospectively
as of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. The Company is currently assessing the impact
that SFAS No. 160 will have on its results of
operations or financial position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
applies to all derivative instruments and related hedged items
accounted for under SFAS No. 133.
SFAS No. 161 requires entities to provide greater
transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items
affect an entitys financial position, results of
operations, and cash flows. To meet these objectives,
SFAS No. 161 requires (1) qualitative disclosures
about objectives for using derivatives by primary underlying
risk exposure and by purpose or strategy, (2) information
about the volume of derivative activity in a flexible format
that the preparer believes
17
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is the most relevant and practicable, (3) tabular
disclosures about balance sheet location and gross fair value
amounts of derivative instruments, income statement and other
comprehensive income location and amounts of gains and losses on
derivative instruments by type of contract, and
(4) disclosures about credit-risk related contingent
features in derivative agreements. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early
application is encouraged, as are comparative disclosures for
earlier periods, but neither are required. The Company has not
yet fully evaluated the impact that SFAS No. 161 will
have on its results of operations or financial position, but
anticipates that additional disclosure surrounding its interest
rate swap instrument will be required.
On May 9, 2008, the FASB issued FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
specifies that issuers of certain convertible debt instruments
must separately account for the liability and equity components
thereof and reflect interest expense at the entitys market
rate of borrowing for non-convertible debt instruments. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is not permitted. FSP
APB 14-1
requires retrospective application to all periods presented in
the annual financial statements for the period of adoption and
where applicable instruments were outstanding during an earlier
period. The cumulative effect of the change in accounting
principle on periods prior to those presented shall be
recognized as of the beginning of the first period presented. An
offsetting adjustment shall be made to the opening balance of
retained earnings for that period, presented separately. The
Company is currently assessing the impact that FSP APB
14-1 will
have on its results of operations or financial position.
Legal
Proceedings and General Liability Claims
The Company is, from time to time, subject to claims and suits
arising in the ordinary course of business, including claims for
damages for personal injuries, medical malpractice, breach of
contracts, wrongful restriction of or interference with
physicians staff privileges and employment related claims.
In certain of these actions, plaintiffs request payment for
damages, including punitive damages that may not be covered by
insurance. The Company is currently not a party to any pending
or threatened proceeding which, in managements opinion,
would have a material adverse effect on the Companys
business, financial condition or results of operations.
Physician
Commitments
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements with various
physicians practicing in the communities it serves. In
consideration for a physician relocating to one of its
communities and agreeing to engage in private practice for the
benefit of the community, the Company may advance certain
amounts of money to the physician, normally over a period of one
year, to assist in establishing the physicians practice.
The amount of commitments the Company estimates it will advance
to physicians as of June 30, 2008 is $19.4 million and
often depends upon the financial results of a physicians
private practice during the guarantee period. Generally, amounts
advanced under the recruiting agreements may be forgiven pro
rata over a period of 48 months contingent upon the
physician continuing to practice in the community. Pursuant to
the Companys standard physician recruiting agreement, any
breach or non-fulfillment by a physician under the physician
recruiting agreement gives the Company the right to recover any
payments made to the physician under the agreement.
18
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Capital
Expenditure Commitments
The Company is reconfiguring some of its facilities to
accommodate patient services more effectively and restructuring
existing surgical capacity in some of its hospitals to permit
additional patient volume and a greater variety of services. The
Company has incurred approximately $27.7 million in
uncompleted projects as of June 30, 2008, which is included
as construction in progress in the Companys accompanying
condensed consolidated balance sheet. At June 30, 2008, the
Company had projects under construction with an estimated cost
to complete and equip of approximately $137.6 million. The
Company is subject to annual capital expenditure commitments in
connection with several of its facilities.
Acquisitions
The Company has historically acquired businesses with prior
operating histories. Acquired companies may have unknown or
contingent liabilities, including liabilities for failure to
comply with healthcare laws and regulations, medical and general
professional liabilities, workers compensation liabilities,
previous tax liabilities and unacceptable business practices.
Although the Company institutes policies designed to conform
practices to its standards following completion of acquisitions,
there can be no assurance that the Company will not become
liable for past activities 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.
19
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
We recommend that you read this discussion together with our
unaudited condensed consolidated financial statements and
related notes included elsewhere in this report, as well as our
2007 Annual Report on
Form 10-K.
Unless otherwise indicated, all relevant financial and
statistical information included herein relates to our
continuing operations.
Overview
We operate general acute care hospitals in non-urban communities
in the United States. We seek to fulfill our mission of making
communities healthier by striving to: (1) improve the
quality and types of healthcare services available in our
communities; (2) provide physicians with a positive
environment in which to practice medicine, with access to
necessary equipment, office space and resources;
(3) develop and provide a positive work environment for
employees; (4) expand each hospitals role as a
community asset; and (5) improve each hospitals
financial performance.
The following table reflects our summarized operating results
for the periods presented (in millions, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
654.3
|
|
|
$
|
680.8
|
|
|
$
|
1,315.5
|
|
|
$
|
1,380.7
|
|
Income from continuing operations
|
|
$
|
24.6
|
|
|
$
|
31.5
|
|
|
$
|
63.3
|
|
|
$
|
71.2
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.43
|
|
|
$
|
0.59
|
|
|
$
|
1.11
|
|
|
$
|
1.31
|
|
Key
Challenges
We anticipate increasing our revenues and profitability on both
a long-term and short-term basis. However, we have the following
internal and external key challenges to overcome:
|
|
|
|
|
Inpatient Volumes. We have experienced
declining inpatient volumes during the past year. This was the
result of physician attrition in several of our markets, lack of
disease across our markets, the closure of certain unprofitable
service lines at a few of our hospitals and the long-term
industry trend of inpatient services shifting to outpatient
services. We will focus on adding or further emphasizing service
lines that are needed in our communities.
|
The following table reflects our quarterly admissions for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
|
52,207
|
|
|
|
52,358
|
|
Second Quarter
|
|
|
48,191
|
|
|
|
47,076
|
|
Third Quarter
|
|
|
48,367
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
47,990
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,755
|
|
|
|
99,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases in Provision for Doubtful
Accounts. We have experienced an increase in our
provision for doubtful accounts during recent years. These
increases were the result of an increased number of uninsured
patients and an increase in co-payments and deductibles from
healthcare plan design changes. These changes increase
collection costs and reduce overall cash collections. However,
we experienced a decrease in our provision for doubtful accounts
during the three months ended June 30, 2008, as compared to
the same period in 2007, which is discussed later in this report
under Operating Results Summary Provision
for Doubtful Accounts.
|
20
Our quarterly provision for doubtful accounts was as follows for
the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
Doubtful Accounts
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
73.2
|
|
|
$
|
82.7
|
|
Second Quarter
|
|
|
81.2
|
|
|
|
76.7
|
|
Third Quarter
|
|
|
78.7
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
81.1
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
314.2
|
|
|
$
|
159.4
|
|
|
|
|
|
|
|
|
|
|
Our revenues decrease when we write-off patient accounts
identified as charity and indigent care. Our hospitals write-off
a portion of a patients account upon the determination
that the patient qualifies under the hospitals
charity/indigent care policy. In the event that a patient
account was previously classified as self-pay when the
determination of charity/indigent status is made, a
corresponding reduction in the provision for doubtful accounts
may occur.
The following table reflects our quarterly charity and indigent
care write-offs for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Charity and
|
|
|
|
Indigent Care
|
|
|
|
Write-Offs
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
14.9
|
|
|
$
|
13.6
|
|
Second Quarter
|
|
|
13.5
|
|
|
|
13.3
|
|
Third Quarter
|
|
|
11.8
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
11.4
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51.6
|
|
|
$
|
26.9
|
|
|
|
|
|
|
|
|
|
|
The provision for doubtful accounts, as well as charity and
indigent care write-offs, relate primarily to self-pay revenues.
The following table reflects our quarterly self-pay revenues,
net of charity and indigent care write-offs and uninsured
discounts, for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Self-Pay Revenues
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
74.7
|
|
|
$
|
79.5
|
|
Second Quarter
|
|
|
79.4
|
|
|
|
82.3
|
|
Third Quarter
|
|
|
80.3
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
75.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310.0
|
|
|
$
|
161.8
|
|
|
|
|
|
|
|
|
|
|
Certain changes were made to our historical self-pay revenues in
the table above. Specifically, we historically classified
uninsured discounts as revenue deductions for HMOs, PPOs and
other private insurers. We changed the classification of
uninsured discounts to revenue deductions for self-pay revenues
effective in this quarterly report on
Form 10-Q
for all periods reported. This change had no impact on our
historical results of operations. The effect of these changes
reduced our self-pay revenues in the above table. We have
determined that it is more appropriate to apply uninsured
discounts as revenue deductions against self-pay revenues rather
than against HMOs, PPOs and other private insurers revenues.
21
The following table shows our revenue days outstanding reflected
in our net accounts receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Revenue Days
|
|
|
|
Outstanding
|
|
|
|
in Accounts
|
|
|
|
Receivable
|
|
|
|
2007
|
|
|
2008
|
|
|
March 31
|
|
|
43.4
|
|
|
|
41.4
|
|
June 30
|
|
|
42.7
|
|
|
|
41.3
|
|
September 30
|
|
|
43.3
|
|
|
|
N/A
|
|
December 31
|
|
|
42.5
|
|
|
|
N/A
|
|
The approximate percentages of billed hospital receivables,
which is a component of total accounts receivable, are
summarized as follows as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
Insured receivables
|
|
|
33.2
|
%
|
|
|
34.9
|
%
|
|
|
34.6
|
%
|
Uninsured receivables (including co-payments and deductibles)
|
|
|
66.8
|
|
|
|
65.1
|
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate percentages of billed hospital receivables in
summarized aging categories are as follows as of the dates
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
0 to 60 days
|
|
|
45.1
|
%
|
|
|
48.2
|
%
|
|
|
48.7
|
%
|
61 to 150 days
|
|
|
19.9
|
|
|
|
17.6
|
|
|
|
18.8
|
|
Over 150 days
|
|
|
35.0
|
|
|
|
34.2
|
|
|
|
32.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to implement a number of operating strategies
related to cash collections. However, if the trend of increasing
self-pay revenues accompanied by increasing levels of write-offs
continues, our future results of operations and future financial
position could be materially adversely affected.
|
|
|
|
|
Physician Recruitment and
Retention. Recruiting, attracting and retaining
both primary care physicians and specialists for our non-urban
communities is a key to increasing revenues, patient volumes and
the value that the communities place on our hospitals. The
medical staffs at our hospitals are typically small and our
revenues are negatively affected by the loss of physicians. The
success of our recruiting efforts will depend on several
factors. In general, there is a shortage of specialty care
physicians. We face intense competition in the recruitment and
retention of specialists because of concerns sometimes held
about practicing or remaining in practice in non-urban
communities. If the growth rate slows in the non-urban
communities where our hospitals operate, then we could
experience difficulty attracting and retaining physicians to
practice in our communities.
|
|
|
|
Challenges in Professional and General Liability
Costs. Professional and general liability costs
remain a challenge to us and we expect this pressure to continue
in the future. Additionally, we experienced unfavorable claims
development results recently, which are reflected in our
professional and general liability costs. We self-insure a
substantial portion of our professional and general liability
costs.
|
|
|
|
Shortage of Clinical Personnel and Utilization of Contract
Labor. In recent years, many hospitals, including
some of the hospitals we own, have encountered difficulty in
recruiting and retaining nurses and other clinical personnel.
