10-Q 1 d407380d10q.htm FORM 10 Form 10
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x

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

For the quarterly period ended September 30, 2012

or

 

¨

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

For the transition period from             to            

Commission file number 333-144337

 

 

United Surgical Partners International, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-2749762

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

15305 Dallas Parkway, Suite 1600

Addison, Texas

  75001
(Address of principal executive offices)   (Zip Code)

(972) 713-3500

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

The number of shares of Common Stock of the Registrant outstanding at November 5, 2012 was 100.

 

 

 


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

 

PART I. Financial Information   

Item 1.

  

Financial Statements:

     3   

Report of Independent Registered Public Accounting Firm

     3   

Consolidated Balance Sheets (unaudited)

     4   

Consolidated Statements of Income (unaudited)

     5   

Consolidated Statements of Comprehensive Income (unaudited)

     7   

Consolidated Statements of Changes in Equity (unaudited)

     8   

Consolidated Statements of Cash Flows (unaudited)

     10   

Notes to Consolidated Financial Statements (unaudited)

     11   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4.

  

Controls and Procedures

     35   
PART II. Other Information   

Item 1.

  

Legal Proceedings

     36   

Item 6.

  

Exhibits

     36   

Signatures

     37   

Note:     Items 1A, 2, 3, 4, and 5 of Part II are omitted because they are not applicable.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

United Surgical Partners International, Inc.:

We have reviewed the consolidated balance sheet of United Surgical Partners International, Inc. and subsidiaries (the Company) as of September 30, 2012, the related consolidated statements of income, comprehensive income and changes in equity for the three-month and nine-month periods ended September 30, 2012 and 2011, and the related consolidated statements of cash flows for the nine-month periods ended September 30, 2012 and 2011. This interim financial information is the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Surgical Partners International, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for the year then ended not presented herein; and in our report dated March 2, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Dallas, Texas

November 5, 2012

 

3


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        
    

(In thousands — except share

data)

 
ASSETS     

Cash and cash equivalents

   $ 63,086      $ 41,822   

Available for sale securities (Note 8)

     10,591        4,815   

Accounts receivable, net of allowance for doubtful accounts of $8,427 and $8,576, respectively

     36,868        58,057   

Other receivables

     14,238        10,499   

Inventories of supplies

     7,382        10,117   

Deferred tax asset, net

     12,918        14,704   

Prepaids and other current assets

     14,719        15,314   
  

 

 

   

 

 

 

Total current assets

     159,802        155,328   

Property and equipment, net

     121,741        235,321   

Investments in unconsolidated affiliates

     452,778        444,734   

Goodwill

     1,131,943        1,209,345   

Intangible assets, net

     343,992        327,140   

Other assets

     23,973        21,630   
  

 

 

   

 

 

 

Total assets

   $ 2,234,229      $ 2,393,498   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Accounts payable

   $ 16,905      $ 28,765   

Accrued salaries and benefits

     22,343        24,405   

Due to affiliates

     149,249        139,628   

Accrued interest

     20,033        6,671   

Current portion of long-term debt

     18,202        25,487   

Other current liabilities

     39,595        52,281   
  

 

 

   

 

 

 

Total current liabilities

     266,327        277,237   

Long-term debt, less current portion

     1,312,588        1,042,969   

Other long-term liabilities

     28,812        30,807   

Deferred tax liability, net

     161,513        167,946   
  

 

 

   

 

 

 

Total liabilities

     1,769,240        1,518,959   

Noncontrolling interests — redeemable (Note 4)

     139,455        106,668   

Commitments and contingencies (Note 11)

    

Equity (Note 9):

    

United Surgical Partners International, Inc. (USPI) stockholder’s equity:

    

Common stock, $0.01 par value; 100 shares authorized; issued and outstanding

     —          —     

Additional paid-in capital

     290,908        778,030   

Accumulated other comprehensive income (loss)

     90        (63,033

Retained earnings (deficit)

     (1,510     17,691   
  

 

 

   

 

 

 

Total USPI stockholder’s equity

     289,488        732,688   

Noncontrolling interests — nonredeemable (Note 4)

     36,046        35,183   
  

 

 

   

 

 

 

Total equity

     325,534        767,871   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,234,229      $ 2,393,498   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Income

 

     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
 
     (Unaudited — in thousands)  

Revenues:

    

Net patient service revenues

   $ 106,886      $ 102,296   

Management and contract service revenues

     19,138        17,807   

Other revenues

     2,281        2,158   
  

 

 

   

 

 

 

Total revenues

     128,305        122,261   

Equity in earnings of unconsolidated affiliates

     22,118        18,890   

Operating expenses:

    

Salaries, benefits, and other employee costs

     32,999        31,461   

Medical services and supplies

     20,184        18,888   

Other operating expenses

     21,838        19,879   

General and administrative expenses

     9,326        10,456   

Provision for doubtful accounts

     2,001        2,758   

Net loss (gain) on deconsolidations, disposals and impairments

     2,233        (1,271

Depreciation and amortization

     5,746        5,226   
  

 

 

   

 

 

 

Total operating expenses

     94,327        87,397   
  

 

 

   

 

 

 

Operating income

     56,096        53,754   

Interest income

     170        143   

Interest expense

     (23,260     (15,308

Loss on early retirement of debt

     (23     —     

Other, net

     34        6   
  

 

 

   

 

 

 

Total other expense, net

     (23,079     (15,159
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     33,017        38,595   

Income tax expense

     (6,394     (8,717
  

 

 

   

 

 

 

Income from continuing operations

     26,623        29,878   

Discontinued operations, net of tax (Note 2):

    

Income (loss) from discontinued operations

     (2     2,006   

Gain on disposal of discontinued operations

     —          —     
  

 

 

   

 

 

 

Total earnings (loss) from discontinued operations

     (2     2,006   
  

 

 

   

 

 

 

Net income

     26,621        31,884   

Less: Net income attributable to noncontrolling interests

     (16,638     (16,598
  

 

 

   

 

 

 

Net income attributable to USPI’s common stockholder

   $ 9,983      $ 15,286   
  

 

 

   

 

 

 

Amounts attributable to USPI’s common stockholder:

    

Income from continuing operations, net of tax

   $ 9,984      $ 13,355   

Earnings (loss) from discontinued operations, net of tax

     (1     1,931   
  

 

 

   

 

 

 

Net income attributable to USPI’s common stockholder

   $ 9,983      $ 15,286   
  

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Income

 

     Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
 
     (Unaudited — in thousands)  

Revenues:

    

Net patient service revenues

   $ 320,818      $ 305,345   

Management and contract service revenues

     58,063        52,874   

Other revenues

     6,839        6,583   
  

 

 

   

 

 

 

Total revenues

     385,720        364,802   

Equity in earnings of unconsolidated affiliates

     66,207        56,923   

Operating expenses:

    

Salaries, benefits, and other employee costs

     99,649        92,536   

Medical services and supplies

     58,882        56,289   

Other operating expenses

     62,925        58,495   

General and administrative expenses

     30,008        28,959   

Provision for doubtful accounts

     6,314        6,743   

Net loss (gain) on deconsolidations, disposals and impairments

     660        (3,749

Depreciation and amortization

     17,409        15,946   
  

 

 

   

 

 

 

Total operating expenses

     275,847        255,219   
  

 

 

   

 

 

 

Operating income

     176,080        166,506   

Interest income

     472        467   

Interest expense

     (62,034     (48,396

Loss on early retirement of debt

     (37,981     —     

Other, net

     (748     (114
  

 

 

   

 

 

 

Total other expense, net

     (100,291     (48,043
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     75,789        118,463   

Income tax expense

     (10,343     (27,291
  

 

 

   

 

 

 

Income from continuing operations

     65,446        91,172   

Discontinued operations, net of tax (Note 2):

    

Income from discontinued operations

     3,434        7,742   

Loss on disposal of discontinued operations

     —          (529
  

 

 

   

 

 

 

Total earnings from discontinued operations

     3,434        7,213   
  

 

 

   

 

 

 

Net income

     68,880        98,385   

Less: Net income attributable to noncontrolling interests

     (51,666     (49,592
  

 

 

   

 

 

 

Net income attributable to USPI’s common stockholder

   $ 17,214      $ 48,793   
  

 

 

   

 

 

 

Amounts attributable to USPI’s common stockholder:

    

Income from continuing operations, net of tax

   $ 13,834      $ 41,769   

Earnings from discontinued operations, net of tax

     3,380        7,024   
  

 

 

   

 

 

 

Net income attributable to USPI’s common stockholder

   $ 17,214      $ 48,793   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
 
     (Unaudited — in thousands)  

Net income

   $ 26,621      $ 31,884   

Other comprehensive income (loss):

