FORM 10-Q
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, 2010

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: 001-11141

  

 

HEALTH MANAGEMENT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   61-0963645

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5811 Pelican Bay Boulevard, Suite 500,

Naples, Florida

  34108-2710
(Address of principal executive offices)   (Zip Code)

(239) 598-3131

(Registrant’s telephone number, including area code)

Not applicable

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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.

 

Large accelerated filer

 

x

  

Accelerated filer  ¨

 

Non-accelerated filer

 

¨  (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

As of October 29, 2010, there were 250,620,715 shares of the registrant’s Class A common stock outstanding.


Table of Contents

 

HEALTH MANAGEMENT ASSOCIATES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

INDEX

 

PART I – FINANCIAL INFORMATION    Page  
Item 1.  Financial Statements.   

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2010 and 2009

     3   

Condensed Consolidated Balance Sheets – September 30, 2010 and December 31, 2009

     4   

Consolidated Statements of Stockholders’ Equity – Nine Months Ended September  30, 2010 and 2009

     5   

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2010 and 2009

     6   

Notes to Interim Condensed Consolidated Financial Statements

     7   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk      27   
Item 4.  Controls and Procedures      27   
PART II – OTHER INFORMATION   
Item 1.  Legal Proceedings      28   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds      28   
Item 6.  Exhibits      28   
Signatures      29   
Index to Exhibits      30   

 

2


Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
            2010                     2009                     2010                     2009          

Net revenue

    $   1,270,659          $   1,121,903          $   3,803,465          $   3,418,373     

Operating expenses:

       

Salaries and benefits

    501,841          438,203          1,500,215          1,332,265     

Supplies

    173,437          154,243          531,083          480,051     

Provision for doubtful accounts

    159,922          143,746          468,458          419,872     

Depreciation and amortization

    61,547          60,422          185,545          179,198     

Rent expense

    30,184          25,532          90,716          75,060     

Other operating expenses

    234,061          202,166          662,952          602,497     
                               

Total operating expenses

    1,160,992          1,024,312          3,438,969          3,088,943     
                               

Income from operations

    109,667          97,591          364,496          329,430     

Other income (expense):

       

Gains (losses) on sales of assets, net

    (435)         90          844          1,936     

Interest and other income, net

    3,342          942          7,264          1,499     

Interest expense

    (52,827)         (54,300)         (158,931)         (163,485)    

Gains (losses) on early extinguishment of debt, net

    -           (533)        -           16,202     

Write-offs of deferred financing costs

    -           -           -           (444)    
                               

Income from continuing operations before income taxes

    59,747          43,790          213,673          185,138     

Provision for income taxes

    (19,867)         (12,495)         (74,661)         (62,392)    
                               

Income from continuing operations

    39,880          31,295          139,012          122,746     

Income from discontinued operations, net of income taxes

    -           626          -           1,042     
                               

Consolidated net income

    39,880          31,921          139,012          123,788     

Net income attributable to noncontrolling interests

    (4,587)         (6,476)         (17,122)         (19,734)    
                               

Net income attributable to Health Management Associates, Inc.

    $ 35,293          $ 25,445          $ 121,890          $ 104,054     
                               

Earnings per share attributable to Health Management

       

Associates, Inc. common stockholders:

       

 Basic

       

Continuing operations

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     

Discontinued operations

    -           -           -           -      
                               

Net income

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     
                               

 Diluted

       

Continuing operations

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     

Discontinued operations

    -           -           -           -      
                               

Net income

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     
                               

Weighted average number of shares outstanding:

       

Basic

    248,526          245,234          248,161          244,953     
                               

Diluted

    250,972          247,514          250,683          246,225     
                               

See accompanying notes.

 

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Table of Contents

 

HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

      September 30, 2010         December 31, 2009    
ASSETS    

Current assets:

   

Cash and cash equivalents

    $ 245,754          $ 106,018     

Available-for-sale securities

    33,846          36,585     

Accounts receivable, less allowances for doubtful accounts of $482,737 and $455,705 at September 30, 2010 and December 31, 2009, respectively

    676,632          656,171     

Supplies, prepaid expenses and other assets

    168,843          157,111     

Prepaid and recoverable income taxes

    31,634          58,852     

Restricted funds

    42,728          45,431     

Assets of discontinued operations

    13,404          13,404     
               

Total current assets

    1,212,841          1,073,572     
               

Property, plant and equipment

    4,142,428          3,955,674     

Accumulated depreciation and amortization

    (1,616,707)         (1,457,408)    
               

Net property, plant and equipment

    2,525,721          2,498,266     
               

Restricted funds

    50,674          38,848     

Goodwill

    917,507          890,852     

Deferred charges and other assets

    93,081          102,561     
               

Total assets

    $     4,799,824          $     4,604,099     
               
LIABILITIES AND STOCKHOLDERS’ EQUITY    

Current liabilities:

   

Accounts payable

    $ 116,479          $ 141,143     

Accrued expenses and other liabilities

    351,734          305,788     

Deferred income taxes

    16,513          42,977     

Current maturities of long-term debt and capital lease obligations

    35,339          35,989     
               

Total current liabilities

    520,065          525,897     

Deferred income taxes

    136,553          133,451     

Long-term debt and capital lease obligations, less current maturities

    2,990,952          3,004,672     

Interest rate swap contract

    254,047          197,827     

Other long-term liabilities

    222,257          198,159     
               

Total liabilities

    4,123,874          4,060,006     
               

Redeemable equity securities

    201,816          182,473     

Stockholders’ equity:

   

Health Management Associates, Inc. equity:

   

Preferred stock, $0.01 par value, 5,000 shares authorized, none issued

    -          -     

Common stock, Class A, $0.01 par value, 750,000 shares authorized, 250,621 shares and 248,517 shares issued at September 30, 2010 and December 31, 2009, respectively

    2,506          2,485     

Accumulated other comprehensive income (loss), net of income taxes

    (155,772)         (120,242)    

Additional paid-in capital

    116,252          96,531     

Retained earnings

    498,291          376,401     
               

Total Health Management Associates, Inc. stockholders’ equity

    461,277          355,175     

Noncontrolling interests

    12,857          6,445     
               

Total stockholders’ equity

    474,134          361,620     
               

Total liabilities and stockholders’ equity

    $ 4,799,824          $ 4,604,099     
               

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2010 and 2009

(in thousands)

(unaudited)

 

    Health Management Associates, Inc.              
    Common Stock     Accumulated
Other
Comprehensive

  Income (Loss), net  
      Additional  
Paid-in

Capital
    Retained
   Earnings  
    Non-
controlling

    Interests   
    Total
Stockholders’

        Equity        
 
             
             
      Shares         Par Value              

Balances at January 1, 2010

      248,517          $   2,485          $   (120,242)         $   96,531          $   376,401          $   6,445        $   361,620     

Comprehensive income:

             

Net income

    -          -          -          -          121,890          17,122          139,012     

Unrealized gains on available-for-sale securities, net

    -          -          861          -          -          -          861     

Change in fair value of interest rate swap contract, net

    -          -          (36,391)         -          -          -          (36,391)    
                   

Total comprehensive income ($86,360 and $17,122 attributable to Health Management Associates, Inc. and noncontrolling interests, respectively)

                103,482     

Exercises of stock options

    856          9          -          9,076          -          -          9,085     

Issuances of deferred stock and restricted stock and related tax matters

    1,248          12          -          (3,117)        -          -          (3,105)    

Stock-based compensation expense

    -          -          -          13,762          -          -          13,762     

Noncontrolling shareholder interest in an acquired business

    -          -          -          -          -          3,565          3,565     

Distributions to noncontrolling shareholders

    -          -          -          -          -          (14,275)         (14,275)    
                                                       

Balances at September 30, 2010

      250,621          $   2,506          $ (155,772)         $   116,252          $   498,291          $   12,857          $   474,134     
                                                       
    Health Management Associates, Inc.              
    Common Stock     Accumulated
Other
Comprehensive

  Income (Loss), net  
      Additional  
Paid-in

Capital
    Retained
   Earnings  
    Non-
controlling

    Interests   
    Total
Stockholders’

        Equity        
 
             
             
      Shares         Par Value              

Balances at January 1, 2009

      244,221          $   2,442          $ (169,914)         $   108,374          $   238,219          $   106,690          $   285,811     

Comprehensive income:

             

Net income

    -          -          -          -          104,054          19,734          123,788     

Unrealized gains on available-for-sale securities, net

    -          -          2,545          -          -          -          2,545     

Change in fair value of interest rate swap contract, net

    -          -          36,140          -          -          -          36,140     
                   

Total comprehensive income ($142,739 and $19,734 attributable to Health Management Associates, Inc. and noncontrolling interests, respectively)

                162,473     

Exercises of stock options

    1,432          14          -          8,481          -          -          8,495     

Issuances of deferred stock and restricted stock, net of forfeitures, and related tax matters

    2,384          24          -          (656)         -          -          (632)    

Stock-based compensation expense

    -          -          -          7,955          -          -          7,955     

Distributions to noncontrolling shareholders

    -          -          -          -          -          (17,884)         (17,884)    
                                                       

Balances at September 30, 2009

      248,037          $   2,480          $ (131,229)         $   124,154          $   342,273          $   108,540          $   446,218     
                                                       

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    Nine Months  Ended
September 30,
 
            2010                     2009          

Cash flows from operating activities:

   

Consolidated net income

    $     139,012          $     123,788     

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

   

Depreciation and amortization

    190,584          184,312     

Provision for doubtful accounts

    468,458          419,872     

Stock-based compensation expense

    13,762          7,955     

Gains on sales of assets, net

    (844)         (1,936)    

Gains on sales of available-for-sale securities

    (4,454)         -     

Gains on early extinguishment of debt, net

    -          (16,202)    

Write-offs of deferred financing costs

    -          444     

Deferred income tax expense (benefit)

    (3,996)         29,859     

Changes in assets and liabilities of continuing operations, net of the effects of acquisitions:

   

Accounts receivable

    (491,360)         (420,297)    

Supplies, prepaid expenses and other current assets

    (9,810)         (3,468)    

Prepaid and recoverable income taxes

    28,654          47,766     

Deferred charges and other long-term assets

    (13,360)         (3,626)    

Accounts payable

    (29,186)         (57,167)    

Accrued expenses and other liabilities

    73,723          47,322     

Equity compensation excess income tax benefits

    (1,112)         (149)    

Income from discontinued operations, net

    -          (1,042)    
               

Net cash provided by continuing operating activities

    360,071          357,431     
               

Cash flows from investing activities:

   

Acquisitions of hospitals and other ancillary health care businesses

    (37,907)         (569)    

Additions to property, plant and equipment

    (147,917)         (158,746)    

