Acquisitions and Investments in Unconsolidated Affiliates

6 Months Ended

Jun. 30, 2014

Business Combinations [Abstract]

Acquisitions and Investments in Unconsolidated Affiliates

Acquisitions and Investments in Unconsolidated Affiliates

As a significant part of its growth strategy, the Company primarily acquires controlling interests in centers.  The Company accounts for its business combinations under the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer be identified for each business combination.  The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control.  The assets acquired, liabilities assumed and any noncontrolling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination.  Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.  Equity method investments are initially recorded at cost, unless such investments are a result of the Company entering into a transaction whereby the Company loses control of a previously controlled entity but retains a noncontrolling interest.  Such transactions, which result in the deconsolidation of a previously consolidated entity, are measured at fair value.

During each of the six months ended June 30, 2014 and 2013, the Company, through a wholly-owned subsidiary, acquired a controlling interest in two centers. The aggregate amount paid for the centers acquired and for settlement of purchase price payable obligations during the six months ended June 30, 2014 and 2013 was approximately $24,437,000 and $18,346,000, respectively, and was paid in cash and funded by a combination of operating cash flow and borrowings under the Company’s revolving credit facility.  The total fair value of an acquisition includes an amount allocated to goodwill, which results from the centers’ favorable reputations in their markets, their market positions and their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model. 

In conjunction with the Company’s acquisition of 17 centers from National Surgical Care, Inc.  (“NSC”) on September 1, 2011, the Company agreed to pay as additional consideration an amount up to $7,500,000 based on a multiple of the excess earnings over the targeted earnings of the acquired centers, if any, from the period of January 1, 2012 to December 31, 2012.  During the six months ended June 30, 2013, the Company paid NSC $2,744,000 as final settlement of the additional consideration due in accordance with the purchase agreement.

The acquisition date fair value of the total consideration transferred and acquisition date fair value of each major class of consideration for the acquisition completed in the six months ended June 30, 2014 and 2013, including post acquisition date adjustments recorded to finalize purchase price allocations, are as follows (in thousands): 

	Six Months Ended June 30,
	2014			2013
Accounts receivable	$	1,023		$	286
Supplies, inventory, prepaid and other current assets	953			143
Property and equipment	2,481			1,504
Goodwill	44,319			27,880
Accounts payable	(2,341		)	(110		)
Other accrued liabilities	(527		)	(68		)
Long-term debt	(214		)	(638		)
Total fair value	45,694			28,997
Less:  Fair value attributable to noncontrolling interests	21,257			10,903
Acquisition date fair value of total consideration transferred	$	24,437		$	18,094

Fair value attributable to noncontrolling interests is based on significant inputs that are not observable in the market.  Key inputs used to determine the fair value include financial multiples used in the purchase of noncontrolling interests in centers.  Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability.  The fair value of noncontrolling interests for acquisitions where the purchase price allocation is not finalized may be subject to adjustment as the Company completes its initial accounting for acquired intangible assets.  For the six months ended June 30, 2014 and 2013, respectively, approximately $25,059,000 and $17,469,000 of goodwill recorded was deductible for tax purposes.  The acquisition related costs incurred by the Company for completed transactions were not significant for the six months ended June 30, 2014 and 2013, respectively. During the three and six months ended June 30, 2014, the Company incurred approximately $3,600,000, respectively, which is included in other operating expenses in the accompanying consolidated statement of earnings, related to the acquisition of Sheridan Healthcare, which was completed subsequent to June 30, 2014, and is further discussed in note 15.

Revenues and net earnings included in the six months ended June 30, 2014 and 2013 associated with completed acquisitions are as follows (in thousands):

	Six Months Ended June 30,
	2014		2013
Revenues	$	2,643	$	1,341
Net earnings	576		426
Less:  Net earnings attributable to noncontrolling interests	355		227
Net earnings attributable to AmSurg Corp. common shareholders	$	221	$	199

The unaudited consolidated pro forma results for the six months ended June 30, 2014 and 2013, assuming all acquisitions completed prior to June 30, 2014 had been consummated on January 1, 2013 and all 2013 acquisitions had been consummated on January 1, 2012, are as follows (in thousands, except per share data):

	Six Months Ended June 30,
	2014		2013
Revenues	$	552,154	$	558,165
Net earnings	129,720		136,524
Amounts attributable to AmSurg Corp. common shareholders:
Net earnings from continuing operations	36,912		38,967
Net earnings	36,610		39,174
Net earnings from continuing operations per common share:
Basic	$	1.16	$	1.25
Diluted	$	1.15	$	1.22
Net earnings:
Basic	$	1.15	$	1.26
Diluted	$	1.14	$	1.23
Weighted average number of shares and share equivalents:
Basic	31,770		31,213
Diluted	32,177		31,872

During the six months ended June 30, 2014, the Company entered into certain transactions whereby it contributed its controlling interests in four centers in exchange for approximately $1,700,000 and noncontrolling interests in three separate entities each jointly owned by a hospital that, after the completion of the transactions, controls the contributed centers.  During the six months ended June 30, 2013, the Company entered into a transaction whereby it contributed $252,000 plus a controlling interest in one center in exchange for a noncontrolling interest in an entity jointly owned by a hospital that, after the completion of the transaction, controlled the contributed center and one additional center. Management of the Company believes these structures provide both economies of scale and potential future growth opportunities in the markets in which the centers are located.  As a result of these transactions, the Company recorded in the accompanying consolidated balance sheets, as a component of investments in unconsolidated affiliates and other, the fair value of the noncontrolling interest in the entities which control the contributed centers of approximately $6,534,000 and $5,200,000 as of the six months ended June 30, 2014 and 2013, respectively.  Accordingly, the Company recognized a net gain on deconsolidation in the accompanying consolidated statements of earnings and comprehensive income of approximately $1,366,000 and $3,411,000 during the three and six months ended June 30, 2014, respectively, and $2,237,000 during the six months ended June 30, 2013, respectively. There was no deconsolidation activity during the three months ended June 30, 2013. In each of these transactions, the gain or loss on deconsolidation was determined based on the difference between the fair value of the Company’s noncontrolling interest in the new entity and the carrying value of both the tangible and intangible assets of the contributed centers immediately prior to each transaction. During the six months ended June 30, 2014, the fair value of the Company’s noncontrolling interest was based on estimates of the expected future earnings, and in certain cases, the Company evaluated likely scenarios which were weighted by a range of expected probabilities of 5% to 35%.