    

Foreign currency translation adjustments

     —          (7,246

Unrealized gain on available-for-sale securities, net of tax

     37        16   

Unrealized gain on interest rate swaps, net of tax

     —          342   
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     37        (6,888
  

 

 

   

 

 

 

Comprehensive income

     26,658        24,996   

Less: Comprehensive income attributable to noncontrolling interests

     (16,638     (16,598
  

 

 

   

 

 

 

Comprehensive income attributable to USPI’s common stockholder

   $ 10,020      $ 8,398   
  

 

 

   

 

 

 
     Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
 
     (Unaudited — in thousands)  

Net income

   $ 68,880      $ 98,385   

Other comprehensive income:

    

Foreign currency translation adjustments

     4,938        2,831   

Unrealized loss on foreign currency contract, net of tax

     (560     —     

Unrealized gain on available-for-sale securities, net of tax

     48        36   

Unrealized gain on interest rate swaps, net of tax

     15        2,523   

Reclassification due to spin-off of U.K. subsidiary:

    

Foreign currency translation adjustments

     58,682        —     
  

 

 

   

 

 

 

Total other comprehensive income

     63,123        5,390   
  

 

 

   

 

 

 

Comprehensive income

     132,003        103,775   

Less: Comprehensive income attributable to noncontrolling interests

     (51,666     (49,592
  

 

 

   

 

 

 

Comprehensive income attributable to USPI’s common stockholder

   $ 80,337      $ 54,183   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

For the Three Months and Nine Months Ended September 30, 2012

 

     USPI’s Common Stockholder              
     Outstanding
Shares
     Par Value      Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Noncontrolling
Interests
Non-Redeemable
    Total  
     (Unaudited — in thousands, except share amounts)  

Balance, December 31, 2011

     100       $ —         $ 778,030      $ (63,033   $ 17,691      $ 35,183      $ 767,871   

Distributions to noncontrolling interests

     —           —           —          —          —          (3,511     (3,511

Purchases of noncontrolling interests

     —           —           (103     —          —          (86     (189

Sales of noncontrolling interests

     —           —           (16,064     —          —          584        (15,480

Contribution related to equity award grants by Parent and other

     —           —           366        —          —          —          366   

Net income

     —           —           —          —          18,724        1,990        20,714   

Other comprehensive income

     —           —           —          4,404        —          —          4,404   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     100         —           762,229        (58,629     36,415        34,160        774,175   

Distributions to noncontrolling interests

     —           —           —          —          —          (3,063     (3,063

Purchases of noncontrolling interests

     —           —           713        —          —          (129     584   

Sales of noncontrolling interests

     —           —           (464     —          —          403        (61

Contribution related to equity award grants by Parent and other

     —           —           575        —          —          —          575   

Spin-off of U.K. subsidiary (Note 2)

     —           —           (193,320     —            (523     (193,843

Dividend to Parent’s equity holders (Note 9)

     —           —           (278,043     —          (36,415     —          (314,458

Net income (loss)

     —           —           —          —          (11,493     1,980        (9,513

Other comprehensive income

     —           —           —          58,682        —          —          58,682   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     100         —           291,690        53        (11,493     32,828        313,078   

Distributions to noncontrolling interests

     —           —           —          —          —          (2,155     (2,155

Purchases of noncontrolling interests

     —           —           (372     —          —          (29     (401

Sales of noncontrolling interests

     —           —           (276     —          —          3,281        3,005   

Contribution related to equity award grants by Parent and other

     —           —           (134     —          —          —          (134

Net income

     —           —           —          —          9,983        2,121        12,104   

Other comprehensive income

     —           —           —          37        —          —          37   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     100       $ —         $ 290,908      $ 90      $ (1,510   $ 36,046      $ 325,534   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

8


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

 

Consolidated Statement of Changes in Equity

For the Three Months and Nine Months Ended September 30, 2011

 

     USPI’s Common Stockholder               
     Outstanding
Shares
     Par Value      Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
     Noncontrolling
Interests
Non-Redeemable
    Total  
     (Unaudited — in thousands, except share amounts)  

Balance, December 31, 2010

     100       $ —         $ 784,573      $ (66,351   $ 68,535       $ 34,394      $ 821,151   

Distributions to noncontrolling interests

     —           —           —          —          —           (1,578     (1,578

Purchases of noncontrolling interests

     —           —           4        —          —           (27     (23

Sales of noncontrolling interests

     —           —           (2,324     —          —           272        (2,052

Contribution related to equity award grants by Parent and other

     —           —           450        —          —           —          450   

Net income

     —           —           —          —          15,721         1,608        17,329   

Other comprehensive income

     —           —           —          10,760        —           —          10,760   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, March 31, 2011

     100         —           782,703        (55,591     84,256         34,669        846,037   

Distributions to noncontrolling interests

     —           —           —          —          —           (2,654     (2,654

Purchases of noncontrolling interests

     —           —           (483     —          —           (603     (1,086

Sales of noncontrolling interests

     —           —           (10,124     —          —           409        (9,715

Contribution related to equity award grants by Parent and other

     —           —           352        —          —           —          352   

Net income

     —           —           —          —          17,786         2,241        20,027   

Other comprehensive income

     —           —           —          1,518        —           —          1,518   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, June 30, 2011

     100         —           772,448        (54,073     102,042         34,062        854,479   

Distributions to noncontrolling interests

     —           —           —          —          —           (1,624     (1,624

Purchases of noncontrolling interests

     —           —           (517     —          —           —          (517

Sales of noncontrolling interests

     —           —           (813     —          —           273        (540

Contribution related to equity award grants by Parent and other

     —           —           267        —          —           —          267   

Net income

     —           —           —          —          15,286         1,957        17,243   

Other comprehensive income

     —           —           —          (6,888     —           —          (6,888
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2011

     100       $ —         $ 771,385      $ (60,961   $ 117,328       $ 34,668      $ 862,420   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

9


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

     Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
 
     (Unaudited — in thousands)  

Cash flows from operating activities:

    

Net income

   $ 68,880      $ 98,385   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Earnings from discontinued operations

     (3,434     (7,213

Loss on early retirement of debt

     37,981        —     

Provision for doubtful accounts

     6,314        6,743   

Depreciation and amortization

     17,409        15,946   

Net loss (gain) on deconsolidations, disposals and impairments

     660        (3,749

Amortization of debt issue costs and discount

     2,973        2,593   

Deferred income tax

     (9,252     11,331   

Equity in earnings of unconsolidated affiliates, net of distributions received

     (3,285     5,694   

Equity-based compensation

     1,188        1,008   

Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:

    

Accounts receivable

     134        (383

Other receivables

     (6,537     (937

Inventories of supplies, prepaids and other current assets

     (2,494     (2,328

Accounts payable and other current liabilities

     17,810        (3,292

Long-term liabilities

     1,516        2,699   
  

 

 

   

 

 

 

Net cash provided by operating activities

     129,863        126,497   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of new businesses and equity interests, net of cash received

     (38,994     (63,996

Proceeds from sale of businesses and equity interests

     2,341        13,315   

Purchases of property and equipment

     (14,587     (8,291

Purchases of marketable securities, net

     (5,768     (4,820

Returns of capital from unconsolidated affiliates

     4,347        1,197   

Decrease in deposits and notes receivable

     2,129        2,324   
  

 

 

   

 

 

 

Net cash used in investing activities

     (50,532     (60,271
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt, net of debt issuance costs

     788,764        5,002   

Payments on long-term debt

     (535,727     (37,429

Increase in cash held on behalf of unconsolidated affiliates and other

     9,336        13,584   

Sales of noncontrolling interests, net

     5,783        531   

Payment of common stock dividend

     (314,458     —     

Distributions to noncontrolling interests

     (58,546     (50,571
  

 

 

   

 

 

 

Net cash used in financing activities

     (104,848     (68,883
  

 

 

   

 

 

 

Cash flows from discontinued operations:

    

Operating cash flows

     5,101        13,872   

Investing cash flows

     (11,383     (15,029

Financing cash flows

     53,142        (454

Effect of exchange rate changes on cash and cash equivalents

     (79     (59
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

     46,781        (1,670
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     21,264        (4,327

Cash and cash equivalents at beginning of period

     41,822        60,253   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 63,086      $ 55,926   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid — continuing operations

   $ 45,734      $ 37,955   

Income taxes paid — continuing operations

     18,593        26,834   

Interest paid — discontinued operations

     772        1,430   

Income taxes paid — discontinued operations

     1,989        2,121   

Non-cash transactions:

    

Spin-off of U.K. subsidiary

   $ (193,843   $ —     

Assets acquired under capital lease obligations

     9,073        5,291   

See accompanying notes to consolidated financial statements

 

10


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1) Basis of Presentation

(a) Description of Business

United Surgical Partners International, Inc., a Delaware Corporation, and subsidiaries (USPI or the Company) was formed in February 1998 for the primary purpose of ownership and management of ambulatory surgery centers, surgical hospitals and related businesses. At September 30, 2012, the Company, headquartered in Dallas, Texas, operated 203 short-stay surgical facilities. Of these 203 facilities, the Company consolidates the results of 59 and accounts for 144 under the equity method. The majority of the Company’s facilities are jointly owned with local physicians and a not-for-profit healthcare system that has other healthcare businesses in the region. At September 30, 2012, the Company had agreements with not-for-profit healthcare systems providing for joint ownership of 142 of the Company’s 203 facilities and also providing a framework for the construction or acquisition of additional facilities in the future. All but two of the Company’s facilities include physician owners. Prior to April 3, 2012, the Company operated seven facilities in the United Kingdom. On April 3, 2012, the Company distributed the stock of its U.K. subsidiary to the Company’s parent, USPI Group Holdings, Inc., equity holders. Subsequent to April 3, 2012, the Company has no further ownership in the U.K. operations. The Company’s former U.K. operations have now been classified as “discontinued operations” in its historical results of operations.