Proceeds from sales of assets and insurance recoveries

    2,305          4,653     

Purchases of available-for-sale securities

    (660,530)         -     

Proceeds from sales of available-for-sale securities

    667,859          -     

Decrease (increase) in restricted funds, net

    (7,935)         4,247     
               

Net cash used in continuing investing activities

    (184,125)         (150,415)    
               

Cash flows from financing activities:

   

Principal payments on debt and capital lease obligations

    (30,353)         (78,842)    

Repurchases of convertible debt securities in the open market

    -          (67,714)    

Proceeds from exercises of stock options

    5,462          8,495     

Cash received from noncontrolling shareholders

    2,547          21,212     

Cash payments to noncontrolling shareholders

    (14,978)         (17,884)    

Equity compensation excess income tax benefits

    1,112          149     
               

Net cash used in continuing financing activities

    (36,210)         (134,584)    
               

Net increase in cash and cash equivalents before discontinued operations

    139,736          72,432     

Net increases (decreases) in cash and cash equivalents from discontinued operations:

   

Operating activities

    -          6,745     

Investing activities

    -          (440)    

Financing activities

    -          (5)    
               

Net increase in cash and cash equivalents

    139,736          78,732     

Cash and cash equivalents at the beginning of the period

    106,018          143,614     
               

Cash and cash equivalents at the end of the period

    $     245,754          $     222,346     
               

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

1.    Business and Basis of Presentation

Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) provide health care services to patients in hospitals and other health care facilities in non-urban communities located primarily in the southeastern United States. As of September 30, 2010, we operated 58 hospitals in fifteen states with a total of 8,576 licensed beds. At such date, twenty-one and ten of our hospitals were located in Florida and Mississippi, respectively. Effective October 1, 2010, we acquired two additional Florida-based hospitals (see Note 9 for further discussion of this acquisition).

Unless specifically indicated otherwise, all amounts and percentages presented in the notes below are exclusive of our discontinued operations, which are identified at Note 4.

The condensed consolidated balance sheet as of December 31, 2009 is unaudited; however it was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. The interim condensed consolidated financial statements as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 are unaudited; however, such interim financial statements reflect all adjustments (consisting only of those of a normal recurring nature) that are, in our opinion, necessary for a fair presentation of our financial position, results of operations and cash flows. Our results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year due to, among other things, the seasonal nature of our business and changes in the economy and the health care regulatory environment, including the possible effects of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Based on the SEC’s guidance, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Additionally, see Note 8 for information regarding new accounting guidance that will affect us in future periods.

Our preparation of interim condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in those financial statements and the accompanying notes. Actual results could differ from those estimates. When completing the interim condensed consolidated financial statements included herein, we evaluated subsequent events up to and including the date that this Quarterly Report on Form 10-Q was filed with the SEC.

2.    Long-Term Debt and Capital Lease Obligations

The following discussion of our long-term debt and capital lease obligations should be read in conjunction with Notes 2 and 3 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. The table below summarizes our long-term debt and capital lease obligations (in thousands).

 

   

  September 30, 2010  

    

  December 31, 2009  

Revolving credit facilities (a)

    $                                   -          $                                 -  

Term Loan (a)

  2,488,309        2,508,934  

6.125% Senior Notes due 2016, net of discounts of approximately $2,045 and $2,322 at September 30, 2010 and December 31, 2009, respectively

  397,955        397,678  

Convertible debt securities, net of discounts of $14,192 and $16,605 at September 30, 2010 and December 31, 2009, respectively (b)

  77,258        75,067  

Installment notes and other unsecured long-term debt

  5,559        6,023  

Capital lease obligations

  57,210        52,959  
          
  3,026,291        3,040,661  

Less current maturities

  (35,339)       (35,989) 
          

Long-term debt and capital lease obligations, less current maturities

    $                    2,990,952          $                   3,004,672  
          

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.    Long-Term Debt and Capital Lease Obligations (continued)

 

 

a. Senior Secured Credit Facilities. Our senior secured credit facilities (the “Credit Facilities”), which we entered into on February 16, 2007, consist of a seven-year $2.75 billion term loan (the “Term Loan”) and a $500.0 million six-year revolving credit facility (the “Revolving Credit Agreement”). The Term Loan requires (i) quarterly principal payments to amortize approximately 1% of the loan’s face value during each year of the loan’s term and (ii) a balloon payment for the remaining outstanding loan balance at the end of the agreement. We are also required to repay principal under the Term Loan in an amount that can be as much as 50% of our annual Excess Cash Flow, as such term is defined in the loan agreement. Based on the annual Excess Cash Flow generated during the year ended December 31, 2008, we were required to repay principal of approximately $94.1 million, which we satisfied with principal payments of $18.4 million during the nine months ended September 30, 2009 and $75.7 million during 2008. There was no annual Excess Cash Flow generated during the year ended December 31, 2009 and we do not believe that we will generate Excess Cash Flow during the year ending December 31, 2010. However, during the nine months ended September 30, 2009, we prepaid $25.0 million of principal under the Term Loan. In connection with our annual Excess Cash Flow payments and our Term Loan prepayment, $0.4 million of deferred financing costs were written off during the nine months ended September 30, 2009.

During 2007, as required by the Credit Facilities, we entered into a receive variable/pay fixed interest rate swap contract that has a term concurrent with the Term Loan. Notwithstanding this contractual arrangement, we remain ultimately responsible for all amounts due and payable under the Term Loan. Although we are exposed to financial risk in the event of nonperformance by one or more of the counterparties to the contract, we do not anticipate nonperformance because our interest rate swap contract is in a liability position and would require us to make settlement payments to the counterparties in the event of a contract termination. The interest rate swap contract provides for us to pay interest at a fixed rate of 6.7445% on the contract’s notional amount, which is expected to reasonably approximate the declining principal balance of the Term Loan. At September 30, 2010, approximately $196.6 million of the Term Loan’s outstanding balance was not covered by the interest rate swap contract and, accordingly, such amount was subject to the Credit Facilities’ variable interest rate provisions (i.e., an effective interest rate of approximately 2.0% on both September 30, 2010 and October 29, 2010).

Although there were no amounts outstanding under the Revolving Credit Agreement on September 30, 2010, standby letters of credit in favor of third parties of approximately $46.9 million reduced the amount available for borrowing thereunder to $453.1 million on such date. The effective interest rate on the variable rate Revolving Credit Agreement was approximately 2.0% on both September 30, 2010 and October 29, 2010.

b. Convertible Debt Securities. During the nine months ended September 30, 2009, we used cash on hand to repurchase certain of our 3.75% Convertible Senior Subordinated Notes due 2028 (principal face amount of approximately $108.6 million) in the open market at approximately 62.4% of their principal face amount, plus accrued and unpaid interest. In connection with such repurchases, we recorded a net gain on the early extinguishment of debt of $16.2 million.

During August 2010, we exercised our right to redeem all of our outstanding 1.50% Convertible Senior Subordinated Notes due 2023. We paid approximately $0.2 million for such redemption, which yielded no gain or loss on the early extinguishment of debt.

Other. The estimated fair values of our long-term debt instruments, determined by reference to quoted market prices, are summarized in the table below (in thousands).

 

       September 30, 2010          December 31, 2009    

Term Loan

     $                 2,363,752           $                 2,371,947     

6.125% Senior Notes due 2016

     403,000           375,000     

Convertible debt securities

     97,591           94,249     

The estimated fair values of our other long-term debt instruments reasonably approximate their carrying amounts in the condensed consolidated balance sheets. See Note 5 for discussion of the estimated fair values of our other financial instruments, including valuation methods and significant assumptions.

The cash paid for interest on our long-term debt and capital lease obligations during the nine months ended September 30, 2010 and 2009, including amounts that have been capitalized, was approximately $149.2 million and $153.5 million, respectively.

At September 30, 2010, we were in compliance with all of the covenants contained in our debt agreements.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

3.    Earnings Per Share

Basic earnings per share is computed based on the weighted average number of outstanding common shares. Diluted earnings per share is computed based on the weighted average number of outstanding common shares plus the dilutive effect of common stock equivalents, primarily computed using the treasury stock method. The table below sets forth the computations of basic and diluted earnings per share for the common stockholders of Health Management Associates, Inc. (in thousands, except per share amounts).

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
            2010                     2009                     2010                     2009          

Numerators:

       

Income from continuing operations

    $ 39,880         $ 31,295         $ 139,012          $ 122,746     

Income attributable to noncontrolling interests

    (4,587)         (6,294)         (17,122)         (18,956)    
                               

Income from continuing operations attributable to Health Management Associates, Inc. common stockholders

    35,293          25,001          121,890          103,790     
                               

Income from discontinued operations

    -          626          -          1,042     

Income from discontinued operations attributable to noncontrolling interests

    -          (182)         -          (778)    
                               

Income from discontinued operations attributable to Health Management Associates, Inc. common stockholders

    -          444          -          264     
                               

Net income attributable to Health Management Associates, Inc. common stockholders

    $ 35,293          $ 25,445          $ 121,890          $ 104,054     
                               

Denominators:

       

Denominator for basic earnings per share-weighted average number of outstanding common shares

    248,526          245,234          248,161          244,953     

Effect of dilutive securities:

       

Stock-based compensation

    2,446          2,280          2,522          1,272     
                               

Denominator for diluted earnings per share

    250,972          247,514          250,683          246,225     
                               

Earnings per share:

       

Basic

       

Continuing operations

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     

Discontinued operations

    -          -          -          -     
                               

Net income

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     
                               

Diluted

       

Continuing operations

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     

Discontinued operations

    -          -          -          -     
                               

Net income

    $ 0.14          $ 0.10          $ 0.49          $ 0.42     
                               

Stock options to purchase approximately 7.0 million and 6.9 million shares of our common stock were not included in the computations of diluted earnings per share during the three and nine months ended September 30, 2010, respectively, because the exercise prices of such stock options were greater than the average market price of our common stock during the respective measurements periods. The corresponding amounts were 7.6 million and 10.9 million shares of common stock for the three and nine months ended September 30, 2009, respectively.

Approximately 1.0 million and 0.9 million shares of common stock relating to deferred stock and restricted stock were not included in the computations of diluted earnings per share during the three and nine months ended September 30, 2010, respectively, because their effect was antidilutive or satisfaction of required performance and/or market conditions for certain stock-based compensation was not achieved by the end of the reporting period. The corresponding amounts for the three and nine months ended September 30, 2009 were 0.8 million and 2.6 million shares of common stock, respectively.