When we are unable to staff our nursing and other clinical
positions, we are required to use contract labor to ensure
adequate patient care. Contract labor generally costs more
|
22
|
|
|
|
|
per hour than employed labor. We have adopted a number of human
resources strategies in an attempt to improve our ability to
recruit and retain nurses and other clinical personnel. However,
we expect that staffing issues related to nurses and other
clinical personnel will continue in the future. Additionally, we
have incurred an increase in professional fees primarily for
anesthesiology, hospitalists, fees for on-call coverage for
physicians, and emergency room services. Our expense for
professional fees paid to hospital-based physicians has
increased as the shortage of these physicians becomes more acute.
|
|
|
|
|
|
Indebtedness. Our consolidated debt was
$1,523.6 million as of June 30, 2008, and we incurred
$44.7 million of net interest expense during the six months
ended June 30, 2008. Our indebtedness decreases our net
income and reduces the amount of funds available for operations,
capital expenditures and future acquisitions. We are in
compliance with our financial debt covenants as of June 30,
2008 and believe we will be in compliance with them throughout
the remainder of 2008.
|
|
|
|
Medicare Changes Hospital Inpatient Prospective
Payment System. Changes with respect to
governmental reimbursement affect our revenues and earnings. On
August 1, 2007, the Centers for Medicare and Medicaid
Services (CMS) issued its hospital inpatient
prospective payment system (IPPS) final rule for
Federal Fiscal year (FFY) 2008, which began on
October 1, 2007. Among other items, the final rule created
745 new severity-adjusted diagnosis-related groups
(Medicare Severity DRGs or MS-DRGs) to
replace Medicares previous 538 DRGs. The new MS-DRGs are
being phased-in over a two-year period. In addition, the final
rule also provided for a market basket increase of 3.3% in FFY
2008 for hospitals that report certain patient care quality
measures and an increase of 1.3% for hospitals that do not
submit this information. However, to offset the effect of the
coding and discharge classification changes that CMS believes
will occur as hospitals implement the MS-DRG system, the final
rule also reduced Medicare payments to hospitals by 1.2% in FFY
2008 and 1.8% in both FFY 2009 and 2010. Subsequently, on
September 29, 2007, President Bush signed Public Law
No. 110-90,
effectively decreasing these reductions for FFY 2008 to 0.6% and
FFY 2009 to 0.9%. CMS has announced that it plans to conduct a
look-back beginning in FFY 2010 and to make
appropriate changes to the reduction percentages based on actual
claims data. The implementation of the MS-DRG system and the
other provisions of the final rule have resulted in our Medicare
acute inpatient hospital reimbursement increasing approximately
2.5% for the first nine months of FFY 2008.
|
On July 31, 2008, CMS issued the IPPS final rule for FFY
2009. Among other items, the final rule completes the two-year
phase-in of MS-DRGs. It also provides for a market basket
increase of 3.6% in FFY 2009 for hospitals that report certain
patient care quality measures and an increase of 1.6% for
hospitals that do not submit this information. As mentioned
above, Public Law
No. 110-90
reduces payment rates by 0.9% for FFY 2009 to account for the
coding and discharge classification changes that CMS believes
will occur as a result of the implementation of the MS-DRG
system. In addition to the payment rate changes, the final rule
reduces the outlier threshold from $22,185 to $20,185 in FFY
2009, adds 13 new patient care quality measures that hospitals
would be required to report in order to receive the full market
basket increase in FFY 2010, and adds two additional categories
of conditions that CMS will no longer reimburse at a higher
weighted MS-DRG when those conditions are acquired in a
hospital. The final rule also contains a number of amendments to
the CMS regulations that implement the Stark Law and finalized
its proposal on the Disclosure of Financial Relationships Report
which requires selected hospitals to disclose certain
information regarding each hospitals ownership, investment
and compensation relationships with physicians. CMS anticipates
that the payment changes in the final rule would increase
Medicare payments to acute care hospitals by nearly
$4.75 billion in FFY 2009. Although difficult to predict,
the provisions of the final rule may result in our Medicare
acute inpatient hospital reimbursement increasing in a range
between 3.0% to 3.5% in FFY 2009.
|
|
|
|
|
Medicare Changes Medicare Hospital Outpatient
Prospective Payment System. On November 1,
2007, CMS issued its final hospital outpatient prospective
payment system rule for calendar year 2008. Among other
provisions, this includes a 3.3% market basket update and
requires hospitals to begin reporting on seven quality measures
of emergency department and perioperative surgical care.
|
23
On July 3, 2008, CMS released the outpatient prospective
payment system proposed rule for calendar year 2009. Among other
provisions, the proposed rule includes a 3.0% market basket
update for outpatient services in 2009. CMS also proposes to
include an additional four quality measures of medical imaging
efficiency in order for hospitals to receive the full payment
update in 2010. Beginning in calendar year 2009, the annual
payment update factor will be reduced by 2.0 percentage
points for hospitals that do not report those measures.
|
|
|
|
|
Medicare Changes Inpatient Rehabilitation
Facility Prospective Payment System. On
July 31, 2007, CMS published its Medicare inpatient
rehabilitation facility prospective payment system final rule
for FFY 2008. The final rule increased the inpatient
rehabilitation facility (IRF) payment rate by 3.2%
and the high-cost outlier threshold from $5,534 to $7,362 for
FFY 2008. The final rule also continued the phase-in of the
requirement that at least 75% of an IRFs patients have one
of 13 designated medical conditions, which has resulted in
decreased volume in our rehabilitation units. However, the
Medicare, Medicaid and SCHIP Extension Act of 2007
(MMSEA), enacted on December 29, 2007,
permanently froze the compliance threshold at 60% effective for
cost reporting periods beginning on or after July 1, 2006,
and allows co-morbid conditions to count toward this threshold.
MMSEA also set the IRF prospective payment system rate increase
factor for FFYs 2008 and 2009 at 0%, effective for discharges
beginning on or after April 1, 2008. On July 31, 2008,
CMS issued its final IRF payment system rule for FFY 2009. In
addition to implementing the changes required by MMSEA, the
final rule sets the outlier threshold for FFY 2009 at $10,250
and updates the IRF prospective payment systems case mix
group relative weights and average length of stay values using
FFY 2007 information. CMS anticipates that the final rule will
decrease aggregate IRF payments by $40.0 million in FFY
2009.
|
|
|
|
Medicaid Changes. States have adopted, or may
be considering, legislation designed to reduce coverage and
program eligibility, enroll Medicaid recipients in managed care
programs
and/or
impose additional taxes on hospitals to help finance or expand
the states Medicaid systems. Future legislation or other
changes in the administration or interpretation of government
health programs could have a material adverse effect on our
financial position and results of operations. On May 25,
2007, CMS issued a final rule entitled Medicaid Program:
Cost Limit for Providers Operated by Units of Government and
Provisions to Ensure the Integrity of Federal-State Financial
Partnership, which was expected to reduce federal Medicaid
funding by $4.0 billion over five years. On the same date,
President Bush signed into law HR 2206, which placed a
moratorium on the implementation of this rule for one year. On
June 30, 2008, President Bush signed into law HR 2642, the
Supplemental Appropriations Act of 2008. This legislation
extends the moratorium on this rule and five other pending
Medicaid rules until April 1, 2009. However, when the
moratorium expires next year, this final rule could
significantly impact state Medicaid programs and our revenue
from these programs.
|
|
|
|
NPI Implementation. To improve the efficiency
of the national healthcare system, the Health Insurance
Portability and Accountability Act of 1996 (HIPAA)
required the Department of Health and Human Services
(HHS) to adopt regulations that, among other things,
established a uniform set of national standards for electronic
healthcare transactions. As part of those regulations, HHS
adopted a requirement that all covered healthcare providers
obtain and use a National Provider Indentifier (NPI)
in all covered electronic healthcare transactions, which
includes the electronic submission of healthcare claims. The NPI
is intended to replace the multiple legacy or
existing Medicare, Medicaid, and private third party payor
provider numbers healthcare providers are currently required to
use. CMS has been phasing in the use of the NPI in the Medicare
program over the past several months. However, beginning
May 23, 2008, all Medicare claims must be submitted under
the providers NPI and Medicare fiscal intermediaries will
no longer accept claims that contain the providers
existing Medicare provider number. Some providers have
encountered difficulties and have had their claims rejected by
the Medicare payment system for issues relating to the
implementation of the NPI.
|
|
|
|
Increases in Supply Costs. During the past few
years, we have experienced an increase in supply costs
per-equivalent admission, especially in the areas of
pharmaceutical, orthopedic, oncology and cardiac supplies. We
participate in a group purchasing organization in an attempt to
achieve lower supply costs
|
24
|
|
|
|
|
from our vendors. Because of the fixed reimbursement nature of
most governmental and commercial payor arrangements, we may not
be able to recover supply cost increases through increased
revenues.
|
|
|
|
|
|
Dependence on Information Systems. Our
business depends significantly on effective information systems
to process clinical and financial information. Our acquisition
activity requires transitions from, and the integration of,
various information systems that are used by hospitals we
acquire. We rely heavily on HCA-IT for information systems
integration pursuant to our contractual arrangement for
information technology services. HCA-IT provides us with
financial, clinical, patient accounting and network information
systems. Effective May 19, 2008, we entered into an
agreement with HCA-IT, which superseded and replaced our
previous agreement with HCA-IT dated May 11, 1999, as
amended. Our new contract with HCA-IT expires on
December 31, 2017 (including a wind-down period) unless
extended by the parties.
|
|
|
|
Summary. Each of our challenges are
intensified by our inability to control related trends and the
associated risks. Therefore, our actual results may differ from
our expectations. To maintain or improve operating margins in
the future, we must, among other things, increase patient
volumes by developing service lines in response to needs in the
communities we serve.
|
Hospital
Acquisitions
We seek to identify and acquire selected hospitals in non-urban
communities. In evaluating a hospital for acquisition, we focus
on a variety of factors. One factor we consider is the number of
patients that are traveling outside of the community for
healthcare services. Another factor we consider is the
hospitals prior operating history and our ability to
implement new healthcare services. In addition, we review the
local demographics and expected future trends. Upon acquiring a
facility, we work to integrate the hospital quickly into our
operating practices. Part I, Item 2. Properties
in our 2007 Annual Report on
Form 10-K
contains a table of our hospitals, including acquisition dates,
which is updated through the date of this report under the
caption Discontinued Operations below. Our results
of operations include the operations of our acquisitions since
the effective date of each acquisition.
Discontinued
Operations
From time to time, we evaluate our facilities and may sell
assets which we believe may no longer fit with our long-term
strategy for various reasons.
Effective April 1, 2008, the existing lease agreement of
Colorado River Medical Center (Colorado River), a 25
bed facility located in Needles, California, was terminated, as
discussed in detail below.
Effective July 1, 2007, we sold Coastal Carolina Medical
Center (Coastal), a 41 bed facility located in
Hardeeville, South Carolina, to Tenet Healthcare Corporation
(Tenet) for approximately $35.0 million, plus
working capital.
Effective May 1, 2007, we sold St. Josephs Hospital,
a 325 bed facility located in Parkersburg, West Virginia, to
Signature Hospital, LLC for approximately $68.5 million,
plus working capital.
Effective January 1, 2007, we sold Saint Francis Hospital,
a 155 bed facility located in Charleston, West Virginia, to the
Herbert J. Thomas Memorial Hospital Association for
approximately $37.5 million, plus working capital.
25
The following table reflects our summarized operating results of
discontinued operations for the periods presented (in millions,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
18.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
55.9
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2.6
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(0.9
|
)
|
Impairment (charge) adjustment
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
(16.4
|
)
|
|
|
2.3
|
|
Loss on sale of hospitals
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(11.2
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(20.1
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from discontinued operations
|
|
$
|
(0.20
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Colorado River
In March 2007, we signed a letter of intent with the Board of
Trustees of Needles Desert Communities Hospital (the Board
of Trustees) to transfer to the Board of Trustees
substantially all of the operating assets and net working
capital of Colorado River plus $1.5 million in cash, which
approximated the net present value of future lease payments due
under the lease agreement between us and the Board of Trustees
in consideration for the termination of the existing operating
lease agreement. Subsequently, in December 2007, we entered into
a definitive agreement with the Board of Trustees that
terminated the existing lease agreement effective April 1,
2008, on which date we transferred Colorado River to the Board
of Trustees. In connection with the signing of the letter of
intent in March 2007 and the termination of the lease agreement
effective April 1, 2008, we recognized an impairment charge
of $0.7 million and $8.6 million, net of income taxes,
or $0.01 and $0.15 loss per diluted share, for the six months
ended June 30, 2007, respectively, and an impairment
adjustment of $2.3 million, net of income taxes, or $0.04
earnings per diluted share, for the six months ended
June 30, 2008. The impairment charge relates to goodwill
impairment, as well as the property and equipment and net
working capital that was originally expected to be transferred
to the Board of Trustees, for which we anticipated receiving no
consideration. The impairment adjustment relates to the reversal
of a portion of the previously recognized impairment charge for
certain net working capital components that were ultimately
excluded from the assets transferred effective April 1,
2008.
The following table sets forth the components of Colorado
Rivers impairment (charge) adjustment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
Property and equipment
|
|
$
|
(1.1
|
)
|
|
$
|
|
|
|
$
|
(4.5
|
)
|
|
$
|
|
|
|
|
|
|
Net working capital
|
|
|
|
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
3.6
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(12.5
|
)
|
|
|
3.6
|
|
|
|
|
|
Income tax benefit (provision)
|
|
|
0.4
|
|
|
|
|
|
|
|
3.9
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
|
|
|
$
|
(8.6
|
)
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Impairment
Coastal
Effective July 1, 2007, we completed the sale of Coastal to
Tenet. In connection with the execution of the definitive
agreement with Tenet, during the three months ended
June 30, 2007, we recognized an impairment charge of
$7.8 million, net of income taxes, or $0.14 loss per
diluted share.