The Company is subject to changes in government legislation that could impact Medicare, Medicaid, and other government reimbursement levels and is also subject to increased levels of managed care penetration and changes in payor patterns that may impact the level and timing of payments for services rendered.

The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The accompanying consolidated financial statements and notes should be read in conjunction with the Company’s December 31, 2011 Form 10-K. It is management’s opinion that the accompanying consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

The Company operates in one reportable business segment, the ownership and operation of surgical facilities in the United States.

The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(2) Discontinued Operations

The Company classifies formerly consolidated subsidiaries in which it has no continuing involvement and consolidated subsidiaries that are held for sale as discontinued operations. The gains or losses on the disposal of these subsidiaries are classified within discontinued operations in the Company’s consolidated statements of income. The Company has also reclassified the historical financial results of these subsidiaries to remove the operations of these entities from the Company’s revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations.

Discontinued operations consist primarily of the Company’s former U.K. operations. On April 3, 2012, the Company distributed the stock of its U.K. subsidiary to its Parent’s equity holders. Subsequent to April 3, 2012, the Company has no ownership in the U.K. operations. Because GAAP requires spin-off transactions to be accounted for at carrying value, there was no gain or loss recorded on the spin-off of the U.K. operations.

Discontinued operations also include two investments in surgery centers that were designated as held for sale at December 31, 2010 and were sold in February 2011. The estimated net loss on disposal of these operations was recorded in the fourth quarter of 2010 and adjusted in 2011.

 

11


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

The table below summarizes certain amounts related to the Company’s discontinued operations for the periods presented (in thousands):

 

     Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Revenues

   $ —        $ 36,528      $ 27,196      $ 83,371   

Income (loss) from discontinued operations before income taxes

   $ (3   $ 4,701      $ 2,547      $ 10,277   

Income tax benefit (expense)

     1        (1,267     (541     (2,535
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ (2   $ 3,434      $ 2,006      $ 7,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss on disposal of discontinued operations before income taxes

   $ —        $ —        $ —        $ (902

Income tax benefit

     —          —          —          373   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loss from disposal of discontinued operations

   $ —        $ —        $ —        $ (529
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(3) Investments in Unconsolidated Affiliates and Business Combination

The Company’s facilities are generally operated through separate legal entities in which the Company holds an equity interest. Other investors generally include physicians who utilize the facility and, in a majority of cases, a local not-for-profit health system.

The Company controls 59 of these entities and therefore consolidates their results. However, the Company accounts for a majority (144 of its 203 facilities at September 30, 2012) as investments in unconsolidated affiliates, i.e., under the equity method, as the Company’s level of influence is significant but does not reach the threshold of controlling the entity. The majority of these investments are partnerships or limited liability companies, which require the associated tax benefit or expense to be recorded by the partners or members. Summarized financial information for the Company’s equity method investees on a combined basis is as follows (amounts are in thousands, except number of facilities, reflect 100% of the investees’ results on an aggregated basis and are unaudited):

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2012     2011     2012     2011  

Unconsolidated facilities operated at period-end

     144        143        144        143   

Income statement information:

        

Revenues

   $ 416,929      $ 378,644      $ 1,254,082      $ 1,100,997   

Operating expenses:

        

Salaries, benefits, and other employee costs

     98,842        89,960        294,750        263,513   

Medical services and supplies

     106,081        88,194        310,012        256,077   

Other operating expenses

     97,972        88,021        290,839        256,786   

Net gain on asset disposals

     (7,026     (100     (6,496     (479

Depreciation and amortization

     17,944        17,286        54,342        48,743   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     313,813        283,361        943,447        824,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     103,116        95,283        310,635        276,357   

Interest expense, net

     (8,341     (8,883     (26,165     (24,711

Other, net

     385        (1     399        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 95,160      $ 86,399      $ 284,869      $ 251,656   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance sheet information:

        

Current assets

   $ 313,714      $ 307,475      $ 313,714      $ 307,475   

Noncurrent assets

     578,332        613,027        578,332        613,027   

Current liabilities

     196,990        178,421        196,990        178,421   

Noncurrent liabilities

     407,333        435,795        407,333        435,795   

 

12


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

The Company regularly engages in the purchase and sale of equity interests with respect to its investments in unconsolidated affiliates that do not result in a change of control. These transactions are primarily the acquisitions and sales of equity interests in unconsolidated surgical facilities and the investment of additional cash in surgical facilities under development. During the nine months ended September 30, 2012, these transactions resulted in a net cash outflow of approximately $19.6 million, which is summarized as follows:

 

 

Effective Date

   Facility Location    Amount  

Investments

     

February 2012

   Midland, Texas(1)    $ 3.0 million   

March 2012

   Chandler, Arizona(1)      0.8 million   

September 2012

   New Jersey(2)      12.3 million   

Various

   Various(3)      3.5 million   
     

 

 

 

Total

      $ 19.6 million   
     

 

 

 

  

 

(1)

Acquisition of a noncontrolling interest in and right to manage a surgical facility in which the Company previously had no involvement. The facility is jointly owned with a hospital partner and local physicians.

(2)

Acquisition of a noncontrolling interest in and right to manage two surgical facilities in Hackensack and Paramus, New Jersey, respectively, in which the Company previously had no involvement. The facilities are jointly owned with a hospital partner and local physicians.

(3)

Represents the net payment related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

Effective June 1, 2012, the Company acquired an additional 44% ownership in a surgical facility in New Jersey in which it already had an equity method investment and the right to manage. As a result of the transaction, the Company now controls the facility and began consolidating its operating results effective June 1, 2012. The Company paid cash totaling $17.1 million, which is subject to certain purchase price adjustments set forth in the purchase agreement. The purchase price was allocated to the facility’s tangible assets and liabilities based upon preliminary estimates of fair value, with the remainder to goodwill. The Company funded the purchase using cash on hand. The adjustments to arrive at pro forma operating results for this acquisition are not material. The Company recorded a gain of approximately $0.2 million as a result of adjusting the carrying value of its existing ownership to fair value as required by GAAP. The gain is included in “Net loss (gain) on deconsolidations, disposals and impairments” in the accompanying consolidated statements of income.

 

(4) Noncontrolling Interests

The Company controls and therefore consolidates the results of 59 of its 203 facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities.