4.    Discontinued Operations

Our discontinued operations during the periods presented herein included: (i) 70-bed Franklin Regional Medical Center in Louisburg, North Carolina; (ii) 125-bed Upstate Carolina Medical Center in Gaffney, South Carolina; and (iii) certain health care operations affiliated with those hospitals. Our discontinued operations also included Gulf Coast Medical Center (“GCMC”) in Biloxi, Mississippi and the Woman’s Center at Dallas Regional Medical Center (the “Center”) in Mesquite, Texas, which were closed on January 1, 2008 and June 1, 2008, respectively. Although we are currently evaluating various disposal alternatives for the idle facilities at GCMC and the Center, the timing of such divestitures has not yet been determined.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4.    Discontinued Operations (continued)

 

 

On March 31, 2008, Novant Health, Inc. and its affiliates (collectively, “Novant”) acquired a 27% equity interest in a limited liability company that then owned/leased and operated our seven general acute care hospitals in North Carolina and South Carolina (the “Carolina Joint Venture”). Effective October 1, 2009, we restructured the Carolina Joint Venture. Although the Carolina Joint Venture continues to own Franklin Regional Medical Center and Upstate Carolina Medical Center (i.e., two of the seven hospitals originally included in the Carolina Joint Venture), Novant now manages both hospitals and receives 99% of the net profits, net losses, free cash flow and capital accounts of those hospitals (our interest in each hospital was effectively reduced from 73% to 1%). Therefore, Franklin Regional Medical Center and Upstate Carolina Medical Center have been included in our discontinued operations.

The operating results and cash flows of discontinued operations have been included in our consolidated financial statements up to the date of disposition. As provided by GAAP, the financial position, operating results and cash flows of the abovementioned entities have been presented as discontinued operations in the interim condensed consolidated financial statements. The assets of discontinued operations in the condensed consolidated balance sheets at both September 30, 2010 and December 31, 2009 represented GCMC’s and the Center’s remaining real property. The table below sets forth the underlying details of our 2009 discontinued operations (in thousands). There were no such operations during 2010.

 

    

  Three Months Ended  
September 30, 2009

    

  Nine Months Ended  
September 30, 2009

Net revenue

     $                             23,047          $                             70,199  

Operating expenses:

       

Salaries and benefits

   9,098        27,405  

Provision for doubtful accounts

   4,784        16,238  

Depreciation and amortization

   1,363        4,064  

Other operating expenses

   6,830        21,148  
           

Total operating expenses

   22,075        68,855  
           

Income from operations

   972        1,344  

Other expenses, net

   (67)       (131) 
           

Income before income taxes

   905        1,213  

Income tax expense

   (279)       (171) 
           

Income from discontinued operations

     $                                 626          $                              1,042  
           

5.    Fair Value Measurements, Available-For-Sale Securities and Restricted Funds

General. GAAP defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes the following three levels of inputs that may be used:

 

Level 1:

  

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2:

  

Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3:

  

Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The table below summarizes the estimated fair values of our financial assets (liabilities) as of September 30, 2010 (in thousands).

 

    

    Level 1    

  

    Level 2    

  

    Level 3    

Available-for-sale securities, including those in restricted funds

     $          127,248        $                   -        $                   -  

Interest rate swap contract

   -      (254,047)     -  
              

Totals

     $          127,248        $      (254,047)       $                   -  
              

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

5.    Fair Value Measurements, Available-For-Sale Securities and Restricted Funds (continued)

 

 

The estimated fair value of our interest rate swap contract was determined using a model that considers various inputs and assumptions, including LIBOR swap rates, cash flow activity, yield curves and other relevant economic measures, all of which are observable market inputs that are classified under Level 2 of the fair value hierarchy. The model also incorporates valuation adjustments for credit risk.

Cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses and other liabilities are reflected in the condensed consolidated balance sheets at their estimated fair values primarily due to their short-term nature. As contemplated by Level 1 of the fair value hierarchy, the estimated fair values of available-for-sale securities and long-term debt (the latter of which are disclosed at Note 2) were determined by reference to quoted market prices.

Available-For-Sale Securities (including those in restricted funds). Supplemental information regarding our available-for-sale securities, which consist solely of shares in mutual funds, is set forth in the table below (dollars in thousands).

 

    Number of
Mutual Fund
Investments
    Cost     Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Values
 

As of September 30, 2010:

         

Debt-based funds

    10          $ 108,970          $ 2,576          $ -          $ 111,546     

Equity-based funds

    6          14,968          810          (76)         15,702     
                                       

Totals

    16          $ 123,938          $ 3,386          $ (76)         $ 127,248     
                                       

As of December 31, 2009:

         

Debt-based funds

    10          $ 100,238          $ 269          $ (164)         $ 100,343     

Equity-based funds

    6          14,563          2,050          (69)         16,544     
                                       

Totals

    16          $       114,801          $         2,319          $ (233)         $     116,887     
                                       

As of September 30, 2010 and December 31, 2009, mutual fund investments with aggregate estimated fair values of approximately $4.5 million (one investment) and $34.3 million (six investments), respectively, generated the nominal gross unrealized losses disclosed in the above table. Due to our brief holding period for each of these securities, as well as other relevant considerations, we concluded that other-than-temporary impairment charges were not necessary at either of the balance sheet dates. We will continue to monitor and evaluate the recoverability of our available-for-sale securities.

During the nine months ended September 30, 2010, we realized gains on sales of available-for-sale securities of approximately $4.5 million, which included $2.1 million that was reclassified from net unrealized gains at December 31, 2009; however, we experienced no realized losses during such period. There were no sales of available-for-sale securities during the nine months ended September 30, 2009. The weighted average cost method is used to determine the historical cost basis of securities that are sold.

Restricted Funds. Our restricted funds are held by a wholly owned captive insurance subsidiary that is domiciled in the Cayman Islands. Generally, the assets of such subsidiary are limited to use in its proprietary operations. The table below summarizes the estimated fair values of our restricted funds (in thousands).

 

   

  September 30, 2010  

 

  December 31, 2009  

Interest-bearing cash

    $                                   -       $                        3,977  

Available-for-sale securities

  93,402     80,302  
       

Totals

    $                        93,402       $                     84,279  
       

Supplemental information regarding the available-for-sale securities that are included in restricted funds is set forth in the table below (in thousands).

 

        Nine Months Ended September 30,      
    2010     2009  

Proceeds from sales

    $                 8,577          $                       -     

Purchases

    18,100          -     

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

6.    Other Significant Matters

Acquisition Activity. Effective July 1, 2010, certain of our subsidiaries acquired from Shands HealthCare a 60% equity interest in each of the following general acute care hospitals and certain related health care operations: (i) 99-bed Shands Lake Shore hospital in Lake City, Florida; (ii) 15-bed Shands Live Oak hospital in Live Oak, Florida; and (iii) 25-bed Shands Starke hospital in Starke, Florida. Shands HealthCare or one of its affiliates continues to hold a 40% equity interest in each of these hospitals and any related health care operations. The purchase price for our 60% interests in these three hospitals was approximately $21.5 million in cash, excluding transaction-related costs. Additionally, we entered into a lease extension in respect of Shands Lake Shore hospital whereby our estimated future lease payments through June 30, 2040 will aggregate $16.0 million.

During the nine months ended September 30, 2010, certain of our subsidiaries acquired four ancillary health care businesses, including one in which we held a pre-acquisition minority equity interest, through (i) the issuance of subsidiary equity securities valued at approximately $3.1 million and (ii) the payment of cash consideration of $16.4 million. Effective September 30, 2009, one of our subsidiaries issued equity securities valued at $9.2 million for certain ancillary health care businesses.

The abovementioned acquisitions, as well as our acquisition subsequent to September 30, 2010 that is discussed at Note 9, were in furtherance of that portion of our business strategy that calls for the acquisition of hospitals and other ancillary health care businesses in rural and non-urban areas.

Our acquisitions are accounted for using the purchase method of accounting. Purchase prices are allocated to the assets acquired and liabilities assumed based on their estimated exit price fair values on the dates of acquisition. As a result of our acquisitions during the nine months ended September 30, 2010 and 2009, we recorded goodwill because the final negotiated purchase prices exceeded the fair value of the net tangible and intangible assets acquired. Most of the goodwill added in 2010 is expected to be tax deductible whereas the goodwill added in 2009 is generally non-deductible. The table below summarizes the purchase price allocations (in thousands) for those acquisitions; however, in some cases, such purchase price allocations are preliminary and remain subject to future refinement as we gather supplemental information.

 

        Nine Months Ended September 30,      
    2010     2009  

Assets acquired:

   

Current and other assets

    $                   2,706          $                        -     

Property, plant and equipment

    43,869          1,450     

Goodwill

    26,655          7,733     
               

Total assets acquired

    73,230          9,183     

Liabilities assumed (principally capital lease obligations)

    (11,550)         -     
               

Net assets acquired

    $                 61,680          $                 9,183     
               

Divestiture. During the nine months ended September 30, 2009, we sold a home health agency for $2.5 million, yielding a gain in the same amount. This gain has been included in gains on sales of assets (continuing operations) in the consolidated statements of income. Historically, this disposed business unit contributed nominally to our consolidated operating results.

Joint Ventures and Redeemable Equity Securities. As of September 30, 2010, we had established joint ventures to own/lease and operate 27 of our hospitals. Local physicians and/or other health care organizations own minority equity interests in each of the joint ventures and participate in the related hospital’s governance. We own a majority of the equity interests in each joint venture and manage the related hospital’s day-to-day operations.

When completing a joint venture transaction, our subsidiary that is a party to the joint venture customarily issues equity securities that provide for the unilateral redemption of such securities by noncontrolling shareholders (typically at the lower of the original investment or fair market value). Redeemable equity securities with redemption features that are not solely within our control are classified outside of permanent equity. Those securities are initially recorded at their estimated fair value on the date of issuance. Securities that are currently redeemable or redeemable after the passage of time are adjusted to their redemption value as changes occur. If it is unlikely that a redeemable equity security will ever require redemption (e.g., we do not expect that a triggering contingency will occur, etc.), then subsequent adjustments to the initially recorded amount will only be recognized in the period that a redemption becomes probable.

As recorded in the condensed consolidated balance sheets, redeemable equity securities represent (i) the minimum amounts that can be unilaterally redeemed for cash by noncontrolling shareholders in respect of their subsidiary equity holdings and (ii) the initial unadjusted estimated fair values of certain contingent rights held by Novant and Shands HealthCare, which are described below. As of September 30, 2010 and through October 29, 2010, the mandatory

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6.    Other Significant Matters (continued)

 

redemptions requested by noncontrolling shareholders in respect of their subsidiary equity holdings have been nominal. A rollforward of our redeemable equity securities is summarized in the table below (in thousands).