The following table sets forth the components of our impairment
charge related to Coastal during the three and six months ended
June 30, 2007 (in millions):
|
|
|
|
|
Goodwill
|
|
$
|
(7.2
|
)
|
Intangible assets
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
(7.6
|
)
|
Income tax provision
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
$
|
(7.8
|
)
|
|
|
|
|
|
Revenue
Sources
Our hospitals generate revenues by providing healthcare services
to our patients. The majority of these healthcare services are
directed by physicians. We are paid for these healthcare
services from a number of different sources, depending upon the
patients medical insurance coverage. Primarily, we are
paid by governmental Medicare and Medicaid programs, commercial
insurance, including managed care organizations, and directly by
the patient. The amounts we are paid for providing healthcare
services to our patients vary depending upon the payor.
Governmental payors generally pay significantly less than the
hospitals customary charges for the services provided.
Please refer to Part I, Item 1. Business,
Sources of Revenue in our 2007 Annual
Report on
Form 10-K
for a detailed discussion of our revenue sources.
Revenues from governmental payors, such as Medicare and
Medicaid, are controlled by complex rules and regulations that
stipulate the amount a hospital is paid for providing healthcare
services. Our compliance with these rules and regulations
requires an extensive effort to ensure we remain eligible to
participate in these governmental programs. In addition, these
rules and regulations are subject to frequent changes as a
result of legislative and administrative action on both the
federal and the state levels. For these reasons, revenues from
governmental programs change frequently and require us to
monitor regularly the environment in which these governmental
programs operate.
Revenues from HMOs, PPOs and other private insurers are subject
to contracts and other arrangements that require us to discount
the amounts we customarily charge for healthcare services. These
discounted arrangements often limit our ability to increase
charges in response to increasing costs. We actively negotiate
with these payors to seek to maintain or increase the pricing of
our healthcare services. Insured patients are generally not
responsible for any difference between customary hospital
charges and the amounts received from commercial insurance
payors. However, insured patients are responsible for payments
not covered by insurance, such as exclusions, deductibles and
co-payments.
Self-pay revenues are primarily generated through the treatment
of uninsured patients. Our hospitals experienced an increase in
self-pay revenues during recent years.
Critical
Accounting Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to
be critical if:
|
|
|
|
|
it requires assumptions to be made that were uncertain at the
time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have
been made could have a material impact on our consolidated
results of operations or financial condition.
|
27
Our critical accounting estimates are more fully described in
our Annual 2007 Report on
Form 10-K
and continue to include the following areas:
|
|
|
|
|
Allowance for doubtful accounts and provision for doubtful
accounts;
|
|
|
|
Revenue recognition/Allowance for contractual discounts;
|
|
|
|
Accounting for stock-based compensation;
|
|
|
|
Goodwill and accounting for business combinations;
|
|
|
|
Professional and general liability claims; and
|
|
|
|
Accounting for income taxes.
|
Critical
Accounting Estimate Update
For 2008, we modified our quarterly process for estimating our
reserve for our critical accounting estimate for professional
and general liability claims by reducing the number of actuarial
calculations upon which the reserve is determined from the
average of two calculations to one.
Results
of Operations
The following definitions apply throughout the remaining portion
of Managements Discussion and Analysis of Financial
Condition and Results of Operations:
Admissions. Represents the total number of
patients admitted (in the facility for a period in excess of
23 hours) to our hospitals and used by management and
investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations
information excludes the operations of hospitals that are
classified as discontinued operations.
Emergency room visits. Represents the total
number of hospital-based emergency room visits.
Equivalent admissions. Management and
investors use equivalent admissions as a general measure of
combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the
outpatient factor (the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by
gross inpatient revenue). The equivalent admissions computation
equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a
general measure of combined inpatient and outpatient volume.
ESOP. Employee stock ownership plan. The ESOP
is a defined contribution retirement plan that covers
substantially all of our employees.
Medicare case mix index. Refers to the acuity
or severity of illness of an average Medicare patient at our
hospitals.
N/A. Not applicable.
N/M. Not meaningful.
Outpatient surgeries. Outpatient surgeries are
those surgeries that do not require admission to our hospitals.
28
Operating
Results Summary
The following tables present summaries of results of operations
for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
654.3
|
|
|
|
100.0
|
%
|
|
$
|
680.8
|
|
|
|
100.0
|
%
|
|
$
|
1,315.5
|
|
|
|
100.0
|
%
|
|
$
|
1,380.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
257.1
|
|
|
|
39.3
|
|
|
|
271.6
|
|
|
|
39.9
|
|
|
|
514.0
|
|
|
|
39.1
|
|
|
|
547.0
|
|
|
|
39.6
|
|
Supplies
|
|
|
89.7
|
|
|
|
13.7
|
|
|
|
95.3
|
|
|
|
14.0
|
|
|
|
182.1
|
|
|
|
13.8
|
|
|
|
190.8
|
|
|
|
13.8
|
|
Other operating expenses
|
|
|
123.0
|
|
|
|
18.8
|
|
|
|
126.5
|
|
|
|
18.5
|
|
|
|
237.3
|
|
|
|
18.1
|
|
|
|
251.8
|
|
|
|
18.3
|
|
Provision for doubtful accounts
|
|
|
81.2
|
|
|
|
12.4
|
|
|
|
76.7
|
|
|
|
11.3
|
|
|
|
154.4
|
|
|
|
11.7
|
|
|
|
159.4
|
|
|
|
11.5
|
|
Depreciation and amortization
|
|
|
34.4
|
|
|
|
5.3
|
|
|
|
34.2
|
|
|
|
5.1
|
|
|
|
66.9
|
|
|
|
5.1
|
|
|
|
67.5
|
|
|
|
5.0
|
|
Interest expense, net
|
|
|
25.4
|
|
|
|
3.9
|
|
|
|
22.2
|
|
|
|
3.3
|
|
|
|
51.8
|
|
|
|
3.9
|
|
|
|
44.7
|
|
|
|
3.2
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
610.8
|
|
|
|
93.4
|
|
|
|
626.8
|
|
|
|
92.1
|
|
|
|
1,206.5
|
|
|
|
91.7
|
|
|
|
1,261.5
|
|
|
|
91.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interests and
income taxes
|
|
|
43.5
|
|
|
|
6.6
|
|
|
|
54.0
|
|
|
|
7.9
|
|
|
|
109.0
|
|
|
|
8.3
|
|
|
|
119.2
|
|
|
|
8.6
|
|
Minority interests in earnings of consolidated entities
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
42.7
|
|
|
|
6.5
|
|
|
|
53.4
|
|
|
|
7.8
|
|
|
|
107.9
|
|
|
|
8.2
|
|
|
|
117.9
|
|
|
|
8.5
|
|
Provision for income taxes
|
|
|
18.1
|
|
|
|
2.8
|
|
|
|
21.9
|
|
|
|
3.2
|
|
|
|
44.6
|
|
|
|
3.4
|
|
|
|
46.7
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
24.6
|
|
|
|
3.7
|
%
|
|
$
|
31.5
|
|
|
|
4.6
|
%
|
|
$
|
63.3
|
|
|
|
4.8
|
%
|
|
$
|
71.2
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended June 30, 2007 and 2008
Revenues
The increase in our revenues for the three months ended
June 30, 2008 as compared to the three months ended
June 30, 2007, was primarily the result of increases in
outpatient diagnostic services, such as CT imaging and
laboratory services, as well as revenues per equivalent
admission. This was partially offset by a decrease in our
admissions and surgical volumes during the three months ended
June 30, 2008 as compared to the same period last year.
Adjustments to estimated reimbursement amounts increased our
revenues by $2.8 million and $1.9 million for the
three months ended June 30, 2007 and 2008, respectively.
29
The following table shows the key drivers of our revenues for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions
|
|
|
48,191
|
|
|
|
47,076
|
|
|
|
(1,115
|
)
|
|
|
(2.3
|
)%
|
Equivalent admissions
|
|
|
96,121
|
|
|
|
95,059
|
|
|
|
(1,062
|
)
|
|
|
(1.1
|
)
|
Revenues per equivalent admission
|
|
$
|
6,807
|
|
|
$
|
7,162
|
|
|
$
|
355
|
|
|
|
5.2
|
|
Medicare case mix index
|
|
|
1.24
|
|
|
|
1.27
|
|
|
|
0.03
|
|
|
|
2.4
|
|
Average length of stay (days)
|
|
|
4.2
|
|
|
|
4.3
|
|
|
|
0.1
|
|
|
|
2.4
|
|
Inpatient surgeries
|
|
|
14,459
|
|
|
|
13,897
|
|
|
|
(562
|
)
|
|
|
(3.9
|
)
|
Outpatient surgeries
|
|
|
37,531
|
|
|
|
37,455
|
|
|
|
(76
|
)
|
|
|
(0.2
|
)
|
Emergency room visits
|
|
|
221,645
|
|
|
|
221,186
|
|
|
|
(459
|
)
|
|
|
(0.2
|
)
|
Outpatient factor
|
|
|
1.99
|
|
|
|
2.02
|
|
|
|
0.03
|
|
|
|
1.5
|
|
The following table shows the sources of our revenues by payor
for the periods presented, expressed as percentages of total
revenues, including adjustments to estimated reimbursement
amounts:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Medicare
|
|
|
33.3
|
%
|
|
|
31.6
|
%
|
Medicaid
|
|
|
9.4
|
|
|
|
9.5
|
|
HMOs, PPOs and other private insurers
|
|
|
41.9
|
|
|
|
44.1
|
|
Self-Pay
|
|
|
12.1
|
|
|
|
12.1
|
|
Other
|
|
|
3.3
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Certain changes have been made to our historical sources of
revenues table above. Specifically, we historically classified
uninsured discounts as revenue deductions for HMOs, PPOs and
other private insurers. We changed the classification of
uninsured discounts to revenue deductions for self-pay revenues
effective in this quarterly report on
Form 10-Q
for all periods reported. This change had no impact on our
historical results of operations. Generally, these
reclassifications reduced self-pay as a percentage of total
revenues and increased HMOs, PPOs, and other private insurers as
a percentage of total revenues. We have determined that it is
more appropriate to apply uninsured discounts as revenue
deductions against self-pay revenues rather than against HMOs,
PPOs and other private insurers revenues.
30
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the periods presented (dollars in millions, except
for salaries and benefits per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
197.4
|
|
|
|
30.2
|
%
|
|
$
|
211.6
|
|
|
|
31.1
|
%
|
|
$
|
14.2
|
|
|
|
7.2
|
%
|
Stock-based compensation
|
|
|
3.6
|
|
|
|
0.5
|
|
|
|
5.8
|
|
|
|
0.8
|
|
|
|
2.2
|
|
|
|
61.9
|
|
Employee benefits
|
|
|
39.3
|
|
|
|
6.0
|
|
|
|
40.7
|
|
|
|
6.0
|
|
|
|
1.4
|
|
|
|
3.6
|
|
Contract labor
|
|
|
12.7
|
|
|
|
2.0
|
|
|
|
11.3
|
|
|
|
1.7
|
|
|
|
(1.4
|
)
|
|
|
(11.7
|
)
|
ESOP expense
|
|
|
4.1
|
|
|
|
0.6
|
|
|
|
2.2
|
|
|
|
0.3
|
|
|
|
(1.9
|
)
|
|
|
(47.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257.1
|
|
|
|
39.3
|
%
|
|
$
|
271.6
|
|
|
|
39.9
|
%
|
|
$
|
14.5
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
90.5
|
|
|
|
N/A
|
|
|
|
91.9
|
|
|
|
N/A
|
|
|
|
1.4
|
|
|
|
1.5
|
%
|
Salaries and benefits per equivalent admission
|
|
$
|
2,554
|
|
|
|
N/A
|
|
|
$
|
2,690
|
|
|
|
N/A
|
|
|
$
|
136
|
|
|
|
5.3
|
%
|
Salaries and wages as a percentage of revenues increased during
the three months ended June 30, 2008 as compared to the
three months ended June 30, 2007, primarily as a result of
increases in our average hourly rate. We experienced an increase
in our average hourly rate as a result of market rate increases
for skilled personnel and an increase in our employed
physicians. Additionally, during the three months ended
June 30, 2008, we continued to implement strategies to
reduce our contract labor by employing nurses and other clinical
personnel.
The increase in our stock-based compensation is generally a
result of an increase in the number of outstanding unvested
stock options and nonvested stock and a change in our forfeiture
rate methodology. We changed from a static forfeiture rate
methodology to a dynamic forfeiture rate methodology during the
later half of 2007. The dynamic forfeiture rate methodology
incorporates the lapse of time into the resulting expense
calculation and results in a forfeiture rate that diminishes as
the granted awards approach its vest date. Accordingly, the
dynamic forfeiture rate methodology results in a more consistent
stock compensation expense calculation over the vesting period
of the award. This change in methodology resulted in a higher
stock compensation expense during the three months ended
June 30, 2008 as compared to three months ended
June 30, 2007.