During the nine months ended September 30, 2012, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $1.9 million and $7.7 million, respectively. The basis difference between the Company’s carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to additional paid-in capital. The impact of these transactions is summarized as follows (in thousands):

 

     Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Net income attributable to USPI’s common stockholder

   $ 9,983      $ 17,2144      $ 15,286      $ 48,793   

Transfers to the noncontrolling interests:

        

Decrease in USPI’s additional paid-in capital for sales of subsidiaries’ equity interests

     (276     (16,804     (813     (13,261

(Decrease) increase in USPI’s additional paid-in capital for purchases of subsidiaries’ equity interests

     (372     238        (517     (996
  

 

 

   

 

 

   

 

 

   

 

 

 

Net transfers to noncontrolling interests

     (648     (16,566     (1,330     (14,257
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase in equity from net income attributable to USPI and transfers to noncontrolling interests

   $ 9,335      $ 648      $ 13,956      $ 34,536   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of its investees’ partnership and operating agreements, to purchase some or all of the noncontrolling interests related to the Company’s consolidated subsidiaries. These repurchase requirements are limited to the portions of its facilities that are owned by physicians who perform surgery at the Company’s facilities and would be triggered by regulatory changes making the existing ownership structure illegal. While the Company is not aware of events that would make the occurrence of such a change probable, regulatory changes are outside the control of the Company. Accordingly, the noncontrolling interests subject to these repurchase provisions have been classified outside of equity and are carried as “noncontrolling interests — redeemable” on the Company’s consolidated balance sheets. The activity for the three and nine months ended September 30, 2012 and 2011 is summarized below (in thousands):

 

     2012
Noncontrolling
Interests —
Redeemable
 

Balance, December 31, 2011

   $ 106,668   

Net income attributable to noncontrolling interests

     15,690   

Distributions to noncontrolling interests

     (17,151

Purchases of noncontrolling interests

     (349

Sales of noncontrolling interests

     20,186   

Acquisition of new business

     3,908   
  

 

 

 

Balance, March 31, 2012

     128,952   

Net income attributable to noncontrolling interests

     15,368   

Distributions to noncontrolling interests

     (16,155

Purchases of noncontrolling interests

     (5,909

Sales of noncontrolling interests

     983   

Acquisition of new business

     12,387   
  

 

 

 

Balance, June 30, 2012

     135,626   

Net income attributable to noncontrolling interests

     14,517   

Distributions to noncontrolling interests

     (16,552

Purchases of noncontrolling interests

     (335

Sales of noncontrolling interests

     2,015   

Acquisition of new business

     4,184   
  

 

 

 

Balance, September 30, 2012

   $ 139,455   
  

 

 

 

 

     2011
Noncontrolling
Interests —
Redeemable
 

Balance, December 31, 2010

   $ 81,668   

Net income attributable to noncontrolling interests

     14,104   

Distributions to noncontrolling interests

     (13,939

Purchases of noncontrolling interests

     (145

Sales of noncontrolling interests

     3,187   
  

 

 

 

Balance, March 31, 2011

     84,875   

Net income attributable to noncontrolling interests

     15,041   

Distributions to noncontrolling interests

     (14,471

Purchases of noncontrolling interests

     (291

Sales of noncontrolling interests

     12,510   

Acquisition of new business

     984   
  

 

 

 

Balance, June 30, 2011

     98,648   

Net income attributable to noncontrolling interests

     14,641   

Distributions to noncontrolling interests

     (16,425

Purchases of noncontrolling interests

     (492

Sales of noncontrolling interests

     1,009   

Acquisition of new business

     1,457   
  

 

 

 

Balance, September 30, 2011

   $ 98,838   
  

 

 

 

 

14


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

(5) Long-term Debt

On April 3, 2012, the Company amended its senior secured credit facility, issued new senior unsecured notes, redeemed all validly tendered outstanding notes pursuant to the previously announced tender offer and consent solicitation, deposited funds with the trustee to redeem the remaining outstanding notes (which have since all been redeemed), and distributed the stock of its U.K. subsidiary to the equity holders of the Company’s parent, USPI Group Holdings, Inc (Parent).

The amended credit facility provided a new term loan and modified the terms of the Company’s existing term loan. The amended credit facility provided for borrowings up to $958.2 million, consisting of $144.9 million in non-extended term loans maturing in April 2014; $313.3 million in extended term loans maturing in April 2017; $375.0 million in new term loans maturing in April 2019; and $125.0 million under a revolving facility maturing in April 2017. In conjunction with the amendment to the credit facility, the Company repaid $16.0 million that was outstanding on its existing revolver and repaid $45.0 million of its existing term loan. The non-extended, extended and new term loans each require quarterly principal payments of 0.25% of the outstanding balance as of April 3, 2012 with the remaining balances due in 2014 for the non-extended term loans, in 2017 for the extended term loans and in 2019 for the new term loan. No principal payments are required on the revolving credit facility until its maturity in 2017. At September 30, 2012, the Company had $828.4 million outstanding under the amended credit facility at a weighted average interest rate of approximately 5.1%. At September 30, 2012, the Company had $123.4 million available for borrowing under the revolving credit facility, representing the facility’s $125.0 million capacity, net of the $1.6 million of outstanding letters of credit.

Interest rates on the amended credit facility are based on the prime rate or LIBOR plus a margin of 1.00% to 4.75%. Additionally, the Company pays 0.50% per annum on the daily-unused commitment of the new revolving credit facility. The Company also pays a quarterly participation fee of 2.13% per annum related to outstanding letters of credit.

The amended credit facility is guaranteed by USPI Holdings, Inc. and its current and future directly and indirectly 100%-owned domestic subsidiaries, subject to certain exceptions, and borrowings under the credit facility are secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of USPI’s capital stock, and the capital stock of each of USPI’s wholly owned domestic subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of the Company’s subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock.

On May 1, 2012, the Company completed the redemption of all of its remaining $240.0 million 8 7/8% senior subordinated notes and $200.0 million 9 1/4%/10% senior subordinated toggle notes, which was funded by the Company’s issuance of $440.0 million 9.0% senior notes due 2020 (the Notes). Interest on the Notes is payable on April 1 and October 1 of each year, and commenced on October 1, 2012. The Notes are unsecured senior obligations of the Company; however, the Notes are guaranteed by all of the Company’s current and future directly and indirectly 100%-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of its subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sells assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. At September 30, 2012, the Company had $440.0 million of Notes outstanding.

 

(6) Other Investments

The consolidated financial statements include the financial statements of USPI and its wholly-owned and controlled subsidiaries. The Company also determines if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations it does not control with voting rights. At September 30, 2012, the Company consolidated one entity in accordance with this accounting guidance.

This entity operates and manages seven surgical facilities in the Houston, Texas area. Despite not holding a controlling voting interest, the Company is the primary beneficiary because the Company is able to make the decisions that are most significant to the operations of the entity and has provided all of the funding for the entity, which the entity has used to acquire surgical facilities. The Company has no exposure for the entity’s losses beyond this investment. Accordingly, the Company did not provide any financial or other support to the entity that it was not previously contractually required to provide during the nine months ended September 30, 2012 or 2011. At September 30, 2012 and 2011, the total assets of this entity were $78.7 million and $79.6 million, and the total liabilities owed to third parties were $17.2 million and $19.3 million, respectively. Such amounts are included in the accompanying consolidated balance sheets.

 

(7) Derivatives

In December 2011, one of the Company’s U.S. subsidiaries loaned its U.K. subsidiary £15.0 million to fund the purchase of a hospital in Sheffield, England. In order to protect the Company against foreign currency fluctuations, in January 2012, the Company entered into a foreign currency contract with a bank to lock in the receipt of $21.5 million at the loan’s due date of May 31, 2012. This contract qualified for hedge accounting, and therefore the contract was recorded at fair value on the Company’s consolidated balance sheet, with the offset to other comprehensive income (loss). Due to the spin-off of the Company’s U.K. subsidiary, the contract was settled on April 4, 2012, and resulted in a payment to the bank of approximately $0.9 million.

 

15


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

(8) Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued. The estimated fair values may not be representative of actual values that will be realized or settled in the future.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

The fair value of the Company’s long-term debt is determined by either (i) estimation of the discounted future cash flows of the debt at rates currently quoted or offered to the Company for similar debt instruments of comparable maturities by its lenders, or (ii) quoted market prices at the reporting date for the traded debt securities. At September 30, 2012, the aggregate carrying amount and estimated fair value of long-term debt were $1.3 billion and $1.4 billion, respectively. At September 30, 2011, the aggregate carrying amount and estimated fair value of long-term debt were each $1.0 billion. The fair value of debt is classified within Level 2 of the valuation hierarchy.

At September 30, 2012 and 2011, the Company had approximately $10.6 million and $4.8 million, respectively, of marketable securities, which are held by the Company’s wholly-owned insurance subsidiary. These investments are used in connection with its retained professional and general liability risks and are not available for general corporate purposes. The marketable securities consist of U.S. Treasury and corporate debt, are classified as available-for-sale and are recorded at fair value on the consolidated balance sheet. The fair value of these securities are classified within Level 2 of the valuation hierarchy, and are based on closing market prices of the investments when applicable, or alternatively, valuations utilizing market data and other observable inputs.

 

(9) Equity

On April 3, 2012, the Company paid a cash dividend of approximately $314.5 million to its Parent’s equity holders. Also, on April 3, 2012, the Company distributed the stock of its U.K. subsidiary to its Parent’s equity holders.

The Company accounts for equity-based compensation, such as stock options and other stock-based awards to employees and directors, at fair value. The fair value of the compensation is measured at the date of grant and recognized as expense over the recipient’s requisite service period.

The Company’s equity-based compensation consists primarily of stock options and restricted stock granted by parent to certain employees and members of the board of directors. The fair value of stock options was estimated at the date of grant using the Black-Scholes formula based on assumptions derived from historical experience.