 

      Nine Months Ended September 30,    
    2010     2009  

Balances at the beginning of the period

    $ 182,473          $ 48,868     

Investments by noncontrolling shareholders and acquisition activity

    5,679          30,832     

Distributions to noncontrolling shareholders

    -          (29)    

Purchases of subsidiary shares from noncontrolling shareholders

    (703)         -     

Estimated fair value of a noncontrolling shareholder’s contingent rights

    14,367          -     
               

Balances at the end of the period

    $ 201,816          $ 79,671     
               

Novant may require us to purchase its 30% equity interest in 105-bed Lake Norman Regional Medical Center in Mooresville, North Carolina for the greater of $150.0 million or the fair market value of such interest in the hospital. This contingent right is exercisable only if we experience a change of control or a change in our senior executive management subsequent to a change of control. Additionally, Shands HealthCare may require us to purchase its 40% equity interest in one or more of the three abovementioned hospitals that we acquired on July 1, 2010 if we experience a change of control. The purchase price in this regard would be set at the fair market value of the equity interests being acquired. We believe it is not probable that the contingent rights of Novant and Shands HealthCare will vest because there are no circumstances known to us that would trigger the requisite change of control provision with either party. Accordingly, the carrying values of the related redeemable equity securities have not been adjusted since being initially recorded insofar as the contingent rights are concerned.

Income Taxes. Our effective income tax rates were approximately 34.9% and 33.7% during the nine months ended September 30, 2010 and 2009, respectively, and 33.3% and 28.5% during the three months ended September 30, 2010 and 2009, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, reduced our effective income tax rates by approximately 300 basis points and 380 basis points during the nine months ended September 30, 2010 and 2009, respectively. The corresponding impact was 280 basis points and 480 basis points during the three months ended September 30, 2010 and 2009, respectively.

Our 2010 provision for income taxes was favorably impacted by the finalization of certain federal and state income tax returns and the satisfactory conclusion of an Internal Revenue Service audit of our tax returns for the years ended December 31, 2007 and 2006. Our 2009 provision for income taxes was favorably impacted by: (i) the finalization of certain federal and state income tax returns; (ii) the satisfactory conclusion of a state tax audit; and (iii) the lapsing of certain state statutes of limitations. These 2009 items were partially offset by adjustments pertaining to stock-based compensation and the related additional paid-in capital pool of excess income tax benefits.

Our net federal and state income tax payments approximated $51.1 million during the nine months ended September 30, 2010, which compares to a corresponding net refund of $14.3 million during the nine months ended September 30, 2009.

Comprehensive Income. GAAP defines comprehensive income as the change in equity of a business enterprise from transactions and other events and circumstances that relate to non-owner sources. The table below presents the details of our total consolidated comprehensive income (in thousands).

 

        Three Months Ended    
September  30,
        Nine Months Ended    
September  30,
 
    2010     2009     2010     2009  

Consolidated net income

    $ 39,880         $ 31,921          $ 139,012         $ 123,788     

Components of other comprehensive income:

       

Unrealized gains on available-for-sale securities, net

    1,207          2,117          861          2,545     

Changes in fair value of interest rate swap contract, net

    (13,369)         (11,158)         (36,391)         36,140     
                               

Other comprehensive income (loss)

    (12,162)         (9,041)         (35,530)         38,685     
                               

Total consolidated comprehensive income

    27,718          22,880          103,482          162,473     

Total comprehensive income attributable to noncontrolling interests

    (4,587)         (6,476)         (17,122)         (19,734)    
                               

Total comprehensive income attributable to Health Management Associates, Inc. common stockholders

    $ 23,131          $ 16,404          $ 86,360          $ 142,739     
                               

See Notes 2 and 5 for information regarding our interest rate swap contract and available-for-sale securities, respectively.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

7.    Commitments and Contingencies

Physician and Physician Group Guarantees. We are committed to providing financial assistance to physicians and physician groups practicing in the communities that our hospitals serve through certain recruiting arrangements and professional services agreements. At September 30, 2010, we were committed to non-cancelable guarantees of approximately $32.6 million under such arrangements. The actual amounts advanced will depend on the financial results of each physician’s and physician group’s private practice during the contractual measurement periods, which generally approximate one year. We believe that the recorded liabilities for physician and physician group guarantees of $13.5 million and $12.6 million at September 30, 2010 and December 31, 2009, respectively, are adequate and reasonable; however, there can be no assurances that the ultimate liability will not exceed our estimates.

ERISA Actions. On or about August 20, 2007, Health Management Associates, Inc. (referred to as “Health Management” for purposes of Note 7) and certain of its executive officers and directors were named as defendants in an action entitled Ingram v. Health Management Associates, Inc. et al. (No. 2:07-CV-00529) (the “Ingram Action”), which was filed in the U.S. District Court for the Middle District of Florida, Fort Myers Division (the “Florida District Court”). This action was brought as a purported class action on behalf of all participants in or beneficiaries of the Health Management Associates, Inc. Retirement Savings Plan (the “Plan”) during the period January 17, 2007 through August 20, 2007 and whose participant accounts included shares of Health Management’s common stock. The plaintiff alleged, among other things, that the defendants: (i) breached their fiduciary responsibilities to Plan participants and their beneficiaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and neglected to adequately supervise the management and administration of the Plan; (ii) failed to communicate complete, full and accurate information regarding the Plan’s investments in Health Management’s common stock; and (iii) had conflicts of interest. Three similar purported ERISA class action lawsuits were subsequently filed in the Florida District Court.

On May 14, 2008, the Florida District Court granted the plaintiffs’ motion to consolidate the four ERISA actions. The consolidated case continues to be administered under the docket number and caption assigned to the Ingram Action. On July 27, 2009, the plaintiffs filed a consolidated amended complaint, which is similar to the original complaint in the Ingram Action. The defendants named in the consolidated amended complaint include Health Management, certain current and former officers and directors of Health Management and members of the Plan’s Retirement Committee. During September 2009, the defendants moved to dismiss the consolidated amended complaint for failure to state a claim. On September 14, 2010, a U.S. Magistrate Judge issued a report recommending that the defendants’ motion to dismiss the consolidated amended complaint be granted. On November 1, 2010, the parties entered into a stipulation that provides for (i) the dismissal of all claims in the ERISA action, including the consolidated amended complaint, with prejudice as to the named plaintiffs and (ii) each side to bear its own costs and attorneys’ fees. On November 2, 2010, the Florida District Court entered an order of dismissal.

Ascension Health Lawsuit. On February 14, 2006, Health Management announced the termination of non-binding negotiations with Ascension Health (“Ascension”) and the withdrawal of a non-binding offer to acquire Ascension’s St. Joseph Hospital, a 231-bed general acute care hospital in Augusta, Georgia. On June 8, 2007, certain Ascension subsidiaries filed a lawsuit against Health Management, entitled St. Joseph Hospital, Augusta, Georgia, Inc. et al. v. Health Management Associates, Inc., in Georgia Superior/State Court of Richmond County claiming that Health Management (i) breached an agreement to purchase St. Joseph Hospital and (ii) violated a confidentiality agreement. The plaintiffs claim at least $35 million in damages. On July 17, 2007, Health Management removed the case to the United States District Court for the Southern District of Georgia, Augusta Division (No. 1:07-CV-00104). On July 13, 2010, the plaintiffs filed a motion for partial summary judgment and Health Management filed a motion for summary judgment. These motions are currently pending.

We do not believe there was a binding acquisition contract with Ascension or any of its subsidiaries and we do not believe Health Management breached a confidentiality agreement. Accordingly, we consider the lawsuit filed by the Ascension subsidiaries to be without merit and we intend to vigorously defend Health Management against the allegations.

Medicare Billing Lawsuit. On January 11, 2010, Health Management and one of its subsidiaries were named in a qui tam lawsuit entitled United States of America ex rel. J. Michael Mastej v. Health Management Associates, Inc. et al. (No. 8:10-cv-00066-SDM-TBM) in the U.S. District Court for the Middle District of Florida, Tampa Division. The plaintiff’s complaint alleges that, among other things, the defendants erroneously submitted claims to Medicare and that those

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7.    Commitments and Contingencies (continued)

 

claims were falsely certified to be in compliance with the portion of the Social Security Act commonly known as the “Stark law” and the Anti-Kickback Act. The plaintiff’s complaint further alleges that the defendants’ conduct violated the False Claims Act. On September 27, 2010, the defendants moved to dismiss the complaint for failure to state a claim with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure and failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of those federal rules. On November 1, 2010, the plaintiff filed a memorandum of law in opposition to the defendants’ motion to dismiss. We intend to vigorously defend Health Management and its subsidiary against the allegations in this matter.

Governmental Matter. Several of our hospitals received letters requesting information in connection with a Department of Justice (“DOJ”) investigation relating to kyphoplasty procedures. Kyphoplasty is a minimally invasive spinal procedure used to treat vertebral compression fractures. The DOJ is currently investigating hospitals and hospital operators in multiple states to determine whether certain Medicare claims for kyphoplasty were incorrect when billed as an inpatient service rather than as an outpatient service. We believe that the DOJ’s investigation originated with a False Claims Act lawsuit against Kyphon, Inc., the company that developed the kyphoplasty procedure. The requested information has been provided to the DOJ and we are cooperating with the investigation. We continue to research and review the requested documentation and relevant regulatory guidance issued during the time period under review to determine billing accuracy. Based on our aggregate billings for inpatient kyphoplasty procedures during the period under review that were performed at the hospitals subject to the DOJ’s inquiry, we do not believe that the final outcome of this matter will be material.

Other. We are also a party to various other legal actions arising out of the normal course of our business. Due to the inherent uncertainties of litigation and dispute resolution, we are unable to estimate the ultimate losses, if any, relating to each of our outstanding legal actions and other loss contingencies. Should an unfavorable outcome occur in some or all of our legal and other related matters, there could be a material adverse effect on our financial position, results of operations and liquidity.

8.    Recent Accounting Guidance

During August 2010, the Financial Accounting Standards Board approved certain modifications to existing accounting standards that will directly affect health care entities in the future. The first change prohibits health care entities from netting projected insurance recoveries against the related liabilities (e.g., medical malpractice claim reserves, etc.) in their balance sheets. The second change clarifies that disclosures regarding the level of charity care provided by a health care entity must (i) represent the direct and indirect costs of providing such services and (ii) include a description of the method used to determine those costs. Additionally, disclosures about charity care must now include information regarding any related reimbursements received by a health care entity.

The modified accounting standards are required to be adopted for fiscal years and interim periods that begin after December 15, 2010. Early adoption of such accounting standards is permitted. The charity care disclosure change must be applied on a retrospective basis; however, the accounting change for insurance recoveries may be applied on either a prospective or retrospective basis. We will adopt the modified accounting standards no later than the quarter ending March 31, 2011; however, we do not believe that there will be a material impact to our consolidated financial statements or the notes thereto.