Our ESOP expense has two components: (1) common stock and
(2) cash. Shares of our common stock are allocated ratably
to employee accounts at approximately 70,000 shares each
quarter. The cash component is discretionary and is impacted by
the amount of forfeitures in the ESOP. We made $1.5 million
of discretionary cash contributions to the ESOP during the three
months ended June 30, 2007. There were no cash
contributions made during the three months ended June 30,
2008, which was the primary reason why our ESOP expense
decreased by 47.7% during the three months ended June 30,
2008 as compared to three months ended June 30, 2007.
31
Supplies
The following table summarizes our supplies expense for the
periods presented (dollars in millions, except for supplies per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
89.7
|
|
|
$
|
95.3
|
|
|
$
|
5.6
|
|
|
|
6.0
|
%
|
Supplies as a percentage of revenues
|
|
|
13.7
|
%
|
|
|
14.0
|
%
|
|
|
30
|
bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
935
|
|
|
$
|
994
|
|
|
$
|
59
|
|
|
|
6.3
|
%
|
Our supplies expense increased for the three months ended
June 30, 2008 compared to the three months ended
June 30, 2007, primarily as a result of increases in
supplies per equivalent admission. Supplies as a percentage of
revenues and supplies per equivalent admission increased as a
result of rising supply costs, particularly those related to
pharmaceutical products, orthopedic implants and other
surgical-related supplies.
Other
Operating Expenses
The following table summarizes our other operating expenses for
the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Professional fees
|
|
$
|
13.9
|
|
|
|
2.1
|
%
|
|
$
|
16.2
|
|
|
|
2.4
|
%
|
|
$
|
2.3
|
|
|
|
16.6
|
%
|
Utilities
|
|
|
11.6
|
|
|
|
1.8
|
|
|
|
12.8
|
|
|
|
1.8
|
|
|
|
1.2
|
|
|
|
10.3
|
|
Repairs and maintenance
|
|
|
13.7
|
|
|
|
2.1
|
|
|
|
14.3
|
|
|
|
2.1
|
|
|
|
0.6
|
|
|
|
4.4
|
|
Rents and leases
|
|
|
6.6
|
|
|
|
1.0
|
|
|
|
6.8
|
|
|
|
1.0
|
|
|
|
0.2
|
|
|
|
6.3
|
|
Insurance
|
|
|
11.7
|
|
|
|
1.8
|
|
|
|
11.7
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Physician recruiting
|
|
|
3.5
|
|
|
|
0.5
|
|
|
|
5.9
|
|
|
|
0.9
|
|
|
|
2.4
|
|
|
|
66.2
|
|
Contract services
|
|
|
35.9
|
|
|
|
5.5
|
|
|
|
34.5
|
|
|
|
5.0
|
|
|
|
(1.4
|
)
|
|
|
(3.7
|
)
|
Non-income taxes
|
|
|
9.4
|
|
|
|
1.4
|
|
|
|
8.8
|
|
|
|
1.3
|
|
|
|
(0.6
|
)
|
|
|
(6.2
|
)
|
Other
|
|
|
16.7
|
|
|
|
2.6
|
|
|
|
15.5
|
|
|
|
2.3
|
|
|
|
(1.2
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123.0
|
|
|
|
18.8
|
%
|
|
$
|
126.5
|
|
|
|
18.5
|
%
|
|
$
|
3.5
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the three months
ended June 30, 2008 as compared to the three months ended
June 30, 2007, was primarily a result of increases in
physician recruiting, professional fees, and utilities partially
offset by decreases in contract services and other expenses.
The increase in professional fees was primarily the result of
increases in fees paid for hospitalists and anesthesiology and
emergency room physician coverage, including call coverage. To
attract and retain qualified anesthesiologists, emergency
department specialists and other critical hospital-based
physicians, hospitals in small communities are increasingly
required to guarantee that these physicians will meet or exceed
negotiated minimum income levels. Our expense for professional
fees paid to hospital-based physicians has increased as the
shortage of these physicians becomes more acute. In addition, an
increasing number of physicians are demanding that our hospitals
retain hospitalists and also be paid for call coverage.
The increase in physician recruiting is primarily the result of
an increase in recruiting fees paid and the increase in the
amount of physician minimum revenue guarantee agreements during
the three months ended June 30, 2008 as compared to the
same period last year. Utilities expense increased for the three
months ended June 30, 2008 as compared to the three months
ended June 30, 2007 as a result of higher energy costs.
32
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
81.2
|
|
|
$
|
76.7
|
|
|
$
|
(4.5
|
)
|
|
|
(5.7
|
)%
|
Percentage of revenues
|
|
|
12.4
|
%
|
|
|
11.3
|
%
|
|
|
(110
|
)bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
13.5
|
|
|
$
|
13.3
|
|
|
$
|
(0.2
|
)
|
|
|
(1.5
|
)
|
Percentage of revenues
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
|
(10
|
)bps
|
|
|
N/M
|
|
The decrease in the provision for doubtful accounts for the
three months ended June 30, 2008 as compared to the three
months ended June 30, 2007, was primarily the result of our
continued strategic efforts that led to improved cash
collections. We have experienced an increase in both up-front
cash collections and collections related to insured receivables
for the three months ended June 30, 2008 as compared to the
same period last year. In addition, the decrease in the
provision for doubtful accounts for the three months ended
June 30, 2008 as compared to the same period in 2007, was
partially the result of a self-pay discount program at our
Tennessee hospitals that was effective July 1, 2007. The
provision and allowance for doubtful accounts are critical
accounting estimates and are further discussed in Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Critical Accounting Estimates, in our 2007 Annual
Report on
Form 10-K.
Depreciation
and Amortization
Depreciation and amortization expense decreased slightly for the
three months ended June 30, 2008 compared to the three
months ended June 30, 2007. During the three months ended
June 30, 2007, we revised purchase price allocations for
our 2006 acquisitions. As a result of the purchase price
allocation changes, we recognized an increase in depreciation
and amortization expense of $3.2 million for the three
months ended June 30, 2007. Excluding the $3.2 million
adjustment during the three months ended June 30, 2007,
depreciation and amortization expense increased. This increase
was primarily related to an increase in depreciable property and
equipment from capital projects that we completed during the
later half of 2007 and first half of 2008.
Interest
Expense
The following table summarizes our interest expense for the
periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities, including commitment fees
|
|
$
|
21.3
|
|
|
$
|
8.7
|
|
|
$
|
(12.6
|
)
|
Province
71/2% Senior
Subordinated Notes
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
31/4% Debentures
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
31/2% Notes
|
|
|
1.8
|
|
|
|
5.0
|
|
|
|
3.2
|
|
Interest rate swap (including ineffective portion)
|
|
|
0.8
|
|
|
|
5.0
|
|
|
|
4.2
|
|
Other
|
|
|
0.2
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0
|
|
|
|
20.6
|
|
|
|
(5.4
|
)
|
Amortization of deferred loan costs
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
0.1
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest expense allocation
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
0.8
|
|
Interest income
|
|
|
(0.9
|
)
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
Capitalized interest
|
|
|
(0.7
|
)
|
|
|
(0.2
|
)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25.4
|
|
|
$
|
22.2
|
|
|
$
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The decrease in interest expense during the three months ended
June 30, 2008, as compared to the three months ended
June 30, 2007, was primarily a result of decreases in our
outstanding debt balances and lower interest rates under the
31/2% Notes
as compared to our senior secured credit facilities
(Senior Secured Credit Facilities), discussed in
more detail below under the heading Liquidity and Capital
Resources Senior Secured Credit Facilities. In
May 2007, we issued a total of $575.0 million of our
31/2% Notes.
The net proceeds of approximately $561.7 million were used
to repay a portion of the outstanding borrowings under our
Senior Secured Credit Facilities. Our weighted-average monthly
interest-bearing debt balance, excluding capital leases,
decreased from $1,618.9 million during the three months
ended June 30, 2007 to $1,514.0 million during the
three months ended June 30, 2008. For a further discussion,
see Liquidity and Capital Resources Debt.
The decreases in our interest expense noted above were partially
offset by an increase in interest expense related to our
interest rate swap. The increase in our interest rate swap
interest expense during the three months ended June 30,
2008, as compared to the three months ended June 30, 2007
was the result of an increase in the spread between our payment
rate, which is based on an annual fixed rate of 5.585% and our
receipt rate, which is based on the prevailing three-month LIBOR
floating rate.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
18.1
|
|
|
$
|
21.9
|
|
|
$
|
3.8
|
|
Effective income tax rate
|
|
|
42.5
|
%
|
|
|
41.1
|
%
|
|
|
(140
|
) bps
|
The increase in our provision for income taxes was primarily the
result of higher income from continuing operations for the three
months ended June 30, 2008 as compared to the same period
last year. This increase was partially offset by a lower
effective tax rate during the three months ended June 30,
2008 as compared to the three months ended June 30, 2007.
Our effective tax rate was higher for the three months ended
June 30, 2007 as a result of a decrease in the estimate for
income from continuing operations for the year ended
December 31, 2007.
34
For
the Six Months Ended June 30, 2007 and 2008
Revenues
The increase in our revenues for the six months ended
June 30, 2008 as compared to the six months ended
June 30, 2007, was primarily the result of increases in
outpatient diagnostic services, such as CT imaging, laboratory
and cardiovascular services, as well as emergency room visits
and revenues per equivalent admission. The increase in our
emergency room visits was the result of a widespread outbreak of
the flu during February and March of 2008. Our respiratory
admissions increased by approximately 9.2% during the six months
ended June 30, 2008 as compared to the same period last
year. This was partially offset by a decrease in our surgical
volumes during the six months ended June 30, 2008 as
compared to the same period last year. Adjustments to estimated
reimbursement amounts increased our revenues by
$4.1 million and $3.5 million for the six months ended
June 30, 2007 and 2008, respectively.
The following table shows the key drivers of our revenues for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
%
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions
|
|
|
100,398
|
|
|
|
99,434
|
|
|
|
(964
|
)
|
|
|
(1.0
|
)%
|
Equivalent admissions
|
|
|
195,575
|
|
|
|
194,592
|
|
|
|
(983
|
)
|
|
|
(0.5
|
)
|
Revenues per equivalent admission
|
|
$
|
6,726
|
|
|
$
|
7,095
|
|
|
$
|
369
|
|
|
|
5.5
|
|
Medicare case mix index
|
|
|
1.24
|
|
|
|
1.27
|
|
|
|
0.03
|
|
|
|
2.4
|
|
Average length of stay (days)
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
0.1
|
|
|
|
2.3
|
|
Inpatient surgeries
|
|
|
29,430
|
|
|
|
28,161
|
|
|
|
(1,269
|
)
|
|
|
(4.3
|
)
|
Outpatient surgeries
|
|
|
74,454
|
|
|
|
73,405
|
|
|
|
(1,049
|
)
|
|
|
(1.4
|
)
|
Emergency room visits
|
|
|
443,920
|
|
|
|
455,252
|
|
|
|
11,332
|
|
|
|
2.6
|
|
Outpatient factor
|
|
|
1.95
|
|
|
|
1.96
|
|
|
|
0.01
|
|
|
|
0.5
|
|
The following table shows the sources of our revenues by payor
for the periods presented, expressed as percentages of total
revenues, including adjustments to estimated reimbursement
amounts:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Medicare
|
|
|
33.9
|
%
|
|
|
32.2
|
%
|
Medicaid
|
|
|
9.7
|
|
|
|
9.7
|
|
HMOs, PPOs and other private insurers
|
|
|
41.4
|
|
|
|
43.5
|
|
Self-Pay
|
|
|
11.7
|
|
|
|
11.7
|
|
Other
|
|
|
3.3
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Certain changes have been made to our historical sources of
revenues table above. Specifically, we historically classified
uninsured discounts as revenue deductions for HMOs, PPOs and
other private insurers. We changed the classification of
uninsured discounts to revenue deductions for self-pay revenues
effective in this quarterly report on
Form 10-Q
for all periods reported. This change had no impact on our
historical results of operations. Generally, these
reclassifications reduced self-pay as a percentage of total
revenues and increased HMOs, PPOs, and other private insurers as
a percentage of total revenues. We have determined that it is
more appropriate to apply uninsured discounts as revenue
deductions against self-pay revenues rather than against HMOs,
PPOs and other private insurers revenues.