Total equity-based compensation, included in the accompanying consolidated statements of income, classified by line item, is as follows (in thousands):

 

                                                                                               
    Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Salaries, benefits and other employee costs

  $ 131      $ 314      $ 80      $ 326   

General and administrative expenses

    220        681        163        682   

Other operating expenses

    —          193        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Expense before income tax benefit

    351        1,188        243        1,008   

Income tax benefit

    (28     (190     (30     (178
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity-based compensation expense, net of tax

  $ 323      $ 998      $ 213      $ 830   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity-based compensation, included in the accompanying consolidated statements of income, classified by type of award, is as follows (in thousands):

 

 

                                                                                               
     Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Share awards

   $ 111      $ 409      $ 123      $ 721   

Stock options

     240        586        120        287   

Warrants

     —          193        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense before income tax benefit

     351        1,188        243        1,008   

Income tax benefit

     (28     (190     (30     (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity-based compensation expense, net of tax

   $ 323      $ 998      $ 213      $ 830   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

(10) Related Party Transactions

Included in general and administrative expenses are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in the Company, in the amount of $0.5 million and $1.5 million in both the three months and nine months ended September 30, 2012 and 2011, respectively. Such amounts accrue at an annual rate of $2.0 million. The Company pays $1.0 million in cash per year with the unpaid balance due and payable upon a change in control. At September 30, 2012, the Company had approximately $6.0 million accrued related to such management fee, of which $0.5 million is included in other current liabilities and $5.5 million is included in other long-term liabilities in the accompanying consolidated balance sheet.

 

(11) Commitments and Contingencies

As of September 30, 2012, the Company had issued guarantees of the indebtedness and other obligations of its investees to third parties, which could potentially require the Company to make maximum aggregate payments totaling approximately $67.9 million. Of the total, $21.5 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures, and $38.3 million of the remaining $46.4 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in the Company’s consolidated balance sheet and related disclosures. The remaining $8.1 million represents a guarantee of the obligations of four facilities which have been sold. The Company has full recourse to the buyers with respect to these amounts.

The Company has recorded long-term liabilities totaling approximately $0.4 million related to the guarantees the Company has issued to unconsolidated affiliates on or after January 1, 2003, and has not recorded any liabilities related to guarantees issued prior to that date. Generally, these arrangements (a) consist of guarantees of real estate and equipment financing, (b) are secured by the related property and equipment, (c) require payments by the Company, when the collateral is insufficient, in the event of a default by the investee primarily obligated under the financing, (d) expire as the underlying debt matures at various dates through 2022, and (e) provide no recourse for the Company to recover any amounts from third parties. The Company also has $1.6 million of letters of credit outstanding.

 

(12) Subsequent Events

The Company has entered into letters of intent with various entities regarding possible joint venture, development, or other transactions. These possible joint ventures, developments of new facilities, or other transactions are in various stages of negotiation.

 

(13) Condensed Consolidating Financial Statements

The following information is presented as required by regulations of the Securities and Exchange Commission (SEC) in connection with the Company’s Notes that have been registered with the SEC. This information is not routinely prepared for use by management. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Accordingly, the operating results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services.

The Notes were issued in a private offering on April 3, 2012 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on September 5, 2012. The exchange offer was completed in October 2012. The Notes are unsecured obligations of the Company; however, the Notes are guaranteed by all of its current and future direct and indirect 100%-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees in which USPI owns less than 100% are not guarantors of the obligation. The financial positions and results of operations (below, in thousands) of the respective guarantors are based upon the guarantor relationship at the end of the period presented. Consolidation adjustments include purchase accounting entries for investments in which the Company’s ownership percentage in non-participating investees is not high enough to permit the application of pushdown accounting.

 

17


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

Condensed Consolidating Balance Sheets:

 

As of September 30, 2012

   Guarantors      Non-Participating
Investees
     Consolidation
Adjustments
    Consolidated
Total
 
ASSETS   

Current assets:

          

Cash and cash equivalents

   $ 60,605       $ 2,481       $ —        $ 63,086   

Available for sale securities

     10,591         —           —          10,591   

Accounts receivable, net

     —           36,868         —          36,868   

Other receivables

     17,615         23,111         (26,488     14,238   

Inventories of supplies

     774         6,608         —          7,382   

Prepaids and other current assets

     26,286         1,351         —          27,637   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     115,871         70,419         (26,488     159,802   

Property and equipment, net

     29,446         91,839         456        121,741   

Investments in unconsolidated affiliates

     877,057         —           (424,279     452,778   

Goodwill and intangible assets, net

     947,419         139,736         388,780        1,475,935   

Other assets

     23,522         890         (439     23,973   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,993,315       $ 302,884       $ (61,970   $ 2,234,229   
  

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Liabilities and Equity

          

Current liabilities:

          

Accounts payable

   $ 6,297       $ 10,608       $ —        $ 16,905   

Accrued expenses and other

     241,543         15,594         (25,917     231,220   

Current portion of long-term debt

     8,661         10,630         (1,089     18,202   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     256,501         36,832         (27,006     266,327   

Long-term debt, less current portion

     1,261,321         51,474         (207     1,312,588   

Other long-term liabilities

     186,005         4,866         (546     190,325   

Parent’s equity

     289,488         184,871         (184,871     289,488   

Noncontrolling interests

     —           24,841         150,660        175,501   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,993,315       $ 302,884       $ (61,970   $ 2,234,229   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2011

   Guarantors      Non-Participating
Investees
     Consolidation
Adjustments
    Consolidated
Total
 
ASSETS   

Current assets:

          

Cash and cash equivalents

   $ 36,198       $ 5,624       $ —        $ 41,822   

Available for sale securities

     4,815         —           —          4,815   

Accounts receivable, net

     —           58,057         —          58,057   

Other receivables

     44,627         52,122         (86,250     10,499   

Inventories of supplies

     737         9,380         —          10,117   

Prepaids and other current assets

     27,433         2,585         —          30,018   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     113,810         127,768         (86,250     155,328   

Property and equipment, net

     23,705         211,296         320        235,321   

Investments in unconsolidated affiliates

     952,116         —           (507,382     444,734   

Goodwill and intangible assets, net

     930,186         251,882         354,417        1,536,485   

Other assets

     88,206         511         (67,087     21,630   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,108,023       $ 591,457       $ (305,982   $ 2,393,498   
  

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

          

Accounts payable

   $ 1,789       $ 26,976       $ —        $ 28,765   

Accrued expenses and other

     227,790         79,603         (84,408     222,985   

Current portion of long-term debt

     5,595         21,193         (1,301     25,487   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     235,174         127,772         (85,709     277,237   

Long-term debt, less current portion

     952,717         91,038         (786     1,042,969   

Other long-term liabilities

     187,444         11,618         (309     198,753   

Parent’s equity

     732,688         335,461         (335,461     732,688   

Noncontrolling interests

     —           25,568         116,283        141,851   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,108,023       $ 591,457       $ (305,982   $ 2,393,498   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

Condensed Consolidating Statements of Income:

 

For the Nine Months Ended September 30, 2012

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Revenues

   $ 83,432      $ 320,401      $ (18,113   $ 385,720   

Equity in earnings of unconsolidated affiliates

     104,768        2,787        (41,348     66,207   

Operating expenses, excluding depreciation and amortization

     63,035        212,975        (17,572     258,438   

Depreciation and amortization

     5,230        12,088        91        17,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     119,935        98,125        (41,980     176,080   

Interest expense, net

     (57,856     (3,706     —          (61,562

Loss on early retirement of debt

     (37,981     —          —          (37,981

Other income (expense), net

     (760     (388     400        (748
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     23,338        94,031        (41,580     75,789   

Income tax expense

     (9,558     (785     —          (10,343
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     13,780        93,246        (41,580     65,446   

Earnings from discontinued operations, net of tax

     3,434        3,212        (3,212     3,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17,214        96,458        (44,792     68,880   

Less: Net income attributable to noncontrolling interests

     —          (12,547     (39,119     (51,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Parent

   $ 17,214      $ 83,911      $ (83,911   $ 17,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

For the Nine Months Ended September 30, 2011

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Revenues

   $ 78,097      $ 304,032      $ (17,327   $ 364,802   

Equity in earnings of unconsolidated affiliates

     96,581        2,489        (42,147     56,923   

Operating expenses, excluding depreciation and amortization

     56,341        198,453        (15,521     239,273   

Depreciation and amortization

     5,071        10,762        113        15,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     113,266        97,306        (44,066     166,506   

Interest expense, net

     (44,890     (3,039     —          (47,929

Other income (expense), net

     (196     265        (183     (114
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     68,180        94,532        (44,249     118,463   