9.    Subsequent Event

Effective October 1, 2010, certain of our subsidiaries acquired from Wuesthoff Health Systems, Inc. the following general acute care hospitals and certain related health care operations: (i) 298-bed Wuesthoff Medical Center in Rockledge, Florida; and (ii) 115-bed Wuesthoff Medical Center in Melbourne, Florida. We paid approximately $151.5 million in cash for this acquisition, excluding transaction-related costs. The assets we acquired were primarily property, plant and equipment and supply inventories. We funded this acquisition with cash on hand at September 30, 2010, which balance included the proceeds from recent sales of available-for-sale securities.

 

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

Results of Operations

Overview

As of September 30, 2010, Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) operated 58 hospitals with a total of 8,576 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia. See Note 9 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding two Florida-based hospitals that we acquired subsequent to September 30, 2010. The operating results of hospitals and other health care businesses that we acquire are included in our consolidated financial statements subsequent to the date of acquisition.

Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1. Discontinued operations were not material to our consolidated results of operations during the periods presented herein.

During March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, the “2010 Health Care Legislation”) were signed into law by President Obama. The primary goals of the 2010 Health Care Legislation are to: (i) provide coverage by January 1, 2014 to an estimated 32 million Americans who currently do not have health insurance; (ii) reform the health care delivery system to improve quality; and (iii) lower the overall costs of providing health care. To accomplish the goal of expanding coverage, the new legislation mandates that all Americans maintain a minimum level of health care coverage. To that end, the 2010 Health Care Legislation expands Medicaid coverage, provides federal subsidies to assist low-income individuals when they obtain health insurance and establishes insurance exchanges through which individuals and small employers can purchase health insurance. Health care cost savings under the 2010 Health Care Legislation are expected to come from: (i) reductions in Medicare and Medicaid reimbursement payments to health care providers, including hospital operators; (ii) initiatives to reduce fraud, waste and abuse in government reimbursement programs; and (iii) other reforms to federal and state reimbursement systems. Although certain aspects of the 2010 Health Care Legislation were effective immediately, it will be several years before most of the far-reaching and innovative provisions of the new legislation become fully effective. While we continue to evaluate the provisions of the 2010 Health Care Legislation, its overall effect on our business cannot be reasonably determined at the present time because, among other things, the new legislation is very broad in scope and there exist uncertainties regarding the interpretation and future implementation of many of the regulations mandated under the 2010 Health Care Legislation.

During the three months ended September 30, 2010, which we refer to as the 2010 Three Month Period, we experienced net revenue growth over the three months ended September 30, 2009, which we refer to as the 2009 Three Month Period, of approximately 13.3%. Such growth principally resulted from: (i) our acquisition of the Sparks Health System (“Sparks”) in Fort Smith, Arkansas in December 2009; (ii) our acquisition of a 60% equity interest in each of three Florida-based general acute care hospitals and certain related health care operations (collectively, “Shands”) in July 2010; and (iii) increased surgical volume attributable to market service development at certain of our hospitals and other health care facilities. Primarily as a result of the growth in net revenue, income from operations increased approximately $12.1 million, or 12.4%, during the 2010 Three Month Period and income from continuing operations increased during the same period by $8.6 million, or 27.4%.

Our strategic operating plans include, among other things, utilizing experienced local and regional management teams, modifying physician employment agreements, renegotiating payor contracts and developing action plans responsive to feedback from patient, physician and employee satisfaction surveys. Our primary objective is to improve operations in the areas of patient volume, operating margins, uninsured/underinsured patient levels and the provision for doubtful accounts. We also seek opportunities for market development in the communities that we serve, including establishing ambulatory surgical centers, urgent care centers, cath labs, angiography suites and orthopedic, cardiology and neurology/neurosurgery centers of excellence. Furthermore, we continue to invest significant resources in physician recruitment and retention (primary care physicians and specialists), emergency room operations, replacement hospital construction and other capital projects. We believe that our company-wide investments to upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions that we experienced during 2009. For 2010, we are implementing ER Extra™, which is our new emergency room operational initiative that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions. Additionally, as we consider potential acquisitions and partnerships for the remainder of 2010 and beyond, we believe that continually improving our existing operations provides us with a fundamentally sound infrastructure upon which we can add hospitals and other ancillary health care businesses.

 

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We have also taken steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is to be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With our knowledgeable and experienced clinical affairs leadership supporting this critical quality initiative, we measure key performance objectives, increase accountability for achieving those objectives and recognize the leaders whose quality indicators and clinical outcomes demonstrate improvement. Our hard work, innovation and persistence are paying off. As most recently reported by the Centers for Medicare and Medicaid Services, all four of our core measure care areas have dramatically improved since the commencement of our clinical quality initiatives and we now rank second in core measures amongst for-profit hospital systems.

Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net revenue during both the 2010 Three Month Period and the 2009 Three Month Period generated on an outpatient basis. Recognizing the importance of these services, we have improved many of our health care facilities to accommodate the outpatient needs of the communities that they serve. We have also invested substantial capital in many of our hospitals and physician practices during the past several years, resulting in improvements and enhancements to our diagnostic imaging and ambulatory surgical services.

During the past several years, various economic and other factors have contributed to an increase in the number of uninsured and underinsured patients seeking health care in the United States. Although this general industry trend has affected us, self-pay admissions as a percent of total admissions at our hospitals was unchanged at approximately 7.6% during both the 2010 Three Month Period and the 2009 Three Month Period. We continue to take various measures to address the impact of uninsured and underinsured patients on our business. Additionally, one of the primary goals of the 2010 Health Care Legislation is to provide health insurance coverage to more Americans. Nevertheless, there can be no assurances that our self-pay admissions will not grow in future periods, especially in light of the prolonged downturn in the economy and correspondingly higher levels of unemployment in many of the markets served by our hospitals. Therefore, we regularly evaluate our self-pay policies and programs and consider changes or modifications as circumstances warrant.

Supplemental Non-GAAP Information

The financial information provided throughout this Quarterly Report on Form 10-Q has been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). However, we also use certain non-GAAP financial performance measures (primarily Adjusted EBITDA, as defined below) in communications with interested parties such as stockholders, analysts, rating agencies, banks and others. We developed Adjusted EBITDA to provide (i) an understanding of the impact of certain items in our consolidated financial statements, some of which are recurring and/or require cash payments, and (ii) meaningful year-over-year comparisons of our consolidated financial results. Additionally, we use Adjusted EBITDA as a baseline to set performance targets under our incentive compensation plans. We believe that Adjusted EBITDA provides interested parties with information about our ability to incur and service our debt obligations and make capital expenditures. For example, Adjusted EBITDA is an integral component in the determination of our compliance with certain covenants under our debt agreements; however, Adjusted EBITDA does not include all of the adjustments required by such debt agreements.

EBITDA is a non-GAAP measure that is defined as consolidated net income before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is EBITDA modified to exclude discontinued operations, net gains/losses on sales of assets, net interest and other income, gains/losses on early extinguishment of debt and write-offs of deferred financing costs. Because Adjusted EBITDA is not a measure of financial performance or liquidity that is determined under GAAP, it should not be considered in isolation or as a substitute for net income, income from operations, cash flows from operating, investing or financing activities, or any other GAAP measure. The items excluded from Adjusted EBITDA are significant components that must be evaluated to assess our financial performance and liquidity. Moreover, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Accordingly, interested parties and other readers of our consolidated financial statements are encouraged to use GAAP measures when evaluating and assessing our financial performance and liquidity.

 

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The table below reconciles our consolidated net income to Adjusted EBITDA (in thousands).

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  

Consolidated net income

     $ 39,880           $ 31,921           $ 139,012           $ 123,788     

Adjustments:

           

Interest expense

     52,827           54,300           158,931           163,485     

Provision for income taxes

     19,867           12,495           74,661           62,392     

Depreciation and amortization

     61,547           60,422           185,545           179,198     

Income from discontinued operations

     -           (626)          -           (1,042)    

(Gains) losses on sales of assets, net

     435           (90)          (844)          (1,936)    

Interest and other income, net

     (3,342)          (942)          (7,264)          (1,499)    

Losses (gains) on early extinguishment of debt, net

     -           533           -           (16,202)    

Write-offs of deferred financing costs

     -           -           -           444     
                                   

Total adjustments

     131,334           126,092          411,029           384,840     
                                   

Adjusted EBITDA

     $       171,214           $       158,013           $       550,041           $       508,628     
                                   

Adjusted EBITDA as a percent of net revenue

     13.5%          14.1%          14.5%          14.9%    
                                   

Critical Accounting Policies and Estimates Update

General. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider a critical accounting policy to be one that requires us to make significant judgments and estimates when we prepare our consolidated financial statements. Such critical accounting policies and estimates, which are more fully described in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2009, include: (i) net revenue; (ii) the provision for doubtful accounts; (iii) impairments of long-lived assets and goodwill; (iv) income taxes; (v) professional liability risks and other self-insured programs; and (vi) legal and other loss contingencies.

There were no material changes to our critical accounting policies and estimates during the 2010 Three Month Period. See Note 8 to the Interim Condensed Consolidated Financial Statements in Item 1 for recent accounting guidance that we will adopt no later than the quarter ending March 31, 2011. We do not believe that such new accounting guidance will have a material impact on our consolidated financial statements or the notes thereto.

Goodwill. We review our goodwill for impairment on an annual basis (i.e., each October 1) or whenever circumstances indicate that a possible impairment might exist. Our judgment regarding the existence of impairment indicators is based on, among other things, market conditions and operational performance. When performing the impairment test, we initially compare the estimated fair values of each reporting unit’s net assets, including allocated home office net assets, to the corresponding carrying amounts on our consolidated balance sheet (i.e., Step 1 of the goodwill impairment test). If the estimated fair value of a reporting unit’s net assets is less than the balance sheet carrying amount, we determine the implied fair value of the reporting unit’s goodwill, compare such fair value to the corresponding carrying amount and, if necessary, record a goodwill impairment charge. We do not believe that any of our reporting units are currently at risk of failing Step 1 of the goodwill impairment test; however, we have not yet completed our October 1, 2010 annual impairment testing.

 

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2010 Three Month Period Compared to the 2009 Three Month Period

The tables below summarize our operating results for the 2010 Three Month Period and the 2009 Three Month Period. Our hospitals that were in operation for all of the 2010 Three Month Period and the 2009 Three Month Period are referred to herein as same three month hospitals.