35
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the periods presented (dollars in millions, except
for salaries and benefits per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
393.6
|
|
|
|
29.9
|
%
|
|
$
|
423.6
|
|
|
|
30.6
|
%
|
|
$
|
30.0
|
|
|
|
7.6
|
%
|
Stock-based compensation
|
|
|
7.2
|
|
|
|
0.6
|
|
|
|
12.2
|
|
|
|
0.9
|
|
|
|
5.0
|
|
|
|
70.7
|
|
Employee benefits
|
|
|
79.2
|
|
|
|
6.0
|
|
|
|
84.0
|
|
|
|
6.1
|
|
|
|
4.8
|
|
|
|
6.0
|
|
Contract labor
|
|
|
26.1
|
|
|
|
2.0
|
|
|
|
23.2
|
|
|
|
1.7
|
|
|
|
(2.9
|
)
|
|
|
(11.0
|
)
|
ESOP expense
|
|
|
7.9
|
|
|
|
0.6
|
|
|
|
4.0
|
|
|
|
0.3
|
|
|
|
(3.9
|
)
|
|
|
(49.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
514.0
|
|
|
|
39.1
|
%
|
|
$
|
547.0
|
|
|
|
39.6
|
%
|
|
$
|
33.0
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
88.9
|
|
|
|
N/A
|
|
|
|
90.2
|
|
|
|
N/A
|
|
|
|
1.3
|
|
|
|
1.5
|
%
|
Salaries and benefits per equivalent admission
|
|
$
|
2,504
|
|
|
|
N/A
|
|
|
$
|
2,643
|
|
|
|
N/A
|
|
|
$
|
139
|
|
|
|
5.6
|
%
|
Salaries and wages as a percentage of revenues increased during
the six months ended June 30, 2008 as compared to the six
months ended June 30, 2007, primarily as a result of
increases in our average hourly rate. We experienced an increase
in our average hourly rate as a result of market rate increases
for skilled personnel and an increase in our employed
physicians. Additionally, during the six months ended
June 30, 2008, we continued to implement strategies to
reduce our contract labor by employing nurses and other clinical
personnel.
The increase in our stock-based compensation is generally a
result of an increase in the number of outstanding unvested
stock options and nonvested stock and a change in our forfeiture
rate methodology. We changed from a static forfeiture rate
methodology to a dynamic forfeiture rate methodology during the
later half of 2007. The dynamic forfeiture rate methodology
incorporates the lapse of time into the resulting expense
calculation and results in a forfeiture rate that diminishes as
the granted awards approach its vest date. Accordingly, the
dynamic forfeiture rate methodology results in a more consistent
stock compensation expense calculation over the vesting period
of the award. This change in methodology resulted in a higher
stock compensation expense during the six months ended
June 30, 2008 as compared to six months ended June 30,
2007.
Our ESOP expense has two components: (1) common stock and
(2) cash. Shares of our common stock are allocated ratably
to employee accounts at approximately 70,000 shares each
quarter. The cash component is discretionary and is impacted by
the amount of forfeitures in the ESOP. We made $3.1 million
of discretionary cash contributions to the ESOP during the six
months ended June 30, 2007. There were no cash
contributions made during the six months ended June 30,
2008, which was the primary reason why our ESOP expense
decreased by 49.5% during the six months ended June 30,
2008 as compared to six months ended June 30, 2007.
36
Supplies
The following table summarizes our supplies expense for the
periods presented (dollars in millions, except for supplies per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
182.1
|
|
|
$
|
190.8
|
|
|
$
|
8.7
|
|
|
|
4.8
|
%
|
Supplies as a percentage of revenues
|
|
|
13.8
|
%
|
|
|
13.8
|
%
|
|
|
|
bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
933
|
|
|
$
|
980
|
|
|
$
|
47
|
|
|
|
5.0
|
%
|
Our supplies expense increased for the six months ended
June 30, 2008 compared to the six months ended
June 30, 2007, primarily as a result of increases in
supplies per equivalent admission. Supplies per equivalent
admission increased as a result of rising supply costs,
particularly those related to pharmaceutical products,
orthopedic implants and other surgical-related supplies.
Other
Operating Expenses
The following table summarizes our other operating expenses for
the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Professional fees
|
|
$
|
28.7
|
|
|
|
2.2
|
%
|
|
$
|
32.8
|
|
|
|
2.4
|
%
|
|
$
|
4.1
|
|
|
|
14.2
|
%
|
Utilities
|
|
|
23.5
|
|
|
|
1.8
|
|
|
|
25.2
|
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
7.2
|
|
Repairs and maintenance
|
|
|
27.0
|
|
|
|
2.1
|
|
|
|
28.4
|
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
5.2
|
|
Rents and leases
|
|
|
13.2
|
|
|
|
1.0
|
|
|
|
13.3
|
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
1.2
|
|
Insurance
|
|
|
17.5
|
|
|
|
1.3
|
|
|
|
21.6
|
|
|
|
1.6
|
|
|
|
4.1
|
|
|
|
23.3
|
|
Physician recruiting
|
|
|
7.3
|
|
|
|
0.6
|
|
|
|
10.6
|
|
|
|
0.8
|
|
|
|
3.3
|
|
|
|
44.3
|
|
Contract services
|
|
|
71.5
|
|
|
|
5.4
|
|
|
|
69.4
|
|
|
|
5.0
|
|
|
|
(2.1
|
)
|
|
|
(3.0
|
)
|
Non-income taxes
|
|
|
18.9
|
|
|
|
1.4
|
|
|
|
18.8
|
|
|
|
1.4
|
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
Other
|
|
|
29.7
|
|
|
|
2.3
|
|
|
|
31.7
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237.3
|
|
|
|
18.1
|
%
|
|
$
|
251.8
|
|
|
|
18.3
|
%
|
|
$
|
14.5
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the six months
ended June 30, 2008 as compared to the six months ended
June 30, 2007, was primarily a result of increases in
professional fees, insurance, physician recruiting and other
expenses, partially offset by a decrease in contract services.
The increase in professional fees was primarily the result of
increases in fees paid for hospitalists and anesthesiology and
emergency room physician coverage, including call coverage. To
attract and retain qualified anesthesiologists, emergency
department specialists and other critical hospital-based
physicians, hospitals in small communities are increasingly
required to guarantee that these physicians will meet or exceed
negotiated minimum income levels. Our expense for professional
fees paid to hospital-based physicians has increased as the
shortage of these physicians becomes more acute. In addition, an
increasing number of physicians are demanding that our hospitals
retain hospitalists and also be paid for call coverage.
Our professional and general liability insurance expense
increased during the six months ended June 30, 2008
compared the six months ended June 30, 2007, primarily as a
result of an increase in our reserves for self-insured
malpractice claims as a result of the settlement of several
claims at amounts higher than those anticipated and the
actuarial implications of such settlements.
37
The increase in physician recruiting is primarily the result of
an increase in recruiting fees paid and the increase in the
amount of physician minimum revenue guarantee agreements during
the six months ended June 30, 2008 as compared to the same
period last year. Other expenses increased primarily as a result
of $1.6 million in costs that were related to certain
discontinued information system conversion projects at a few of
our hospitals.
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
154.4
|
|
|
$
|
159.4
|
|
|
$
|
5.0
|
|
|
|
3.2
|
%
|
Percentage of revenues
|
|
|
11.7
|
%
|
|
|
11.5
|
%
|
|
|
(20
|
)bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
28.4
|
|
|
$
|
26.9
|
|
|
$
|
(1.5
|
)
|
|
|
(5.2
|
)%
|
Percentage of revenues
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
|
(10
|
)bps
|
|
|
N/M
|
|
Our provision for doubtful accounts as a percentage of revenues
decreased for the six months ended June 30, 2008 as
compared to the same period last year, primarily as a result of
our continued strategic efforts that led to improved cash
collections. We have experienced an increase in both up-front
cash collections and collections related to insured receivables
for the six months ended June 30, 2008 as compared to the
same period last year. In addition, the decrease in the
provision for doubtful accounts as a percentage of revenues for
the six months ended June 30, 2008 as compared to the same
period in 2007, was partially the result of a self-pay discount
program at our Tennessee hospitals that was effective
July 1, 2007. The increase in the provision for doubtful
accounts for the six months ended June 30, 2008 as compared
to the six months ended June 30, 2007 was primarily the
result of an increase in self-pay revenues for the six months
ended June 30, 2008 over the same period last year. The
provision for doubtful accounts relates principally to self-pay
amounts due from patients. The provision and allowance for
doubtful accounts are critical accounting estimates and are
further discussed in Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Critical
Accounting Estimates, in our 2007 Annual Report on
Form 10-K.
Depreciation
and Amortization
Depreciation and amortization expense increased slightly for the
six months ended June 30, 2008 compared to the six months
ended June 30, 2007. During the six months ended
June 30, 2007, we revised purchase price allocations for
our 2006 acquisitions. As a result of the purchase price
allocation changes, we recognized an increase in depreciation
and amortization expense of $3.2 million for the six months
ended June 30, 2007. Excluding the $3.2 million
adjustment during the six months ended June 30, 2007, our
depreciation and amortization expense increased as a result of
an increase in depreciable property and equipment from capital
projects that we completed during the later half of 2007 and
first half of 2008.
38
Interest
Expense
The following table summarizes our interest expense for the
periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities, including commitment fees
|
|
$
|
46.6
|
|
|
$
|
19.9
|
|
|
$
|
(26.7
|
)
|
Province
71/2% Senior
Subordinated Notes
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
31/4% Debentures
|
|
|
3.7
|
|
|
|
3.7
|
|
|
|
|
|
31/2% Notes
|
|
|
1.8
|
|
|
|
10.1
|
|
|
|
8.3
|
|
Interest rate swap (including ineffective portion)
|
|
|
1.3
|
|
|
|
7.8
|
|
|
|
6.5
|
|
Other
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53.9
|
|
|
|
41.9
|
|
|
|
(12.0
|
)
|
Amortization of deferred loan costs
|
|
|
3.1
|
|
|
|
3.7
|
|
|
|
0.6
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest expense allocation
|
|
|
(2.5
|
)
|
|
|
(0.1
|
)
|
|
|
2.4
|
|
Interest income
|
|
|
(1.3
|
)
|
|
|
(0.5
|
)
|
|
|
0.8
|
|
Capitalized interest
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51.8
|
|
|
$
|
44.7
|
|
|
$
|
(7.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in interest expense during the six months ended
June 30, 2008 compared to the six months ended
June 30, 2007, was primarily the result of decreases in our
outstanding debt balances and lower interest rates under the
31/2% Notes
as compared to our Senior Secured Credit Facilities, discussed
in more detail below under the heading Liquidity and
Capital Resources Senior Secured Credit
Facilities. In May 2007, we issued a total of
$575.0 million of our
31/2% Notes.
The net proceeds of approximately $561.7 million were used
to repay a portion of the outstanding borrowings under our
Senior Secured Credit Facilities. Our weighted-average monthly
interest-bearing debt balance, excluding capital leases,
decreased from $1,640.3 million during the six months ended
June 30, 2007 to $1,513.0 million during the six
months ended June 30, 2008. For a further discussion, see
Liquidity and Capital Resources Debt.
The decreases in our interest expense noted above were partially
offset by an increase in interest expense related to our
interest rate swap. The increase in our interest rate swap
interest expense during the six months ended June 30, 2008,
as compared to the six months ended June 30, 2007 was the
result of an increase in the spread between our payment rate,
which is based on an annual fixed rate of 5.585% and our receipt
rate, which is based on the prevailing three-month LIBOR
floating rate.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
44.6
|
|
|
$
|
46.7
|
|
|
$
|
2.1
|
|
Effective income tax rate
|
|
|
41.3
|
%
|
|
|
39.6
|
%
|
|
|
(170
|
)bps
|
The increase in our provision for income taxes was primarily the
result of higher income from continuing operations for the six
months ended June 30, 2008 as compared to the same period
last year. Our lower effective tax rate during the six months
ended June 30, 2008 as compared to the six months ended
June 30, 2007 was due to a reduction in the valuation
allowance against deferred tax assets and deferred tax
liabilities
39
resulting from a change in state taxation apportionment
percentages. During the six months ended June 30, 2008, we
benefited from some tax restructuring that will generate taxable
income and allow the utilization of state net operating loss
carry forwards that we were previously unable to conclude that
would more likely than not be utilized. Based upon actual and
budgeted financial results, we concluded during the six months
ended June 30, 2008 that the state net operating loss carry
forwards would likely be utilized and accordingly, released the
valuation allowance during the six months ended June 30,
2008. In addition, the tax restructuring reduced our overall
state allocation and apportionment percentages, which reduced
the required deferred tax liabilities during the six months
ended June 30, 2008. Both of the favorable adjustments to
the provision for income taxes were isolated to the six months
ended June 30, 2008.
Our effective tax rate was higher for the six months ended
June 30, 2007 as a result of a decrease in the estimate for
income from continuing operations for the year ended
December 31, 2007.