Income tax expense

     (26,600     (691     —          (27,291
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     41,580        93,841        (44,249     91,172   

Earnings from discontinued operations, net of tax

     7,213        7,730        (7,730     7,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     48,793        101,571        (51,979     98,385   

Less: Net income attributable to noncontrolling interests

     —          (11,640     (37,952     (49,592
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Parent

   $ 48,793      $ 89,931      $ (89,931   $ 48,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

Condensed Consolidating Statements of Comprehensive Income:

 

For the Nine Months Ended September 30, 2012

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Net income

   $ 17,214      $ 96,458      $ (44,792   $ 68,880   

Other comprehensive income:

        

Foreign currency translation adjustments

     4,938        4,938        (4,938     4,938   

Unrealized gain on available for sale securities, net of tax

     48        —          —          48   

Unrealized loss on foreign currency contract, net of tax

     (560     —          —          (560

Unrealized gain on interest rate swap, net of tax

     15        15        (15     15   

Reclassification due to spin-off of U.K. subsidiary:

        

Foreign currency translation adjustments

     58,682        58,682        (58,682     58,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     63,123        63,635        (63,635     63,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     80,337        160,093        (108,427     132,003   

Comprehensive income attributable to noncontrolling interests

     —          (12,547     (39,119     (51,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Parent

   $ 80,337      $ 147,546      $ (147,546   $ 80,337   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Nine Months Ended September 30, 2011

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Net income

   $ 48,793      $ 101,571      $ (51,979   $ 98,385   

Other comprehensive income:

        

Foreign currency translation adjustments

     2,831        2,831        (2,831     2,831   

Unrealized gain on available for sale securities, net of tax

     36        —          —          36   

Unrealized gain on interest rate swap, net of tax

     2,523        168        (168     2,523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     5,390        2,999        (2,999     5,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     54,183        104,570        (54,978     103,775   

Comprehensive income attributable to noncontrolling interests

     —          (11,640     (37,952     (49,592
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Parent

   $ 54,183      $ 92,930      $ (92,930   $ 54,183   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

 

Condensed Consolidating Statements of Cash Flows:

 

For the Nine Months Ended September 30, 2012

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Cash flows from operating activities:

        

Net income

   $ 17,214      $ 96,458      $ (44,792   $ 68,880   

Earnings on discontinued operations

     (3,434     (3,212     3,212        (3,434

Loss on early retirement of debt

     37,981        —          --00        37,981   

Changes in operating and intercompany assets and liabilities and noncash items included in net income

     20,059        8,621        (2,244     26,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     71,820        101,867        (43,824     129,863   

Cash flows from investing activities:

        

Purchases of property and equipment, net

     (9,279     (5,308     —          (14,587

Purchases and sales of new businesses and equity interests, net

     (36,428     (225     —          (36,653

Other items, net

     1,148        6,322        (6,762     708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (44,559     789        (6,762     (50,532

Cash flows from financing activities:

        

Long-term borrowings, net

     255,312        (3,065     790        253,037   

Purchases and sales of noncontrolling interests, net

     5,783        —          —          5,783   

Distributions to noncontrolling interests

     —          (102,146     43,600        (58,546

Payment of common stock dividend

     (314,458     —          —          (314,458

Increase in cash held on behalf of noncontrolling interest holders and other

     3,015        349        5,972        9,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (50,348     (104,862     50,362        (104,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

     47,494        (937     224        46,781   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     24,407        (3,143     —          21,264   

Cash at the beginning of the period

     36,198        5,624        —          41,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash at the end of the period

   $ 60,605      $ 2,481      $ —        $ 63,086   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Nine Months Ended September 30, 2011

   Guarantors     Non-Participating
Investees
    Consolidation
Adjustments
    Consolidated
Total
 

Cash flows from operating activities:

        

Net income

   $ 48,793      $ 101,571      $ (51,979   $ 98,385   

Earnings on discontinued operations

     (7,213     (7,730     7,730        (7,213

Changes in operating and intercompany assets and liabilities and noncash items included in net income

     32,994        475        1,856        35,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     74,574        94,316        (42,393     126,497   

Cash flows from investing activities:

        

Purchases of property and equipment, net

     (2,318     (5,973     —          (8,291

Purchases and sales of new businesses and equity interests, net

     (50,681     —          —          (50,681

Other items, net

     1,315        19,334        (21,948     (1,299
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (51,684     13,361        (21,948     (60,271

Cash flows from financing activities:

        

Long-term borrowings, net

     (28,949     (5,733     2,255        (32,427

Purchases and sales of noncontrolling interests, net

     531        —          —          531   

Distributions to noncontrolling interests

     —          (92,964     42,393        (50,571

Increase in cash held on behalf of noncontrolling interest holders and other

     (5,748     (361     19,693        13,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (34,166     (99,058     64,341        (68,883

Net cash provided by (used in) discontinued operations

     (1,363     (307     —          (1,670
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash

     (12,639     8,312        —          (4,327

Cash at the beginning of the period

     60,186        67        —          60,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash at the end of the period

   $ 47,547      $ 8,379      $ —        $ 55,926   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “continues,” “will,” “may,” “should,” “estimates,” “intends,” “plans” and similar expressions, and statements regarding the Company’s business strategy and plans, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such factors include, among others, the following: our significant indebtedness; general economic and business conditions, including without limitation the condition of the financial markets; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into or renew managed care provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement in the United States; the efforts of insurers, healthcare providers and others to contain healthcare costs; the impact of healthcare reform; liability and other claims asserted against us; the highly competitive nature of healthcare; changes in business strategy or development plans of healthcare systems with which we partner; the ability to attract and retain qualified physicians and personnel, including nurses and other healthcare professionals and other personnel; the availability of suitable acquisition and development opportunities and the length of time it takes to complete acquisitions and developments; our ability to integrate new and acquired businesses with our existing operations; the availability and terms of capital to fund the expansion of our business, including the acquisition and development of additional facilities and certain additional factors, risks and uncertainties discussed in this Annual Report on Form 10-K. We disclaim any obligation and make no promise to update any such factors or forward-looking statements or to publicly announce the results of any revisions to any such factors or forward-looking statements, whether as a result of changes in underlying factors, to reflect new information as a result of the occurrence of events or developments or otherwise. Given these uncertainties, investors and prospective investors are cautioned not to rely on such forward-looking statements.

Overview

We operate ambulatory surgery centers and surgical hospitals across the United States. Prior to April 3, 2012, we also owned and operated private healthcare facilities in the United Kingdom. On April 3, 2012, we declared a stock dividend which distributed our investment in our U.K. subsidiary to the equity holders of our parent, USPI Group Holdings, Inc (Parent), and as a result we no longer own or operate facilities in the United Kingdom. Our U.K. operations are now classified as “discontinued operations” in our historical results of operations.

As of September 30, 2012, we operated 203 facilities. All but two of our 203 facilities include local physician owners, and 142 of these facilities are also partially owned by various not-for-profit healthcare systems (hospital partners). In addition to facilitating the joint ownership of the majority of our existing facilities, our agreements with these healthcare systems provide a framework for the construction or acquisition of additional facilities in the future. The two facilities we are currently developing both include hospital partners. During the first nine months of 2012, we acquired equity interests in a surgical facility in Midland, Texas, a surgical facility in Chandler, Arizona, and two facilities in New Jersey, all of which have a hospital partner, as does our newest facility, a surgical center in Pittsburgh, Pennsylvania which opened in March 2012.

Our facilities, consisting of ambulatory surgery centers and surgical hospitals, specialize in non-emergency surgical cases. Due in part to advancements in medical technology, the volume and complexity of surgical cases performed in an outpatient setting has steadily increased over the past three decades. Our facilities earn a fee from patients, insurance companies, or other payors in exchange for providing the facility and related services a surgeon requires in order to perform a surgical case. In addition, we earn a monthly fee from each facility we operate in exchange for managing its operations. In recent years we have focused on partnering our facilities with hospital partners, which we believe improves the long-term profitability and potential of our facilities.

Prior to April 3, 2012, we operated and owned four hospitals, an oncology clinic, a diagnostic and surgery center and an eye clinic in the United Kingdom, which supplement the services provided by the government-sponsored healthcare system. Patients at these facilities choose to receive care at private facilities primarily because of the long wait to receive diagnostic procedures or elective surgery at government-sponsored facilities and pay us either from personal funds or through private insurance, which is offered by some employers as a benefit to their employees. In 2011, we acquired a controlling interest in a diagnostic and surgery center located in Edinburgh, Scotland and a hospital in Sheffield, England. In March 2012, we acquired an eye clinic in Solihull, England. As described above, we have had no ownership in the U.K. operations since April 3, 2012.