 

    Three Months Ended September 30,  
    2010     2009  
    Amount     Percent
of Net
Revenue
    Amount     Percent of
Net
Revenue
 
    (in thousands)           (in thousands)        

Net revenue

    $ 1,270,659          100.0   %      $ 1,121,903         100.0   % 

Operating expenses:

       

Salaries and benefits

    501,841          39.5         438,203         39.1    

Supplies

    173,437          13.7         154,243         13.7    

Provision for doubtful accounts

    159,922          12.6         143,746         12.8    

Depreciation and amortization

    61,547          4.8         60,422         5.4    

Rent expense

    30,184          2.4         25,532         2.3    

Other operating expenses

    234,061          18.4         202,166         18.0    
                               

Total operating expenses

    1,160,992          91.4         1,024,312         91.3    
                               

Income from operations

    109,667          8.6         97,591         8.7    

Other income (expense):

       

Gains (losses) on sales of assets, net

    (435)                90           

Interest and other income, net

    3,342          0.3         942         0.1    

Interest expense

    (52,827)         (4.2)        (54,300)        (4.8)   

Losses on early extinguishment of debt

    -                 (533)        (0.1)   
                               

Income from continuing operations before income taxes

    59,747          4.7         43,790         3.9    

Provision for income taxes

    (19,867)         (1.6)        (12,495)        (1.1)   
                               

Income from continuing operations

    $ 39,880          3.1   %      $ 31,295         2.8   % 
                               
    Three Months Ended September 30,           Percent  
    2010     2009     Change         Change      

Same Three Month Hospitals

       

Occupancy

    41.4%         42.5%         (110 ) bps*      n/a   

Patient days

    298,308          306,871          (8,563)        (2.8)  % 

Admissions

    72,634          74,890          (2,256)        (3.0)  % 

Adjusted admissions†

    134,591          135,033          (442)        (0.3)  % 

Emergency room visits

    329,431          355,213          (25,782)        (7.3)  % 

Surgeries

    75,264          71,317          3,947         5.5  % 

Outpatient revenue percent

    51.5%         50.2%         130   bps      n/a   

Inpatient revenue percent

    48.5%         49.8%         (130)  bps      n/a   

Total Hospitals

       

Occupancy

    41.6%         42.5%         (90)  bps      n/a   

Patient days

    323,925          306,871          17,054         5.6  % 

Admissions

    78,566          74,890          3,676         4.9  % 

Adjusted admissions†

    146,397          135,033          11,364         8.4  % 

Emergency room visits

    360,940          355,213          5,727         1.6  % 

Surgeries

    80,126          71,317          8,809         12.4  % 

Outpatient revenue percent

    52.7%         50.2%         250   bps      n/a   

Inpatient revenue percent

    47.3%         49.8%         (250)  bps      n/a   

 

*

basis points

Admissions adjusted for outpatient volume

 

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Net revenue during the 2010 Three Month Period was approximately $1,270.7 million as compared to $1,121.9 million during the 2009 Three Month Period. This change represented an increase of $148.8 million, or 13.3%. Our same three month hospitals provided $57.6 million, or 38.7%, of the increase in net revenue as a result of increased surgical volume attributable to physician recruitment and market service development, as well as improvements in reimbursement rates. These items were partially offset by decreases in hospital admissions and emergency room visits, as well as unfavorable movement in our payor mix. Among other things, hospital admissions and emergency room visits declined in 2010 due to (i) fewer births at our hospitals and (ii) a less severe 2010 flu season as compared to 2009 when there was an outbreak of H1N1 influenza (“swine flu”) in the United States. The remaining 2010 net revenue increase of $91.2 million was due to our acquisitions of Sparks in December 2009 and Shands in July 2010. Net revenue per adjusted admission increased approximately 4.5% during the 2010 Three Month Period as compared to the 2009 Three Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers, partially offset by the unfavorable movement in our payor mix during the 2010 Three Month Period.

Our provision for doubtful accounts during the 2010 Three Month Period decreased 20 basis points to 12.6% of net revenue as compared to 12.8% of net revenue during the 2009 Three Month Period. This improvement in our provision for doubtful accounts during the 2010 Three Month Period was primarily due to: (i) a reduction in emergency room visits by uninsured patients; (ii) a 10 basis point decline in self-pay admissions at our same three month hospitals; and (iii) improved collections of self-pay patient balances and patient responsibility amounts (e.g., deductibles, co-payments, other amounts not covered by insurance, etc.).

Our consistently applied accounting policy is that accounts written off as charity and indigent care are not recognized in net revenue and, accordingly, such amounts have no impact on our provision for doubtful accounts. However, as a measure of our fiscal performance, we routinely aggregate amounts pertaining to our (i) provision for doubtful accounts, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care and then we divide the resulting total by the sum of our (i) net revenue, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care. We believe that this fiscal measure, which we refer to as our Uncompensated Patient Care Percentage, provides us with key information regarding the aggregate level of patient care for which we do not receive remuneration. During the 2010 Three Month Period and the 2009 Three Month Period, our Uncompensated Patient Care Percentage was 26.5% and 25.7%, respectively. This 80 basis point increase during the 2010 Three Month Period primarily reflects more charity and indigent care, greater uninsured self-pay patient revenue discounts and unfavorable movement in our payor mix.

Salaries and benefits as a percent of net revenue increased to 39.5% during the 2010 Three Month Period from 39.1% during the 2009 Three Month Period. This increase was primarily due to disproportionately higher salaries and benefits at our recent acquisitions.

Rent expense as a percent of net revenue increased during the 2010 Three Month Period as compared to the 2009 Three Month Period while the same percent for depreciation and amortization declined. In recent years, we have entered into fewer capital lease arrangements as a result of more favorable operating lease terms. As our use of operating leases has increased, depreciation and amortization has declined and rent expense has increased. Additionally, certain of our hospitals reached the end of their depreciable lives during the 2010 Three Month Period, which further reduced depreciation and amortization expense in 2010.

Other operating expenses as a percent of net revenue increased from 18.0% during the 2009 Three Month Period to 18.4% during the 2010 Three Month Period. This change was primarily due to higher repairs and maintenance costs and an increase in attorneys’ fees and other costs related to our acquisitions, partially offset by savings realized from consolidating certain vendor agreements.

Interest and other income increased from approximately $0.9 million during the 2009 Three Month Period to $3.3 million during the 2010 Three Month Period. This increase primarily relates to (i) gains on sales of available-for-sale securities of $1.7 million in 2010 with no corresponding amount in 2009 and (ii) better returns on invested funds during 2010.

Interest expense decreased from approximately $54.3 million during the 2009 Three Month Period to $52.8 million during the 2010 Three Month Period. Such decrease was primarily due to a lower average outstanding principal balance on our $2.75 billion seven-year term loan during the 2010 Three Month Period as compared to the 2009 Three Month Period. We also experienced a lower overall effective interest rate on such borrowings because more of the outstanding balance thereunder was not covered by our interest rate swap contract. These reductions in interest expense were partially offset by a lesser amount of capitalized interest during the 2010 Three Month Period. See “Liquidity, Capital Resources and Capital Expenditures” below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.

 

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During the 2009 Three Month Period, we repurchased certain of our convertible debt securities, which yielded losses on the early extinguishment of debt of approximately $0.5 million. See Note 2(b) to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our convertible debt repurchases.

Our effective income tax rates were approximately 33.3% and 28.5% during the 2010 Three Month Period and the 2009 Three Month Period, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, reduced our effective income tax rates by approximately 280 basis points and 480 basis points during the 2010 Three Month Period and the 2009 Three Month Period, respectively. Our 2010 provision for income taxes was favorably impacted by the finalization of certain federal and state income tax returns and the satisfactory conclusion of an Internal Revenue Service audit of our tax returns for the years ended December 31, 2007 and 2006. Our provision for income taxes during the 2009 Three Month Period was favorably impacted by: (i) the finalization of certain federal and state income tax returns; (ii) the satisfactory conclusion of a state tax audit; and (iii) the lapsing of certain state statutes of limitations. These 2009 items were partially offset by adjustments pertaining to stock-based compensation and the related additional paid-in capital pool of excess income tax benefits.

 

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2010 Nine Month Period Compared to the 2009 Nine Month Period

The tables below summarize our operating results for the nine months ended September 30, 2010 and 2009, which we refer to as the 2010 Nine Month Period and the 2009 Nine Month Period, respectively. Our hospitals that were in operation for all of the 2010 Nine Month Period and the 2009 Nine Month Period are referred to herein as same nine month hospitals.

 

    Nine Months Ended September 30,  
    2010     2009  
    Amount     Percent
of Net
Revenue
    Amount     Percent
of Net
Revenue
 
    (in thousands)           (in thousands)        

Net revenue

    $ 3,803,465          100.0   %      $ 3,418,373          100.0   % 

Operating expenses:

       

Salaries and benefits

    1,500,215          39.4         1,332,265          39.0    

Supplies

    531,083          14.0         480,051          14.1    

Provision for doubtful accounts

    468,458          12.3         419,872          12.3    

Depreciation and amortization

    185,545          4.9         179,198          5.2    

Rent expense

    90,716          2.4         75,060          2.2    

Other operating expenses

    662,952          17.4         602,497          17.6    
                               

Total operating expenses

    3,438,969          90.4         3,088,943          90.4    
                               

Income from operations

    364,496          9.6         329,430          9.6    

Other income (expense):

       

Gains on sales of assets, net

    844                 1,936          0.1    

Interest and other income, net

    7,264          0.2         1,499            

Interest expense

    (158,931)         (4.2)        (163,485)         (4.8)   

Gains on early extinguishment of debt, net

    -                 16,202          0.5    

Write-offs of deferred financing costs

    -                 (444)           
                               

Income from continuing operations before income taxes

    213,673          5.6         185,138          5.4    

Provision for income taxes

    (74,661)         (1.9)        (62,392)         (1.8)   
                               

Income from continuing operations

    $ 139,012          3.7   %      $ 122,746          3.6   % 
                               
    Nine Months Ended September 30,           Percent  
    2010     2009     Change     Change  

Same Nine Month Hospitals

       

Occupancy

    44.3%         45.3%         (100)  bps*      n/a   

Patient days

    954,157          977,160          (23,003)        (2.4)  % 

Admissions

    229,802          232,798          (2,996)        (1.3)  % 

Adjusted admissions†

    414,285          405,140          9,145         2.3  % 

Emergency room visits

    998,323          1,033,970          (35,647)        (3.4)  % 

Surgeries

    227,659          217,432          10,227         4.7  % 

Outpatient revenue percent

    50.2%         48.0%         220   bps      n/a   

Inpatient revenue percent

    49.8%         52.0%         (220)  bps      n/a   

Total Hospitals

       

Occupancy

    43.9%         45.3%         (140)  bps      n/a   

Patient days

    1,022,534          977,160          45,374         4.6  % 

Admissions

    243,944          232,798          11,146         4.8  % 

Adjusted admissions†

    440,932          405,140          35,792         8.8  % 

Emergency room visits

    1,057,855          1,033,970          23,885         2.3  % 

Surgeries

    240,471          217,432          23,039         10.6  % 

Outpatient revenue percent

    50.4%         48.0%         240   bps      n/a   

Inpatient revenue percent

    49.6%         52.0%         (240)  bps      n/a   

 

*

basis points

Admissions adjusted for outpatient volume

 

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Net revenue during the 2010 Nine Month Period was approximately $3,803.5 million as compared to $3,418.4 million during the 2009 Nine Month Period. This change represented an increase of $385.1 million, or 11.3%. Our same nine month hospitals provided $154.2 million, or 40.0%, of the increase in net revenue as a result of increased surgical volume attributable to physician recruitment and market service development, as well as improvements in reimbursement rates. These items were partially offset by decreases in hospital admissions and emergency room visits, as well as unfavorable movement in our payor mix. Among other things, hospital admissions and emergency room visits declined in 2010 due to (i) fewer births at our hospitals and (ii) a less severe 2010 flu season as compared to 2009 when there was an outbreak of H1N1 influenza (“swine flu”) in the United States. The remaining 2010 net revenue increase of $230.9 million was due to our acquisitions of Sparks in December 2009 and Shands in July 2010. Net revenue per adjusted admission increased approximately 2.2% during the 2010 Nine Month Period as compared to the 2009 Nine Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers, partially offset by the unfavorable movement in our payor mix during the 2010 Nine Month Period.