Liquidity
and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our
operations and our debt borrowings. We believe that our
internally generated cash flows and amounts available under our
debt agreements will be adequate to service existing debt,
finance internal growth, expend funds on capital expenditures
and fund certain small to mid-size hospital acquisitions.
The following table reconciles the non-GAAP metric of free
operating cash flow to the cash provided by operating
activities continuing operations, as stated in our
accompanying condensed consolidated statements of cash flows and
presents our summarized cash flow information for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Net cash flows provided by continuing operating activities
|
|
$
|
84.3
|
|
|
$
|
74.3
|
|
|
$
|
135.3
|
|
|
$
|
179.4
|
|
Less: Purchase of property and equipment
|
|
|
(40.6
|
)
|
|
|
(42.3
|
)
|
|
|
(72.6
|
)
|
|
|
(75.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free operating cash flow
|
|
|
43.7
|
|
|
|
32.0
|
|
|
|
62.7
|
|
|
|
103.7
|
|
Acquisition, net of cash acquired
|
|
|
|
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
(9.3
|
)
|
Proceeds from (payments for) disposal of hospitals
|
|
|
72.7
|
|
|
|
(3.3
|
)
|
|
|
72.8
|
|
|
|
(3.3
|
)
|
Payment of debt issue costs
|
|
|
(13.3
|
)
|
|
|
|
|
|
|
(13.3
|
)
|
|
|
|
|
Proceeds from borrowings
|
|
|
575.0
|
|
|
|
10.4
|
|
|
|
615.0
|
|
|
|
10.4
|
|
Payments on borrowings
|
|
|
(705.1
|
)
|
|
|
|
|
|
|
(757.5
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
11.1
|
|
|
|
0.1
|
|
|
|
12.1
|
|
|
|
0.1
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(30.5
|
)
|
|
|
|
|
|
|
(118.1
|
)
|
Other
|
|
|
1.6
|
|
|
|
(5.5
|
)
|
|
|
1.8
|
|
|
|
(5.7
|
)
|
Cash flows from operations (used in) provided by discontinued
operations
|
|
|
(5.2
|
)
|
|
|
(2.2
|
)
|
|
|
7.6
|
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(19.5
|
)
|
|
$
|
(8.3
|
)
|
|
$
|
1.2
|
|
|
$
|
(28.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-GAAP metric of free operating cash flow is an important
liquidity measure for us. Our computation of free operating cash
flow consists of net cash flow provided by continuing operations
less cash flows used for purchases of property and equipment.
Our cash flows provided by continuing operating activities for
the three months ended June 30, 2008 were negatively
impacted by an increase in interest payments by
$22.6 million during the three months ended June 30,
2008 as compared to the three months ended June 30, 2007,
which was partially offset by an increase in income from
continuing operations during the three months ended
June 30, 2008 as compared to the three months ended
June 30. 2007. Additionally, our net cash flows provided by
continuing operating activities for the three months ended
June 30, 2007 was positively impacted by the return of
funds of approximately $8.5 million previously over-funded
to our
40
employee 401(k) plan during the three months ended
March 31, 2007. There was no net impact from this
transaction on our continuing operating activities for the six
months ended June 30, 2007.
Our cash flows provided by continuing operating activities for
the six months ended June 30, 2008 were positively impacted
by an increase in income from continuing operations as compared
to the six months ended June 30, 2007, partially offset by
an increase in interest payments by $10.9 million during
the six months ended June 30, 2008 as compared to the six
months ended June 30, 2007.
We believe that free operating cash flow is useful to investors
and management as a measure of the ability of our business to
generate cash and is also utilized for debt repayments.
Computations of free operating cash flow may differ from company
to company. Therefore, free operating cash flow should be used
as a complement to, and in conjunction with, our condensed
consolidated statements of cash flows presented in our condensed
consolidated financial statements included elsewhere in this
report.
Working
Capital
Our net working capital and current ratio are summarized as
follows for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Total current assets
|
|
$
|
601.4
|
|
|
$
|
585.2
|
|
Total current liabilities
|
|
|
261.5
|
|
|
|
246.4
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
339.9
|
|
|
$
|
338.8
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
Our management believes that capital expenditures in key areas
at our hospitals should increase our local market share and help
persuade patients to obtain healthcare services at our
facilities within their communities.
The following table reflects our capital expenditures for the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Capital projects
|
|
$
|
30.6
|
|
|
$
|
28.9
|
|
|
$
|
50.1
|
|
|
$
|
50.7
|
|
Routine
|
|
|
8.6
|
|
|
|
12.4
|
|
|
|
19.6
|
|
|
|
23.7
|
|
Information systems
|
|
|
1.4
|
|
|
|
1.0
|
|
|
|
2.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40.6
|
|
|
$
|
42.3
|
|
|
$
|
72.6
|
|
|
$
|
75.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
33.7
|
|
|
$
|
33.9
|
|
|
$
|
65.5
|
|
|
$
|
66.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of capital expenditures to depreciation expense
|
|
|
120.5
|
%
|
|
|
124.8
|
%
|
|
|
110.8
|
%
|
|
|
113.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have a formal and intensive review procedure for the
authorization of capital expenditures. The most important
financial measure of acceptability for a discretionary capital
project is whether its projected discounted cash flow return on
investment exceeds our cost of capital. We will continue to
invest in modern technologies, emergency rooms and operating
room expansions, the construction of medical office buildings
for physician expansion and reconfiguring the flow of patient
care.
41
Debt
An analysis and roll-forward of our long-term debt is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Proceeds from
|
|
|
Payments of
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
Borrowings
|
|
|
Borrowings
|
|
|
Other
|
|
|
2008
|
|
|
Senior Secured Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
706.0
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
706.4
|
|
Revolving Loans
|
|
|
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
10.0
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
31/2% Notes
|
|
|
575.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575.0
|
|
31/4% Debentures
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225.0
|
|
Other, including capital leases
|
|
|
5.2
|
|
|
|
|
|
|
|
(5.0
|
)
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517.4
|
|
|
$
|
10.4
|
|
|
$
|
(5.0
|
)
|
|
$
|
0.8
|
|
|
$
|
1,523.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use leverage, or our debt to total capitalization ratio, to
make financing decisions. The following table illustrates our
financial statement leverage and the classification of our debt
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Current portion of long-term debt
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
|
|
Long-term debt
|
|
|
1,516.9
|
|
|
|
1,523.1
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,517.4
|
|
|
|
1,523.6
|
|
|
|
6.2
|
|
Total stockholders equity
|
|
|
1,544.2
|
|
|
|
1,526.6
|
|
|
|
(17.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,061.6
|
|
|
$
|
3,050.2
|
|
|
$
|
(11.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
49.6
|
%
|
|
|
50.0
|
%
|
|
|
40bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
|
53.5
|
%
|
|
|
53.0
|
%
|
|
|
|
|
Variable rate debt(*)
|
|
|
46.5
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
46.9
|
%
|
|
|
47.1
|
%
|
|
|
|
|
Subordinated debt
|
|
|
53.1
|
|
|
|
52.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Our interest rate swap mitigates our floating rate risk on our
outstanding variable rate borrowings which converts our variable
rate debt to an annual fixed rate of 5.585%. The above
calculation does not consider the effect of our interest rate
swap. Our interest rate swap decreases our variable rate debt as
a percentage of our outstanding debt from 46.5% to zero as of
December 31, 2007 and from 47.0% to zero as of
June 30, 2008. Please refer to the Capital
Resources Interest Rate Swap section below for
a discussion of our interest rate swap agreement. |
42
Capital
Resources
31/2% Convertible
Senior Subordinated Notes due May 15, 2014
On May 29, 2007, we issued $500.0 million of our
31/2% Notes,
and on May 31, 2007, we issued another $75.0 million
pursuant to the underwriters exercise of their
over-allotment option. The net proceeds of approximately
$561.7 million were used to repay a portion of our
outstanding borrowings under the Credit Agreement. The
31/2% Notes
bear interest at the rate of
31/2%
per year, payable semi-annually on May 15 and November 15.
Please refer to Part I. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Capital Resources
31/2% Convertible
Senior Subordinated Notes due May 15, 2014 in our
2007 Annual Report on
Form 10-K
for a detailed discussion of the
31/2% Notes.
Senior
Secured Credit Facilities
Terms
On April 15, 2005, in connection with the Province business
combination, we entered into the Credit Agreement with CITI, as
administrative agent and the lenders party thereto, Bank of
America, N.A., CIBC World Markets Corp., SunTrust Bank and UBS
Securities LLC, as co-syndication agents and Citigroup Global
Markets Inc., as sole lead arranger and sole book runner.
Effective May 11, 2007, we amended our Credit Agreement and
increased our additional tranches available under our term B
loans (the Term B Loans) and revolving loans (the
Revolving Loans) by $200.0 million and
$50.0 million, respectively. Additionally, the amendment
allows for the issuance of up to $250.0 million in term A
loans (the Term A Loans), which was previously
unavailable. Finally, the amendment modified certain existing
non-monetary terms of the Credit Agreement to allow for the
flexibility in the issuance of the
31/2% Notes.
The Credit Agreement, as amended, provides for secured Term A
Loans up to $250.0 million, Term B Loans up to
$1,450.0 million and Revolving Loans of up to
$350.0 million. In addition, the Credit Agreement provides
that we may request additional tranches of Term B Loans up to
$400.0 million and additional tranches of Revolving Loans
up to $100.0 million. The Term B Loans mature on
April 15, 2012. The Term A Loans and Revolving Loans both
mature on April 15, 2010. The Credit Agreement is
guaranteed on a senior secured basis by our subsidiaries with
certain limited exceptions. The Term B Loans are subject to
additional mandatory prepayments with a certain percentage of
excess cash flow as specifically defined in the Credit
Agreement. As amended, the Credit Agreement provides for letters
of credit up to $75.0 million.
Borrowings
and Payments
During June 2008, we borrowed $10.0 million under our
Credit Agreement in the form of Revolving Loans for general
corporate purposes. The $10.0 million borrowing was fully
repaid during July 2008.
During 2007, we made a mandatory repayment of a portion of our
outstanding Term B Loans with the proceeds from the sale of
Coastal effective July 1, 2007. Subsequently, certain of
the syndicate of lenders under the Term B Loans declined this
mandatory repayment and in April 2008, CITI returned to us
$0.4 million of the previously repaid Term B Loans. The
remaining balances of the Term B Loans are scheduled to be
repaid in 2011 and 2012 in four equal installments totaling
$706.4 million.
Letters
of Credit and Availability
As of June 30, 2008, we had $38.4 million in letters
of credit outstanding under the Revolving Loans that were
related to the self-insured retention level of our general and
professional liability insurance and workers compensation
programs as security for payment of claims. Under the terms of
the Credit Agreement, Revolving Loans available for borrowing
were $401.6 million as of June 30, 2008, including the
$100.0 million available under the additional tranche.
Under the terms of the Credit Agreement, Term A Loans and Term B
Loans available for borrowing were $250.0 million and
$400.0 million, respectively, as of June 30, 2008, all
of which is available under the additional tranches.
43
Interest
Rates
Interest on the outstanding balances of the Term B Loans is
payable, at our option, at CITIs base rate (the alternate
base rate or ABR) plus a margin of 0.625%
and/or at an
adjusted London Interbank Offered Rate (Adjusted
LIBOR) plus a margin of 1.625%. Interest on the Revolving
Loans is payable at ABR plus a margin for ABR Revolving Loans or
Adjusted LIBOR plus a margin for eurodollar Revolving Loans. The
margin on ABR Revolving Loans ranges from 0.25% to 1.25% based
on the total leverage ratio being less than 2.00:1.00 to greater
than 4.50:1.00. The margin on the eurodollar Revolving Loans
ranges from 1.25% to 2.25% based on the total leverage ratio
being less than 2.00:1.00 to greater than 4.50:1.00.
As of June 30, 2008, the applicable annual interest rate
under the Term B Loans was 4.27%, which was based on the
90-day
Adjusted LIBOR plus the applicable margin. The
90-day
Adjusted LIBOR was 2.65% at June 30, 2008. The
weighted-average applicable annual interest rate for the three
months and six months ended June 30, 2008 under the Term B
Loans was 4.61% and 5.35%, respectively.
As of June 30, 2008, the applicable annual interest rate
under the Revolving Loans was 5.75%, which was based on ABR of
5.0% plus the applicable margin of 0.75%.
Covenants
The Credit Agreement requires us to satisfy certain financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreement. The minimum interest coverage ratio can be no less
than 3.50:1.00 for all periods ending after December 31,
2005. These calculations are based on the trailing four
quarters. The maximum total leverage ratios cannot exceed
4.25:1.00 for the periods ending on June 30, 2008 through
December 31, 2008; 4.00:1.00 for the periods ending on
March 31, 2009 through December 31, 2009; and
3.75:1.00 for the periods ending thereafter. In addition, on an
annualized basis, we are also limited with respect to amounts we
may spend on capital expenditures. Such amounts cannot exceed
10.0% of revenues for all years ending after December 31,
2006.