Our growth and success depends on our ability to continue to grow volumes at our existing facilities, to successfully open new facilities we develop, to successfully integrate acquired facilities into our operations, and to maintain productive relationships with our physician and hospital partners. We believe we will have significant opportunities to operate more facilities in the future in existing and new markets and that many of these will include hospital partners.

 

22


Table of Contents

Due in large part to our partnerships with physician and hospital partners, we do not consolidate 144 of the 203 facilities in which we have ownership interests. To help analyze our results of operations, we disclose an operating measure we refer to as systemwide revenue growth, which includes both consolidated and unconsolidated facilities. While revenues of our unconsolidated facilities are not recorded as revenues by USPI, we believe the information is important in understanding our financial performance because these revenues are the basis for calculating the Company’s management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for our equity in earnings of unconsolidated affiliates and a significant component of our operating cash flows. In addition, we disclose growth rates and operating margins (both consolidated and unconsolidated) for the facilities that were operational in both the current and prior year periods, a group we refer to as same store facilities.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, revenue recognition, income taxes and intangible assets.

Our determination of whether to consolidate an entity in which we hold an investment, account for it under the equity method, or carry it at cost has a significant impact on our consolidated financial statements because of the typical business model under which we operate, where the majority of the facilities we operate are partially owned by hospital partners, physicians, and other parties. These quarterly consolidated financial statements have been prepared using the same consolidation policy as that used in our latest audited consolidated financial statements.

We also consider our accounting policy regarding intangible assets to be a critical accounting policy given the significance of intangible assets as compared to the total assets of our company. There have been no significant changes in our application of GAAP to intangible assets since the preparation of our latest audited consolidated financial statements.

Our revenue recognition and accounts receivable policy and our method of accounting for income taxes involve significant judgments and estimates. There have been no significant changes in assumptions, estimates, and judgments in the preparation of these quarterly consolidated financial statements from the assumptions, estimates, and judgments used in the preparation of our latest audited consolidated financial statements.

Spin-off of United Kingdom Operations

Until April 3, 2012, we operated in two countries, the United States of America and the United Kingdom. On April 3, 2012, we distributed the stock of our U.K. subsidiary to our Parent’s equity holders. Subsequent to April 3, 2012, we have no further ownership in the U.K. operations. Our former U.K. operations have now been classified as “discontinued operations” in our historical results of operations. Because GAAP requires spin-off transactions to be accounted for at carrying value, there was no gain or loss reported as a result of the spin-off.

Equity Investments and Development Projects

Our strategy includes the acquisition of ownership interests in surgical facilities and the development of new facilities. In addition to the initial transaction to acquire a facility, we also engage in transactions to acquire additional ownership in a facility we already operate or to sell a portion of our interest in a facility to a physician or hospital partner. When those transactions involve our investments in unconsolidated affiliates but do not involve a change of control, the cash flow impact is classified within investing activities. During the nine months ended September 30, 2012, these transactions resulted in a net cash outflow of approximately $19.6 million, which is summarized below:

 

Effective Date

   Facility Location   Amount  

Investments

    

February 2012

   Midland, Texas(1)   $ 3.0 million   

March 2012

   Chandler, Arizona(1)     0.8 million   

September 2012

   New Jersey(2)     12.3 million   

Various

   Various(3)     3.5 million   
    

 

 

 

Total

     $ 19.6 million   
    

 

 

 

 

(1)

Acquisition of a noncontrolling interest in and right to manage a surgical facility in which the Company previously had no involvement. The facility is jointly owned with a hospital partner and local physicians.

(2)

Acquisition of a noncontrolling interest in and right to manage two surgical facilities in Hackensack and Paramus, New Jersey, respectively, in which we previously had no involvement. The facilities are jointly owned with a hospital partner and local physicians.

(3)

Represents the net payment related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

 

23


Table of Contents

Effective June 1, 2012, we acquired an additional 44% ownership in a surgical facility in New Jersey in which we already had an equity method investment and the rights to manage. As a result of the transaction, we now control the facility and began consolidating its operating results effective June 1, 2012. We paid cash totaling $17.1 million, which is subject to certain purchase price adjustments set forth in the purchase agreement. We recorded a gain of approximately $0.2 million as a result of adjusting the carrying value of its existing ownership to fair value as required by GAAP. The gain is included in “Net loss (gain) on deconsolidations, disposals and impairments” in the accompanying consolidated statements of income.

We control and therefore consolidate the results of 59 of our 203 facilities. Similar to our investments in unconsolidated affiliates, we regularly engage in the purchase and sale of equity interests in our consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among us, our consolidated subsidiaries, and noncontrolling interests. During the nine months ended September 30, 2012, we purchased and sold equity interests in various consolidated subsidiaries in the amounts of $1.9 million and $7.7 million, respectively. The difference between our carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to our additional paid-in capital. These transactions resulted in a $16.6 million decrease to our additional paid-in capital during the nine months ended September 30, 2012.

Sources of Revenue

Revenues primarily include the following:

 

   

net patient service revenues of the facilities that we consolidate for financial reporting purposes, which are typically those facilities in which we have ownership interests of greater than 50% or otherwise maintain effective control or for which we are otherwise the primary beneficiary;

 

   

management and contract service revenues, consisting of the fees that we earn from managing the facilities that we do not consolidate for financial reporting purposes and the fees we earn from providing contracted services to other healthcare providers. Our consolidated revenues and expenses do not include the management fees we earn from operating the facilities that we consolidate for financial reporting purposes as those fees are charged to subsidiaries and thus eliminate in consolidation.

The following table summarizes our revenues by type and as a percentage of total revenue for the periods presented:

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2012     2011     2012     2011  

Net patient service revenues

     83     84     83     84

Management and contract service revenues

     15        15        15        14   

Other revenues

     2        1        2        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net patient service revenues consist of the revenues earned by facilities we consolidate for financial reporting purposes. As a percent of our total revenues, these revenues did not significantly change compared to prior year periods.

Our management and contract service revenues are earned from the following types of activities (in thousands):

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2012      2011      2012      2011  

Management of surgical facilities

   $ 16,461       $ 15,212       $ 50,154       $ 45,083   

Contract services provided to other healthcare providers

     2,677         2,595         7,909         7,791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total management and contract service revenues

   $ 19,138       $ 17,807       $ 58,063       $ 52,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

As described above, our primary business is the operation of surgical facilities.

 

24


Table of Contents

Results of Operations

The following table summarizes certain consolidated statement of income items expressed as a percentage of revenues for the periods indicated:

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 

USPI

   2012     2011     2012     2011  

Total revenues

     100.0     100.0     100.0     100.0

Equity in earnings of unconsolidated affiliates

     17.2        15.5        17.2        15.6   

Operating expenses, excluding depreciation and amortization

     (69.0     (67.2     (67.0     (65.6

Depreciation and amortization

     (4.5     (4.3     (4.5     (4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     43.7        44.0        45.7        45.6   

Interest and other expense, net

     (18.0     (12.4     (26.0     (13.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     25.7        31.6        19.7        32.5   

Income tax expense

     (5.0     (7.2     (2.7     (7.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     20.7        24.4        17.0        25.0   

Earnings from discontinued operations, net of tax

     —          1.7        0.9        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20.7        26.1        17.9        27.0   

Less: Net income attributable to noncontrolling interests

     (12.9     (13.6     (13.4     (13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to USPI’s common stockholder

     7.8     12.5     4.5     13.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Our business model of partnering with not-for-profit hospitals and physicians results in our accounting for 144 of our surgical facilities under the equity method rather than consolidating their results. The following table reflects the summarized results of the unconsolidated facilities that we account for under the equity method of accounting (amounts are expressed as a percentage of unconsolidated affiliates’ revenues, and reflect 100% of the investees’ results on an aggregated basis):

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 

USPI’s Unconsolidated Affiliates

   2012     2011     2012     2011  

Total revenues

     100.0     100.0     100.0     100.0

Operating expenses, excluding depreciation and amortization

     (71.0     (70.3     (70.9     (70.5

Depreciation and amortization

     (4.3     (4.5     (4.3     (4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     24.7        25.2        24.8        25.1   

Interest and other expense, net

     (1.9     (2.4     (2.1     (2.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22.8        22.8        22.7        22.8   

Income tax expense

     (0.6     (0.6     (0.5     (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22.2     22.2     22.2     22.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Executive Summary

Our strategy continues to include growing the profits of our existing facilities, developing new facilities with hospital partners, and adding other facilities through acquisition. Our operating results for the three and nine months ended September 30, 2012 reflect 5% and 6% same store facility revenue growth as compared to the corresponding periods in 2011. The increases are due in part to a 2% and 3% increase in our same store case volumes for the three months and nine months ended September 30, 2012, respectively, and our overall business also grew as a result of our operating more facilities in 2012, largely as a result of acquisitions made during the second half of 2011. These growth drivers resulted in a 4% and 6% increase in operating income for the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011. The third quarter of 2012 had one fewer day of operations for our facilities than the third quarter of 2011, which we believe contributed to our case volume and revenues growing more slowly than in earlier quarters of the year and to our facilities’ operating income margins decreasing. In addition to growing our existing facilities, we operated more facilities in 2012. During the first nine months of 2012, we acquired equity interests in a surgical facility in Midland, Texas, a surgical facility in Chandler, Arizona, and two facilities in New Jersey, all of which have a hospital partner, as does our newest facility, a surgical center in Pittsburgh, Pennsylvania which opened in March 2012.