Our provision for doubtful accounts as a percent of net revenue was 12.3% during each of the 2010 Nine Month Period and the 2009 Nine Month Period. Moreover, the uninsured patients in the mix of patients that we serve remained generally unchanged (approximately 7.1% and 7.0% of total hospital admissions during the 2010 Nine Month Period and the 2009 Nine Month Period, respectively). During the 2010 Nine Month Period, the provision for doubtful accounts was favorably impacted by a reduction in emergency room visits by uninsured patients and improved collections of self-pay patient balances and patient responsibility amounts (e.g., deductibles, co-payments, other amounts not covered by insurance, etc.). During the 2010 Nine Month Period and the 2009 Nine Month Period, our Uncompensated Patient Care Percentage, which is described above under the heading “2010 Three Month Period Compared to the 2009 Three Month Period,” was 25.2% and 24.5%, respectively. This 70 basis point increase during the 2010 Nine Month Period primarily reflects greater uninsured self-pay patient revenue discounts, more charity and indigent care and unfavorable movement in our payor mix.

Salaries and benefits as a percent of net revenue increased to 39.4% during the 2010 Nine Month Period from 39.0% during the 2009 Nine Month Period. This increase was primarily due to disproportionately higher salaries and benefits at our recent acquisitions.

Rent expense as a percent of net revenue increased during the 2010 Nine Month Period as compared to the 2009 Nine Month Period while the same percent for depreciation and amortization declined. In recent years, we have entered into fewer capital lease arrangements as a result of more favorable operating lease terms. As our use of operating leases has increased, depreciation and amortization has declined and rent expense has increased. Additionally, certain of our hospitals reached the end of their depreciable lives during the 2010 Nine Month Period, which further reduced depreciation and amortization expense in 2010.

Other operating expenses as a percent of net revenue decreased from 17.6% during the 2009 Nine Month Period to 17.4% during the 2010 Nine Month Period. This decline is primarily due to the full benefit of various cost containment measures that we have implemented, the centralization of certain home office functions, such as physician recruiting and marketing, and savings realized from consolidating certain vendor agreements. These reductions in other operating expenses were partially offset by an increase in attorneys’ fees and other costs related to our acquisitions.

Interest and other income increased from approximately $1.5 million during the 2009 Nine Month Period to $7.3 million during the 2010 Nine Month Period. This increase primarily relates to (i) gains on sales of available-for-sale securities of $4.5 million in 2010 with no corresponding amount in 2009 and (ii) better returns on invested funds during 2010.

Interest expense decreased from approximately $163.5 million during the 2009 Nine Month Period to $158.9 million during the 2010 Nine Month Period. Such decrease was primarily due to lower average outstanding principal balances on our $2.75 billion seven-year term loan and our convertible debt securities during the 2010 Nine Month Period as compared to the 2009 Nine Month Period. These reductions in interest expense were partially offset by a lesser amount of capitalized interest during the 2010 Nine Month Period. See “Liquidity, Capital Resources and Capital Expenditures” below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.

During the 2009 Nine Month Period, we repurchased certain of our convertible debt securities, which yielded a net gain on the early extinguishment of debt of approximately $16.2 million. See Note 2(b) to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our convertible debt repurchases.

Our effective income tax rates were approximately 34.9% and 33.7% during the 2010 Nine Month Period and the 2009 Nine Month Period, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, reduced our effective income tax rates by approximately 300 basis points and 380 basis points during the 2010 Nine Month Period and the 2009 Nine Month Period, respectively. Our 2010 and 2009 effective income tax rates were also impacted by the same items described above under the heading “2010 Three Month Period Compared to the 2009 Three Month Period.”

 

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Liquidity, Capital Resources and Capital Expenditures

Liquidity

Our cash flows from continuing operating activities provide the primary source of cash for our ongoing business needs. At September 30, 2010, we also had (i) approximately $33.8 million of available-for-sale securities that will primarily be used to fund a portion of our self-insured medical malpractice program and (ii) borrowing capacity under our revolving credit facilities that can be used for, among other things, general business purposes and acquisitions. We believe that our various sources of cash are adequate to meet our foreseeable operating, capital expenditure, business acquisition and debt service needs. As discussed at Note 9 to the Interim Condensed Consolidated Financial Statements in Item 1, we used $151.5 million of our cash on hand at September 30, 2010 to complete an acquisition of two Florida-based hospitals and certain related health care operations on October 1, 2010. Below is a summary of our recent cash flow activity (in thousands).

 

    

Nine Months Ended

September 30,

    

2010

  

2009

Sources (uses) of cash and cash equivalents:

     

Operating activities

    $                360,071        $                357,431  

Investing activities

   (184,125)     (150,415) 

Financing activities

   (36,210)     (134,584) 

Discontinued operations

   -      6,300  
         

Net increase in cash and cash equivalents

    $                139,736        $                  78,732  
         

Operating Activities

Our cash flows from continuing operating activities increased approximately $2.6 million, or 0.7%, during the 2010 Nine Month Period when compared to the 2009 Nine Month Period. This increase primarily related to (i) improved profitability (i.e., an increase of $35.1 million in income from operations during the 2010 Nine Month Period compared to the 2009 Nine Month Period) and (ii) increases in our current liabilities during the 2010 Nine Month Period that were primarily due to the timing of vendor payments and payroll. Partially offsetting these items were (i) income taxes (i.e., net federal and state income tax payments of $51.1 million during the 2010 Nine Month Period compared to net refunds of $14.3 million during the 2009 Nine Month Period) and (ii) an increase in accounts receivable from the acquisition that we completed on July 1, 2010 (see further discussion below under “Days Sales Outstanding”). We expect to make additional estimated income tax payments during the remainder of 2010. Furthermore, we believe that the accounts receivable cash collections at our newly acquired hospitals, including our two-hospital acquisition on October 1, 2010, will continue to negatively impact our operating cash flows through December 31, 2010. See Notes 6 and 9 to the Interim Condensed Consolidated Financial Statements for information regarding our acquisitions.

Investing Activities

Cash used in investing activities during the 2010 Nine Month Period included: (i) approximately $147.9 million of additions to property, plant and equipment, consisting primarily of new medical and information technology equipment, software, renovation and expansion projects at certain of our facilities and construction of a replacement hospital for Madison County Medical Center in Canton, Mississippi; (ii) $16.4 million to acquire four ancillary health care businesses; (iii) $21.5 million to acquire a 60% equity interest in each of three Florida-based hospitals; and (iv) a $7.9 million increase in our restricted funds. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our acquisitions during the 2010 Nine Month Period. Excluding the available-for-sale securities in restricted funds, we had net cash proceeds of $7.3 million from buying and selling such securities during the 2010 Nine Month Period, as well as $2.3 million of proceeds from sales of assets and insurance recoveries during that period.

Cash used in investing activities during the 2009 Nine Month Period included approximately $158.7 million of additions to property, plant and equipment, consisting primarily of renovation and expansion projects at certain of our facilities. These cash outlays were partially offset by a $4.2 million decrease in our restricted funds and $4.7 million of proceeds from sales of assets.

Financing Activities

During the 2010 Nine Month Period, we made principal payments on long-term debt and capital lease obligations of approximately $30.4 million. We also paid $15.0 million to noncontrolling shareholders for recurring distributions and mandatory repurchases of subsidiary shares. Partially offsetting these cash outlays were (i) $2.5 million that we received from noncontrolling shareholders to acquire minority equity interests in certain of our joint ventures and (ii) $5.5 million of cash proceeds from exercises of stock options. See Notes 2 and 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt/capital lease arrangements and our joint venture activity, respectively.

 

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During the 2009 Nine Month Period, we made principal payments on long-term debt and capital lease obligations of approximately $78.8 million, including an $18.4 million mandatory Excess Cash Flow payment (as described below under “Capital Resources”) and a $25.0 million prepayment under our $2.75 billion seven-year term loan. We also paid (i) $67.7 million to repurchase certain of our convertible debt securities in the open market and (ii) $17.9 million to noncontrolling shareholders, including a distribution of $11.1 million from our joint venture in North Carolina and South Carolina (prior to such joint venture’s restructuring). These cash outlays were partially offset by $21.2 million that we received from noncontrolling shareholders to acquire minority equity interests in certain of our joint ventures and $8.5 million of cash proceeds from exercises of stock options.

Days Sales Outstanding

Days sales outstanding, or DSO, is calculated by dividing quarterly net revenue by the number of days in the quarter. The result is divided into the net accounts receivable balance at the end of the quarter to obtain our DSO. We believe that this statistic is an important measure of collections on our accounts receivable, as well as our liquidity. Our DSO was 50 days at September 30, 2010, which compares to 49 days at September 30, 2009.

We are in the process of obtaining the necessary approvals to use the predecessor Medicare and Medicaid provider numbers from the hospitals that we acquired on July 1, 2010 to commence billing. During this process, we are unable to bill for the services we provide, which has caused our accounts receivable to grow and correspondingly increased our DSO by approximately one day at September 30, 2010. We are also currently completing the same process in respect of the Medicare and Medicaid provider numbers for the two hospitals and related health care operations that we acquired on October 1, 2010. See Notes 6 and 9 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our acquisitions.