The financial covenant requirements and ratios are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level at
|
|
|
|
|
|
|
June 30,
|
|
|
|
Requirement
|
|
|
2008
|
|
|
Minimum Interest Coverage Ratio
|
|
|
>3.50:1.00
|
|
|
|
5.73
|
|
Maximum Total Leverage Ratio
|
|
|
<4.25:1.00
|
|
|
|
3.24
|
|
In addition, the Credit Agreement contains customary affirmative
and negative covenants, which among other things, limit our
ability to incur additional debt, create liens, pay dividends,
effect transactions with our affiliates, sell assets, pay
subordinated debt, merge, consolidate, enter into acquisitions
and effect sale leaseback transactions.
Our Credit Agreement does not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our cost of borrowings.
31/4% Convertible
Senior Subordinated Debentures due August 15,
2025
On August 10, 2005, we sold $225.0 million of our
31/4% Debentures.
The net proceeds were approximately $218.4 million and were
used to repay indebtedness and for working capital and general
corporate purposes. The
31/4% Debentures
bear interest at the rate of
31/4%
per year, payable semi-annually on February 15 and
August 15. Please refer to Part I. Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Capital
Resources
31/4% Convertible
Senior Subordinated Debentures due August 15, 2025 in
our 2007 Annual Report on
Form 10-K
for a detailed discussion of the
31/4% Debentures.
44
Province
71/2% Senior
Subordinated Notes
The $6.1 million outstanding principal amount of
Provinces
71/2% Senior
Subordinated Notes due 2013 (the
71/2% Notes)
bears interest at the rate of
71/2%
payable semi-annually on June 1 and December 1. We have the
right to redeem all or a portion of the
71/2% Notes
on or after June 1, 2008, at the current redemption prices,
plus accrued and unpaid interest. The
71/2% Notes
are unsecured and subordinated to our existing and future senior
indebtedness. The supplemental indenture contains no material
covenants or restrictions.
Province
41/4% Convertible
Subordinated Notes
In connection with the Province business combination,
approximately $172.4 million of the $172.5 million
outstanding principal amount of Provinces
41/4% Convertible
Subordinated Notes due 2008 was purchased and subsequently
retired. The supplemental indenture contains no material
covenants or restrictions.
Interest
Rate Swap
On June 1, 2006, we entered into an interest rate swap
agreement with Citibank as counterparty. The interest rate swap
agreement, as amended, was effective as of November 30,
2006 and has a maturity date of May 30, 2011. We entered
into the interest rate swap agreement to mitigate the floating
interest rate risk on a portion of our outstanding variable rate
borrowings. The interest rate swap agreement requires us to make
quarterly fixed rate payments to Citibank calculated on a
notional amount as set forth in the table below at an annual
fixed rate of 5.585% while Citibank will be obligated to make
quarterly floating payments to us based on the three-month LIBOR
on the same referenced notional amount. Notwithstanding the
terms of the interest rate swap transaction, we are ultimately
obligated for all amounts due and payable under the Credit
Agreement.
|
|
|
|
|
|
|
Notional Amount
|
|
Date Range
|
|
(In millions)
|
|
|
November 30, 2006 to November 30, 2007
|
|
$
|
900.0
|
|
November 30, 2007 to November 28, 2008
|
|
$
|
750.0
|
|
November 28, 2008 to November 30, 2009
|
|
$
|
600.0
|
|
November 30, 2009 to November 30, 2010
|
|
$
|
450.0
|
|
November 30, 2010 to May 30, 2011
|
|
$
|
300.0
|
|
On January 1, 2008, we adopted the provisions of FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157) with respect to the
valuation of our interest rate swap agreement. We did not adopt
the provisions of SFAS No. 157 as it relates to
nonfinancial assets pursuant to FSP
FAS 157-2,
Effective Date of FASB Statement No. 157.
SFAS No. 157 clarifies how companies are required to
use a fair value measure for recognition and disclosure by
establishing a common definition of fair value, a framework for
measuring fair value, and expanding disclosures about fair value
measurements. The adoption of SFAS No. 157 did not
have a material impact on our results of operations or financial
position.
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
We determine the fair value of our interest rate swap based on
the amount at which it could be settled, which is referred to in
SFAS No. 157 as the exit price. This price is based
upon observable market assumptions and appropriate valuation
adjustments for credit risk. We have categorized our interest
rate swap as Level 2 under SFAS No. 157.
The interest rate swap agreement exposes us to credit risk in
the event of non-performance by Citibank. However, we do not
anticipate non-performance by Citibank. We do not hold or issue
derivative financial instruments for trading purposes. The fair
value of our interest rate swap at December 31, 2007 and
June 30, 2008 reflected a liability balance of
approximately $31.0 million and $30.5 million,
respectively, and is
45
included in professional and general liability claims and other
liabilities in the accompanying condensed consolidated balance
sheets. The interest rate swap reflects a liability balance as
of December 31, 2007 and June 30, 2008 because of
decreases in market interest rates since inception.
We have designated the interest rate swap as a cash flow hedge
instrument. We assess the effectiveness of this cash flow hedge
instrument on a quarterly basis. We completed our quarterly
assessment of the cash flow hedge instrument at June 30,
2008, and determined the hedge to be partially ineffective in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133). Because the notional
amount of the interest rate swap in effect at the quarterly
assessment intervals during the six months ended June 30,
2008 exceeded our outstanding borrowings under our variable rate
debt Credit Agreement, a portion of the cash flow hedge
instrument was determined to be ineffective. We recognized an
increase in interest expense of approximately $0.6 million
related to the ineffective portion of our cash flow hedge during
the six months ended June 30, 2008.
Debt
Ratings
Please refer to Part I. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Capital Resources Debt
Ratings in our 2007 Annual Report on
Form 10-K
for a detailed discussion of the way our debt is rated. During
the six months ended June 30, 2008, there were no material
changes in our debt ratings presented in our 2007 Annual Report
on
Form 10-K.
Liquidity
and Capital Resources Outlook
We expect the level of capital expenditures during the period
July 1, 2008 through December 31, 2008 to be in a
range of $84.0 million to $100.0 million. We have
large projects in process at a number of our facilities. We are
reconfiguring some of our hospitals to more effectively
accommodate patient services and restructuring existing surgical
capacity in some of our hospitals to permit additional patient
volume and a greater variety of services. At June 30, 2008,
we had projects under construction with an estimated additional
cost to complete and equip of approximately $137.6 million.
See Note 9 to our consolidated financial statements
included elsewhere in this report for a discussion of required
capital expenditures for certain facilities. We anticipate
funding these expenditures through cash provided by operating
activities, available cash and borrowings available under our
Credit Agreement.
Our business strategy contemplates the selective acquisition of
additional hospitals and other healthcare service providers, and
we regularly review these potential acquisitions. These
acquisitions may, however, require additional financing. We
regularly evaluate opportunities to sell additional equity or
debt securities, obtain credit facilities from lenders or
restructure our long-term debt or equity for strategic reasons
or to further strengthen our financial position. The sale of
additional equity or convertible debt securities could result in
additional dilution to our stockholders.
We have never declared or paid cash dividends on our common
stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not
currently intend to declare or pay any cash dividends on our
common stock. Our Board of Directors will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends. Delaware law prohibits us from paying any dividends
unless we have capital surplus or net profits available for this
purpose. In addition, our credit facilities impose restrictions
on our ability to pay dividends.
In November 2007, our Board of Directors authorized the
repurchase of up to $150.0 million of outstanding shares of
our common stock either in the open market or through privately
negotiated transactions, subject to market conditions,
regulatory constraints and other factors, to utilize excess cash
flow after its capital expenditure needs have been satisfied. We
are not obligated to repurchase any specific number of shares
under the program. The program expires on November 26,
2008, but may be extended, suspended or discontinued at any time
prior to the expiration date. We repurchased approximately 0.9
and 3.9 million shares for an aggregate purchase price,
including commissions, of approximately $28.3 million and
$103.7 million at an average purchase price of $31.25 and
$26.57 per share during the three and six months ended
June 30, 2008, respectively. As of June 30, 2008, we
had repurchased in the aggregate, approximately 5.3 million
46
shares at an aggregate purchase price, including commissions, of
approximately $144.9 million with an average purchase price
of $27.55 per share. We have designated these shares as treasury
stock.
We believe that cash flows from operations, amounts available
under our credit facility and our access to capital markets are
sufficient to fund the purchase prices for any potential
acquisitions, meet expected liquidity needs, including repayment
of our debt obligations, planned capital expenditures and other
expected operating needs over the next three years.
Contractual
Obligations
We have various contractual obligations, which are recorded as
liabilities in our condensed consolidated financial statements.
Other items, such as certain purchase commitments and other
executory contracts, are not recognized as liabilities in our
condensed consolidated financial statements but are required to
be disclosed. For example, we are required to make certain
minimum lease payments for the use of property under certain of
our operating lease agreements. Except for our new agreement
with HCA-IT effective May 19, 2008 discussed below, which
superseded and replaced our previous agreement with HCA-IT dated
May 11, 1999, as amended, there were no material changes in
our contractual obligations presented in our 2007 Annual Report
on
Form 10-K.
The following is an update of our contractual obligation to
HCA-IT, reflecting the May 19, 2008 agreement (in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
July 1, 2008 to
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
Total
|
|
|
December 31, 2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
After 2012
|
|
|
HCA-IT services
|
|
$
|
257.6
|
|
|
$
|
11.8
|
|
|
$
|
49.1
|
|
|
$
|
52.1
|
|
|
$
|
144.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
HCA-IT provides various information systems services, including,
but not limited to, financial, clinical, patient accounting and
network information services to us under a contract that expires
on December 31, 2017, including a wind-down period. The
amounts are based on estimated fees that will be charged to our
hospitals as of July 1, 2008 with an annual fee increase
that is capped by the consumer price index increase. We used a
3.0% annual rate increase as the estimated consumer price index
increase for the contract period. These fees will increase if we
acquire additional hospitals and use HCA-IT for information
system conversion services at the acquired hospitals.
Off-Balance
Sheet Arrangements
We had standby letters of credit outstanding of approximately
$38.4 million as of June 30, 2008, all of which
relates to the self-insured retention levels of our professional
and general liability insurance and workers compensation
programs as security for the payment of claims.
Recently
Issued Accounting Pronouncements
Please refer to Note 8 of our accompanying condensed
consolidated financial statements included elsewhere in this
report for a discussion of the impact of recently issued
accounting pronouncements.
Contingencies
Please refer to Note 9 of our condensed consolidated
financial statements included elsewhere in this report for a
discussion of our material financial contingencies, including:
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|
Legal proceedings and general liability claims;
|
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|
|
Physician commitments;
|
|
|
|
Capital expenditure commitments; and
|
|
|
|
Acquisitions.
|
47
Forward-Looking
Statements
We make forward-looking statements in this report and in other
reports and proxy statements we file with the SEC
and/or
release to the public. In addition, our senior management makes
forward-looking statements orally to analysts, investors, the
media and others. Broadly speaking, forward-looking statements
include:
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|
|
projections of our revenues, net income, earnings per share,
capital expenditures, cash flows, debt repayments, interest
rates, certain operating statistics and data or other financial
items;
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|
|
descriptions of plans or objectives of our management for future
operations or services, including acquisitions, divestitures,
business strategies and initiatives;
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|
|
interpretations of Medicare and Medicaid law and their effects
on our business; and
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|
|
descriptions of assumptions underlying or relating to any of the
foregoing.
|
In this report, for example, we make forward-looking statements
discussing our expectations about:
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|
|
future financial performance and condition;
|
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|
|
future liquidity and capital resources;
|
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|
|
repurchases of our common stock;
|
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|
|
future cash flows;
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|
|
existing and future debt and equity structure;
|
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|
|
compliance with debt covenants;
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|
|
our strategic goals;
|
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|
|
our business strategy and operating philosophy, including the
manner in which potential acquisitions or divestitures are
evaluated;
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|
supply and information technology costs;
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|
|
changes in interest rates;
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|
|
our plans as to the payment of dividends;
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|
industry and general economic trends;
|
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|
|
the efforts of insurers and other payors, healthcare providers
and others to contain healthcare costs;
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|
reimbursement changes;
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|
|
patient volumes and related revenues;
|
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|
|
future capital expenditures;
|
|
|
|
expected changes in certain expenses;
|
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|
|
the impact of changes in our critical accounting estimates;
|
|
|
|
claims and legal actions relating to professional liabilities
and other matters;
|
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|
|
non-GAAP measures;
|
|
|
|
the impact and applicability of new accounting standards;
|
|
|
|
staffing issues relating to nurses and other clinical
personnel; and
|
|
|
|
physician recruiting and retention.
|
There are a number of factors, many beyond our control, that
could cause results to differ significantly from our
expectations. Part I, Item 1A. Risk Factors of
our 2007 Annual Report on
Form 10-K
contains a summary of these factors. Any factor described in our
2007 Annual Report on
Form 10-K
could by itself, or
48
together with one or more factors, adversely affect our
business, results of operations
and/or
financial condition. There may be factors not described in our
2007 Annual Report on
Form 10-K
that could also cause results to differ from our expectations.