 

25


Table of Contents

Continuing a trend experienced in recent years, our consolidated revenue growth of 5% in the third quarter of 2012 as compared to the corresponding period in 2011 was less than our systemwide revenue growth of 9%, primarily due to our continuing to add more equity method facilities as compared to consolidated facilities. Our systemwide revenues include all facilities that we operate; our revenues only include consolidated facilities, which represent less than one-third of our facilities. Accounting for more of our facilities under the equity method is a direct result of deploying our primary business strategy of jointly owning our facilities with prominent local physicians and often a hospital partner. In carrying out this strategy during the period from January 1, 2011 to September 30, 2012, our number of equity method facilities increased from 130 to 144 while our consolidated facility count increased from 54 to 59, driven by our acquisition and disposal activity.

Our net earnings from a facility, whether consolidated or equity method, are driven by the same factors: the facility’s underlying profits and revenues and our ownership percentage. Accordingly, to assess our overall operating results we often utilize systemwide and same store measures, which include all facilities. These measures were positive in the third quarter of 2012, with same store revenues increasing 5% and systemwide revenues increasing 9% as compared to the corresponding prior year period, a product of same store growth and a net increase of 14 facilities since the beginning of 2011.

As discussed in more detail below, we completed several significant financing and equity transactions on April 3, 2012, including the payment of a $314.5 million cash dividend, the spin-off of our U.K. operations and the refinancing of a substantial portion of our outstanding debt.

Our Business and Key Measures

We operate surgical facilities in partnership with local physicians and, in the majority of facilities, a not-for-profit health system partner. We hold an ownership interest in each facility, each being operated through a separate legal entity owned by physicians, the health systems and us. We operate each facility on a day-to-day basis through a management services contract. Our sources of earnings from each facility consist of:

 

   

our share of each facility’s net income or loss, which is computed by multiplying the facility’s net income or loss times the percentage of each facility’s equity interests owned by us; and

 

   

management services revenues, computed as a percentage of each facility’s net revenues (often net of bad debt expense).

Our role as an owner and day-to-day manager provides us with significant influence over the operations of each facility. In a growing majority of our facilities (currently 144 of our 203 facilities), this influence does not represent control of the facility; we account for our investments in these facilities under the equity method, i.e., as unconsolidated affiliates. We control the remaining 59 of our facilities and account for these investments as consolidated subsidiaries.

Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than us is classified within “net income attributable to noncontrolling interests.”

For unconsolidated affiliates, our consolidated statements of income reflect our earnings in only two line items:

 

   

equity in earnings of unconsolidated affiliates: our share of the net income of each facility, which is based on the facilities’ net income or loss and the percentage of the facility’s outstanding equity interests owned by us; and

 

   

management and administrative services revenues: income we earn in exchange for managing the day-to-day operations of each facility, usually quantified as a percentage of each facility’s net revenues less bad debt expense.

In summary, our operating income is driven by the performance of all facilities we operate and by our ownership interest in those facilities, but our individual revenue and expense line items only contain consolidated businesses, which represent less than one-third of our facilities. This translates to trends in operating income that often do not correspond with changes in revenues and expenses. The divergence in these relationships is particularly significant when our strategy is heavily weighted to unconsolidated affiliates, as it has been in recent years. Accordingly, we review several types of information in order to monitor and analyze our results of operations, including:

 

   

The results of operations of our unconsolidated affiliates

 

   

Our average ownership share in the facilities we operate; and

 

   

Facility operating indicators, such as systemwide revenue growth, same store revenue growth, and same store operating margins.

 

26


Table of Contents

Our Consolidated and Unconsolidated Results

The following table shows our results of operations and the results of operations of our unconsolidated affiliates (in thousands).

 

     Three Months Ended September 30              
     2012     2011     Variance to Prior Year  
     USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
    USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
    USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
 

Revenues:

            

Net patient service revenues

   $ 106,886      $ 414,572      $ 102,296      $ 375,568      $ 4,590      $ 39,004   

Management and contract service revenues

     19,138        —          17,807        —          1,331        —     

Other income

     2,281        2,357        2,158        3,076        123        (719
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     128,305        416,929        122,261        378,644        6,044        38,285   

Equity in earnings of unconsolidated affiliates

     22,118        —          18,890        —          3,228        —     

Operating expenses:

            

Salaries, benefits, and other employee costs

     32,999        98,842        31,461        89,960        1,538        8,882   

Medical services and supplies

     20,184        106,081        18,888        88,194        1,296        17,887   

Other operating expenses

     21,838        86,170        19,879        79,033        1,959        7,137   

General and administrative expenses

     9,326        —          10,456        —          (1,130     —     

Provision for doubtful accounts

     2,001        11,802        2,758        8,988        (757     2,814   

Net (gain) loss on deconsolidations, disposals and impairments

     2,233        (7,026     (1,271     (100     3,504        (6,926

Depreciation and amortization

     5,746        17,944        5,226        17,286        520        658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     94,327        313,813        87,397        283,361        6,930        30,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     56,096        103,116        53,754        95,283        2,342        7,833   

Interest income

     170        87        143        97        27        (10

Interest expense

     (23,260     (8,428     (15,308     (8,980     (7,952     552   

Loss on early retirement of debt

     (23     —          —          —          (23     —     

Other

     34        385        6        (1     28        386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (23,079     (7,956     (15,159     (8,884     (7,920     928   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     33,017        95,160        38,595        86,399        (5,578     8,761   

Income tax expense

     (6,394     (2,326     (8,717     (2,219     2,323        (107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     26,623        92,834        29,878        84,180        (3,255     8,654   

Discontinued operations, net of tax

     (2     —          2,006        —          (2,008     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     26,621      $ 92,834        31,884      $ 84,180        (5,263   $ 8,654   
    

 

 

     

 

 

     

 

 

 

Less: Net income attributable to noncontrolling interests

     (16,638       (16,598       (40  
  

 

 

     

 

 

     

 

 

   

Net income attributable to USPI’s common stockholder

   $ 9,983        $ 15,286        $ (5,303  
  

 

 

     

 

 

     

 

 

   

USPI’s equity in earnings of unconsolidated affiliates

     $ 22,118        $ 18,890        $ 3,228   

 

27


Table of Contents
     Nine Months Ended September 30              
     2012     2011     Variance to Prior Year  
     USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
    USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
    USPI as
Reported
Under
GAAP
    Unconsolidated
Affiliates
 

Revenues:

            

Net patient service revenues

   $ 320,818      $ 1,245,868      $ 305,345      $ 1,093,113      $ 15,473      $ 152,755   

Management and contract service revenues

     58,063        —          52,874        —          5,189        —     

Other income

     6,839        8,214        6,583        7,884        256        330   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     385,720        1,254,082        364,802        1,100,997        20,918        153,085   

Equity in earnings of unconsolidated affiliates

     66,207        —          56,923        —          9,284        —     

Operating expenses:

            

Salaries, benefits, and other employee costs

     99,649        294,750        92,536        263,513        7,113        31,237   

Medical services and supplies

     58,882        310,012        56,289        256,077        2,593        53,935   

Other operating expenses

     62,925        256,112        58,495        230,608        4,430        25,504   

General and administrative expenses

     30,008        —          28,959        —          1,049        —     

Provision for doubtful accounts

     6,314        34,727        6,743        26,178        (429     8,549   

Net (gain) loss on deconsolidations, disposals and impairments

     660        (6,496     (3,749     (479     4,409        (6,017

Depreciation and amortization

     17,409        54,342        15,946        48,743        1,463        5,599   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     275,847        943,447        255,219        824,640        20,628        118,807   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     176,080        310,635        166,506        276,357        9,574        34,278   

Interest income

     472        253        467        285        5        (32

Interest expense

     (62,034     (26,418     (48,396     (24,996     (13,638     (1,422

Loss on early retirement of debt

     (37,981     —          —          —          (37,981