Income Taxes

Other than certain state net operating loss carryforwards, we believe that it is more likely than not that reversals of existing taxable temporary differences, future taxable income and carrybacks will allow us to realize the deferred tax assets that are recognized in our consolidated balance sheets.

Capital Resources

Senior Secured Credit Facilities. Our variable rate senior secured credit facilities (the “Credit Facilities”), which we entered into on February 16, 2007, consist of a seven-year $2.75 billion term loan (the “Term Loan”) and a $500.0 million six-year revolving credit facility (the “Revolving Credit Agreement”). The Term Loan requires (i) quarterly principal payments to amortize approximately 1% of the loan’s face value during each year of the loan’s term and (ii) a balloon payment for the remaining outstanding loan balance at the end of the agreement. We are also required to repay principal under the Term Loan in an amount that can be as much as 50% of our annual Excess Cash Flow, as such term is defined in the loan agreement; however, we do not believe that any such payment will be required for the year ending December 31, 2010. Our mandatory principal payments under the Credit Facilities for the twelve months ending September 30, 2011 are approximately $25.8 million. Throughout the Revolving Credit Agreement’s six-year term, we are obligated to pay commitment fees based on the amounts available for borrowing. Additionally, the Revolving Credit Agreement has a $75.0 million standby letter of credit limit. During the 2010 Three Month Period, we did not borrow under the Revolving Credit Agreement. Amounts outstanding under the Credit Facilities may be repaid at our option at any time, in whole or in part, without penalty.

We can elect whether interest on the Credit Facilities, which is generally payable quarterly in arrears, is calculated using LIBOR or prime as its base rate. The effective interest rate includes a spread above our selected base rate and is subject to modification in certain circumstances. Additionally, we may elect differing base interest rates for the Term Loan and the Revolving Credit Agreement. During 2007, as required by the Credit Facilities, we entered into a receive variable/pay fixed interest rate swap contract that provides for us to pay a fixed interest rate of 6.7445% on the notional amount of such contract for the seven-year term of the Term Loan. Notwithstanding this contractual arrangement, we remain ultimately responsible for all amounts due and payable under the Term Loan. Although we are exposed to financial risk in the event of nonperformance by one or more of the counterparties to the contract, we do not anticipate nonperformance because our interest rate swap contract is in a liability position and would require us to make settlement payments to the counterparties in the event of a contract termination. See Note 5 to the Interim Condensed Consolidated Financial Statements in Item 1 regarding the estimated fair value of our interest rate swap contract. At September 30, 2010, approximately $196.6 million of the Term Loan’s outstanding balance was not covered by the interest rate swap contract and, accordingly, such amount was subject to the Credit Facilities’ variable interest rate provisions (i.e., an effective interest rate of approximately 2.0% on both September 30, 2010 and October 29, 2010).

Although there were no amounts outstanding under the Revolving Credit Agreement on October 29, 2010, standby letters of credit in favor of third parties of approximately $48.3 million reduced the amount available for borrowing thereunder to $451.7 million on such date. Our effective interest rate on the variable rate Revolving Credit Agreement was approximately 2.0% on October 29, 2010.

 

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We intend to fund the Term Loan’s quarterly principal and interest payments and mandatory Excess Cash Flow payments, if any, with available cash balances, cash provided by operating activities and/or borrowings under the Revolving Credit Agreement.

Demand Promissory Note. We maintain a $10.0 million secured demand promissory note in favor of a bank for use as a working capital line of credit in conjunction with our cash management program. Pursuant to the terms and conditions of the demand promissory note, we may borrow and repay, on a revolving basis, up to the principal face amount of the note. All principal and accrued interest will be immediately due and payable upon the bank’s written demand. We did not borrow under this credit facility during the 2010 Three Month Period. The demand promissory note’s effective interest rate on October 29, 2010 was approximately 2.3%; however, there were no amounts outstanding thereunder on such date.

Debt Covenants

The Credit Facilities and the indentures governing our convertible debt securities and our 6.125% Senior Notes due 2016 contain covenants that, among other things, require us to maintain compliance with certain financial ratios. At September 30, 2010, we were in compliance with all of the covenants contained in those debt agreements. The table below summarizes certain key financial covenants under the Credit Facilities and our corresponding actual performance as of and for the period ended September 30, 2010. We believe that these financial covenants and the related ratios are important because they provide us with information about our ability to: (i) service our existing debt obligations; (ii) incur new debt or borrow under the Revolving Credit Agreement; and (iii) maintain good relationships with our lenders. The methodologies used to determine these ratios can be found at Exhibit 99.1 to our Current Report on Form 8-K/A that was filed on July 8, 2009.

 

         Requirement        Actual

Minimum required consolidated interest coverage ratio

   2.75 to 1.00        3.35 to 1.00    

Maximum permitted consolidated leverage ratio

   4.90 to 1.00    4.18 to 1.00

Although there can be no assurances, we believe that we will continue to be in compliance with all of our debt covenants. Should we fail to comply with one or more of our debt covenants in the future and are unable to remedy the matter, an event of default may result. In that circumstance, we would seek a waiver from our lenders or renegotiate the related debt agreement; however, such renegotiations could, among other things, subject us to higher interest and financing costs on our debt obligations and our credit ratings could be adversely affected.

Dividends

As part of a recapitalization of our balance sheet, our Board of Directors declared a special cash dividend that was paid in March 2007. In light of the special cash dividend, we indefinitely suspended all future dividend payments. Additionally, the Credit Facilities restrict our ability to pay cash dividends.

Standby Letters of Credit

As of October 29, 2010, we maintained approximately $48.3 million of standby letters of credit in favor of third parties with various expiration dates through October 1, 2011. Should any or all of these letters of credit be drawn upon, we intend to satisfy such obligations with available cash balances, cash provided by operating activities and, if necessary, borrowings under the Revolving Credit Agreement.

Capital Expenditures and Other

We believe that capital expenditures for property, plant and equipment will range from 4.5% to 5.5% of our net revenue for the year ending December 31, 2010, which is within the capital expenditure limitations of the Credit Facilities. As of September 30, 2010, we had started: (i) construction of a replacement hospital for Madison County Medical Center in Canton, Mississippi; (ii) several hospital renovation and expansion projects; and (iii) certain information technology hardware and software upgrades. Additionally, we estimate that the cost to build and equip a replacement hospital for Walton Regional Medical Center in Monroe, Georgia will range from $40 million to $45 million. Although we negotiated a deferral of all construction activities for this replacement hospital until December 1, 2010, we are currently obligated to complete construction no later than December 31, 2012. We do not believe that any of our construction, renovation and expansion projects are individually significant or that they represent, in the aggregate, a material commitment of our resources.

Part of our strategic business plan calls for us to acquire hospitals and other ancillary health care businesses that are aligned with our business model, available at a reasonable price and otherwise meet our strict acquisition criteria. We generally fund acquisitions, replacement hospital construction and other recurring capital expenditures with available cash balances, cash provided by operating activities, proceeds from sales of available-for-sale securities, amounts available under

 

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revolving credit agreements and proceeds from long-term debt issuances, or a combination thereof. Specifically, we funded the acquisition of two Florida-based hospitals on October 1, 2010 with cash on hand at September 30, 2010, which balance included the proceeds from recent sales of available-for-sale securities. This acquisition is discussed at Note 9 to the Interim Condensed Consolidated Financial Statements in Item 1.

Divestitures of Idle Property

As more fully discussed at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1, we intend to sell (i) Gulf Coast Medical Center, formerly a general acute care hospital in Biloxi, Mississippi that we closed on January 1, 2008, and (ii) the Woman’s Center at Dallas Regional Medical Center, formerly a specialty women’s hospital in Mesquite, Texas that we closed on June 1, 2008. However, the timing of such divestitures has not yet been determined. We intend to use the proceeds from the sales of these closed hospitals for general business purposes.

Contractual Obligations and Off-Balance Sheet Arrangements

During the 2010 Nine Month Period, there were no material changes to the contractual obligation and off-balance sheet information provided in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2009.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believe,” “anticipate,” “intend,” “expect,” “may,” “could,” “plan,” “continue,” “should,” “project,” “estimate” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may include projections of revenue, provisions for doubtful accounts, income or loss, capital expenditures, debt structure, principal payments on debt, capital structure, other financial items, statements regarding our plans and objectives for future operations, acquisitions, divestitures and other transactions, statements of future economic performance, statements regarding the effects and/or interpretations of recently enacted or future health care laws and regulations, statements of the assumptions underlying or relating to any of the foregoing statements, and statements that are other than statements of historical fact.

Forward-looking statements are based on our current plans and expectations and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the risks and uncertainties identified by us under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2009 and Item 1A of Part II of our Quarterly Report on Form 10-Q for the three months ended March 31, 2010. Furthermore, we operate in a continually changing business environment and new risk factors emerge from time to time. We cannot predict what these new risk factors may be, nor can we assess the impact, if any, of such new risk factors on our business or results of operations or the extent to which any factor or combination of factors may cause our actual results to differ materially from those expressed or implied by any of our forward-looking statements.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update such risk factors or to publicly announce the results of any revisions to the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect new information, future events or other developments.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

During the 2010 Nine Month Period, there were no material changes to the quantitative and qualitative disclosures about market risks that were presented in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December  31, 2009.

Item 4.    Controls and Procedures.

Conclusion Regarding The Effectiveness Of Disclosure Controls And Procedures. Our President and Chief Executive Officer (principal executive officer) and our Executive Vice President and Chief Financial Officer (principal financial officer) evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date.

Changes In Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

Descriptions of and updates to material legal proceedings are set forth at Note 7 to the Interim Condensed Consolidated Financial Statements in Item  1 of Part I of this Quarterly Report on Form 10-Q and are incorporated herein by reference.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

The table below summarizes the number of shares of Health Management Associates, Inc. common stock that were withheld to satisfy tax withholding obligations for stock-based compensation awards that vested during the three months ended September 30, 2010.

 

Month Ended

   Total Number of
    Shares Purchased    
         Average Price    
Per Share
 

July 31, 2010

     7,290                 $ 7.57           

August 31, 2010

     -           -           

September 30, 2010

     -           -           
           

Total

     7,290        
           

Item 6.    Exhibits.

See Index to Exhibits beginning on page 30 of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

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

 

    HEALTH MANAGEMENT ASSOCIATES, INC.
Date: November 3, 2010     By:   

/s/ Gary S. Bryant

     

Gary S. Bryant

     

Vice President and Controller

     

(Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

 

31.1

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

 

31.2

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

 

32.1

  

Section 1350 Certifications.

*

 

101.INS

  

XBRL Instance Document

*

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

*

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

*

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase Document

*

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

*

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

*  Pursuant to Rule 406T of Regulation S-T, the information in this exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement, prospectus or other document filed under the Securities Act of 1933, or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

 

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