Forward-looking statements discuss matters that are not
historical facts. Because they discuss future events or
conditions, forward-looking statements often include words such
as can, could, may,
should, believe, will,
would, expect, project,
estimate, anticipate, plan,
intend, target, continue or
similar expressions. Do not unduly rely on forward-looking
statements, which give our expectations about the future and are
not guarantees. Forward-looking statements speak only as of the
date they are made. We do not undertake any obligation to update
our forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events. The following are some of
the factors that could cause our actual results to differ
materially from the expected results described in or underlying
our forward-looking statements:
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|
|
|
reduction in payments to healthcare providers by government and
commercial third-party payors, as well as changes in the manner
in which employers provide healthcare coverage to their
employees including high deductible plans;
|
|
|
|
the possibility of adverse changes in, and requirements of,
applicable laws, regulations, policies and procedures;
|
|
|
|
our ability to manage healthcare risks, including malpractice
litigation, and the lack of state and federal tort reform;
|
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|
|
the availability, cost and terms of insurance coverage;
|
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|
|
the highly competitive nature of the healthcare business,
including the competition to recruit and retain physicians and
other healthcare professionals;
|
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|
|
the ability to attract and retain qualified management and
personnel;
|
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|
|
our reliance on contract labor;
|
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|
|
the geographic concentration of our operations;
|
|
|
|
changes in our operating or expansion strategy;
|
|
|
|
the ability to operate and integrate newly acquired facilities
successfully;
|
|
|
|
the availability and terms of capital to fund our business
strategy;
|
|
|
|
changes in our liquidity or the amount or terms of our
indebtedness and in our debt credit ratings;
|
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|
|
the potential adverse impact of government investigations and
litigation involving the business practices of healthcare
providers, including whistleblowers investigations;
|
|
|
|
changes in generally accepted accounting principles or practices;
|
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|
|
volatility in the market value of our common stock;
|
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|
|
changes in general economic conditions in the markets we serve;
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|
ability to add or further emphasize service lines that are
needed in our communities;
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|
|
our reliance on information technology systems maintained by
HCA-IT;
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|
|
the costs of complying with the Americans with Disabilities Act;
|
|
|
|
possible adverse rulings, judgments, settlements and other
outcomes of pending litigation; and
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|
|
those risks and uncertainties described from time to time in our
filings with the SEC.
|
49
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Interest
Rates
The following discussion relates to our exposure to market risk
based on changes in interest rates:
Outstanding
Debt
We have an interest rate swap to manage our exposure to changes
in interest rates. Accordingly, we are not currently exposed to
market risk related to fluctuations in interest rates. The
interest rate swap converts a portion of our indebtedness to a
fixed rate with a notional amount of $750.0 million at
June 30, 2008 and at an annual fixed rate of 5.585%. The
notional amount of the swap agreement represents a balance used
to calculate the exchange of cash flows and is not an asset or
liability. Any market risk or opportunity associated with this
swap agreement is offset by the opposite market impact on the
related debt. Our interest rate swap agreement exposes us to
credit risk in the event of non-performance by Citibank.
However, we do not anticipate non-performance by Citibank.
As of June 30, 2008, we had outstanding debt of
$1,523.6 million, 47.0%, or $716.4 million, of which
was subject to variable rates of interest. However, our interest
rate swap decreases our variable rate debt as a percentage of
our outstanding debt from 47.0% to zero as of June 30,
2008. The notional amount of our swap agreement decreases to
$600.0 million effective November 28, 2008, at which
point, a portion of our outstanding debt will exceed the
notional amount and we will be exposed to market risk related to
changes in interest rates.
As of June 30, 2008, the fair value of our outstanding
variable rate debt approximates its carrying value. The fair
value of our $225.0 million
31/4% Debentures
and $575.0 million
31/2% Notes
was approximately $187.0 million and $477.3 million,
respectively, based on the quoted market prices at June 30,
2008.
Cash
Balances
Certain of our outstanding cash balances are invested overnight
with high credit quality financial institutions. We do not hold
direct investments in auction rate securities, collateralized
debt obligations, structured investment vehicles or
mortgage-backed securities. We do not have significant exposure
to changing interest rates on invested cash at June 30,
2008. As a result, the interest rate market risk implicit in
these investments at June 30, 2008, if any, is low.
|
|
Item 4.
|
Controls
and Procedures.
|
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report pursuant to
Rule 13a-15
of the Securities and Exchange Act of 1934, as amended (the
Exchange Act). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in ensuring
that information required to be disclosed by us (including our
consolidated subsidiaries) in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported on a timely basis.
There has been no change in our internal control over financial
reporting during the three months ended June 30, 2008 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
50
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
We are, from time to time, subject to claims and suits arising
in the ordinary course of business, including claims for damages
for personal injuries, medical malpractice, breach of contracts,
wrongful restriction of or interference with physicians
staff privileges and employment related claims. In certain of
these actions, plaintiffs request payment for damages, including
punitive damages that may not be covered by insurance. We are
currently not a party to any pending or threatened proceeding,
which, in managements opinion, would have a material
adverse effect on our business, financial condition or results
of operations.
There have been no material changes in our risk factors from
those disclosed in our 2007 Annual Report on
Form 10-K.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
The following table summarizes our share repurchase activity by
month for the three months ended June 30, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
of Shares that
|
|
|
|
|
|
|
Weighted
|
|
|
Part of a
|
|
|
May Yet be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Under the
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Program(1)
|
|
|
Program(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
April 1, 2008 to April 30, 2008(2)
|
|
|
77,532
|
|
|
$
|
28.37
|
|
|
|
|
|
|
|
|
|
May 1, 2008 to May 31, 2008
|
|
|
548,039
|
|
|
$
|
31.37
|
|
|
|
548,039
|
|
|
$
|
16.2
|
|
June 1, 2008 to June 30, 2008
|
|
|
359,424
|
|
|
$
|
31.08
|
|
|
|
359,424
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
984,995
|
|
|
$
|
31.03
|
|
|
|
907,463
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In November 2007, the Companys Board of Directors
authorized the repurchase of up to $150.0 million of
outstanding shares of the Companys common stock either in
the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints and other
factors, to utilize excess cash flow after its capital
expenditure needs have been satisfied. The Company is not
obligated to repurchase any specific number of shares under the
program. The program expires on November 26, 2008, but may
be extended, suspended or discontinued at any time prior to the
expiration date. As of June 30, 2008, the Company had
repurchased in the aggregate, approximately 5.3 million
shares at an aggregate purchase price, including commissions, of
approximately $144.9 million. These shares have been
designated by the Company as treasury stock. |
|
(2) |
|
This relates to shares redeemed for tax withholding purposes
upon vesting of certain previously granted restricted shares
under the LTIP. |
51
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
We held our annual meeting of stockholders on May 13, 2008.
At the annual meeting, the following matters were submitted to a
vote of the Companys stockholders:
Proposal 1 Election of Directors.
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
|
Votes
|
|
|
|
For
|
|
|
Withheld
|
|
|
William F. Carpenter III
|
|
|
46,726,758
|
|
|
|
1,676,097
|
|
Richard H. Evans
|
|
|
44,535,561
|
|
|
|
3,867,294
|
|
Michael P. Haley
|
|
|
44,531,790
|
|
|
|
3,871,065
|
|
As indicated in the above table, William F. Carpenter III,
Richard H. Evans and Michael P. Haley were elected as
Class III directors. The term of the Class III
directors will continue until the annual meeting of stockholders
in 2011, or until their respective successors are elected and
qualified. The terms of the following Class I directors
will continue until the annual meeting of stockholders in 2009,
or until their respective successors are elected and qualified:
Marguerite W. Kondracke, John E. Maupin, Jr., D.D.S. and
Owen G. Shell, Jr. The term of the following Class II
directors will continue until the annual meeting in 2010, or
until their respective successors are elected and qualified:
Gregory T. Bier and DeWitt Ezell, Jr.
Proposal 2 Ratification of the selection of
Ernst & Young LLP as our independent registered public
accounting firm for the year ending December 31, 2008.
|
|
|
|
|
Votes
|
|
Votes
|
|
Votes
|
For
|
|
Against
|
|
Abstain
|
|
47,915,124
|
|
485,661
|
|
2,070
|
Proposal 3 Amendment of Amended and Restated
1998 Long-Term Incentive Plan.
|
|
|
|
|
Votes
|
|
Votes
|
|
Votes
|
For
|
|
Against
|
|
Abstain
|
|
36,856,924
|
|
8,697,839*
|
|
187,890
|
|
|
|
* |
|
Includes 2,660,202 broker non-votes |
The effect of our stockholders approval of the LTIP
amendment was that the share authorization under the LTIP was
increased by an additional 2,100,000 shares and the limit
on grants of restricted shares, performance shares and other
full-value awards was increased by 700,000 shares.
Proposal 4 Amendment of Management Stock
Purchase Plan (MSPP).
|
|
|
|
|
Votes
|
|
Votes
|
|
Votes
|
For
|
|
Against
|
|
Abstain
|
|
35,843,763
|
|
9,704,578*
|
|
194,312
|
|
|
|
* |
|
Includes 2,660,202 broker non-votes |
The effect of our stockholders approval of the MSPP
amendment was that the share authorization under the MSPP was
increased by an additional 75,000 shares.
52
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference from exhibits to the Registration Statement on
Form S-8
filed on April 19, 2005, File
No. 333-124093).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws (incorporated by reference
from exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251).
|
|
3
|
.3
|
|
Amendment No. 1 to the Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated May 20, 2008, File
No. 000-51251).
|
|
10
|
.1
|
|
Computer and Data Processing Services Agreement dated
May 21, 2008, by and between HCA Information Technology
Services, Inc. and LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to the LifePoint Hospitals, Inc. Current
Report on
Form 8-K
dated May 21, 2008, File
No. 000-51251).
|
|
10
|
.2
|
|
First Amendment, dated May 13, 2008, to the LifePoint
Hospitals, Inc. Amended and Restated 1998 Long-Term Incentive
Plan.
|
|
10
|
.3
|
|
First Amendment, dated May 13, 2008, to the LifePoint
Hospitals, Inc. Management Stock Purchase Plan.
|
|
10
|
.4
|
|
Amended and Restated LifePoint Hospitals, Inc. Outside Directors
Stock and Incentive Compensation Plan, dated May 14, 2008.
|
|
10
|
.5
|
|
Form of LifePoint Hospitals, Inc. Deferred Restricted Stock
Award Agreement.
|
|
10
|
.6
|
|
Recoupment Policy Relating to Unearned Incentive Compensation of
Executive Officers (incorporated by reference from exhibits to
the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated May 20, 2008, File
No. 000-51251).
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
53
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.
LifePoint Hospitals, Inc.
David M. Dill
Executive Vice President and
Chief Financial Officer
Date: August 8, 2008
54
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference from exhibits to the Registration Statement on
Form S-8
filed on April 19, 2005, File
No. 333-124093).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws (incorporated by reference
from exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251).
|
|
3
|
.3
|
|
Amendment No. 1 to the Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated May 20, 2008, File
No. 000-51251).
|
|
10
|
.1
|
|
Computer and Data Processing Services Agreement dated
May 21, 2008, by and between HCA Information Technology
Services, Inc. and LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to the LifePoint Hospitals, Inc. Current
Report on
Form 8-K
dated May 21, 2008, File
No. 000-51251).
|
|
10
|
.2
|
|
First Amendment, dated May 13, 2008, to the LifePoint
Hospitals, Inc. Amended and Restated 1998 Long-Term Incentive
Plan.
|
|
10
|
.3
|
|
First Amendment, dated May 13, 2008, to the LifePoint
Hospitals, Inc. Management Stock Purchase Plan.
|
|
10
|
.4
|
|
Amended and Restated LifePoint Hospitals, Inc. Outside Directors
Stock and Incentive Compensation Plan, dated May 14, 2008.
|
|
10
|
.5
|
|
Form of LifePoint Hospitals, Inc. Deferred Restricted Stock
Award Agreement.
|
|
10
|
.6
|
|
Recoupment Policy Relating to Unearned Incentive Compensation of
Executive Officers (incorporated by reference from exhibits to
the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated May 20, 2008, File
No. 000-51251).
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|