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 June 30, 2011

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 July 29, 2011, there were 254,102,805 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 JUNE 30, 2011

INDEX

 

PART I – FINANCIAL INFORMATION    Page  

Item 1.  Financial Statements.

  

Consolidated Statements of Income – Three and Six Months Ended June 30, 2011 and 2010

     3   

Condensed Consolidated Balance Sheets – June 30, 2011 and December 31, 2010

     4   

Consolidated Statements of Stockholders’ Equity – Six Months Ended June 30, 2011 and 2010

     5   

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010

     6   

Notes to Interim Condensed Consolidated Financial Statements

     7   

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

     18   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4.  Controls and Procedures

     28   

PART II – OTHER INFORMATION

  

Item 1.  Legal Proceedings

     29   

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

     30   

Item 5.  Other Information

     30   

Item 6.  Exhibits

     30   

Signatures

     31   

Index to Exhibits

     32   

 

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
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Net revenue

    $     1,395,353          $     1,230,101          $     2,822,182          $     2,495,255     

Operating expenses:

           

 Salaries and benefits

     546,198           483,423           1,115,236           983,443     

 Supplies

     185,789           175,036           380,255           353,491     

 Provision for doubtful accounts

     170,787           147,906           342,856           304,065     

 Depreciation and amortization

     64,201           60,280           128,829           120,802     

 Rent expense

     36,774           30,042           72,621           59,594     

 Other operating expenses

     252,037           212,233           494,975           418,340     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     1,255,786           1,108,920           2,534,772           2,239,735     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     139,567           121,181           287,410           255,520     

Other income (expense):

           

 Gains (losses) on sales of assets, net

     (854)          84           (794)          1,279     

 Interest and other income, net

     993           2,651           1,127           3,922     

 Interest expense

     (51,033)          (52,530)          (102,070)          (106,104)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     88,673           71,386           185,673           154,617     

Provision for income taxes

     (31,757)          (25,318)          (66,791)          (55,061)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     56,916           46,068           118,882           99,556     

Loss from discontinued operations, net of income taxes

     (1,583)          (355)          (1,437)          (424)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated net income

     55,333           45,713           117,445           99,132     

Net income attributable to noncontrolling interests

     (6,722)          (6,056)          (13,310)          (12,535)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Health Management Associates, Inc.

    $ 48,611          $ 39,657          $ 104,135          $ 86,597     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share attributable to Health Management Associates, Inc. common stockholders:

           

 Basic

           

Continuing operations

    $ 0.20          $ 0.16          $ 0.42          $ 0.35     

Discontinued operations

     (0.01)          -           (0.01)          -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

    $ 0.19          $ 0.16          $ 0.41          $ 0.35     
  

 

 

    

 

 

    

 

 

    

 

 

 

 Diluted

           

Continuing operations

    $ 0.20          $ 0.16          $ 0.42          $ 0.35     

Discontinued operations

     (0.01)          -           (0.01)          -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

    $ 0.19          $ 0.16          $ 0.41          $ 0.35     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding:

           

 Basic

     251,765           248,390           250,898           247,975     
  

 

 

    

 

 

    

 

 

    

 

 

 

 Diluted

     255,235           251,198           254,478           250,535     
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

3


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

         June 30, 2011            December 31, 2010    
ASSETS      

Current assets:

     

Cash and cash equivalents

    $ 90,307          $ 101,812     

Available-for-sale securities

     140,430           57,327     

Accounts receivable, less allowances for doubtful accounts of $534,464 and $495,486 at June 30, 2011 and December 31, 2010, respectively

     761,776           759,131     

Supplies, prepaid expenses and other assets

     191,047           184,081     

Prepaid and recoverable income taxes

     45,340           44,961     

Restricted funds

     33,580           39,684     

Assets of discontinued operations

     6,530           11,384     
  

 

 

    

 

 

 

Total current assets

     1,269,010           1,198,380     
  

 

 

    

 

 

 

Property, plant and equipment

     4,453,492           4,265,435     

Accumulated depreciation and amortization

     (1,711,946)          (1,602,488)    
  

 

 

    

 

 

 

Net property, plant and equipment

     2,741,546           2,662,947     
  

 

 

    

 

 

 

Restricted funds

     69,710           51,067     

Goodwill

     911,632           909,470     

Deferred charges and other assets

     110,163           88,221     
  

 

 

    

 

 

 

Total assets

    $ 5,102,061          $ 4,910,085     
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

    $ 169,383          $ 172,501     

Accrued expenses and other liabilities

     338,242           321,332     

Deferred income taxes

     13,818           27,052     

Current maturities of long-term debt and capital lease obligations

     35,660           34,745     
  

 

 

    

 

 

 

Total current liabilities

     557,103           555,630     

Deferred income taxes

     189,038           157,177     

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

     2,984,915           2,983,719     

Interest rate swap contract

     195,243           215,473     

Other long-term liabilities

     299,320           263,113     
  

 

 

    

 

 

 

Total liabilities

     4,225,619           4,175,112     
  

 

 

    

 

 

 

Redeemable equity securities

     203,434           201,487     

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, 254,095 shares and 250,880 shares issued at June 30, 2011 and December 31, 2010, respectively

     2,541           2,509     

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

     (114,829)          (131,124)    

Additional paid-in capital

     144,818           123,040     

Retained earnings

     630,605           526,470     
  

 

 

    

 

 

 

Total Health Management Associates, Inc. stockholders’ equity

     663,135           520,895     

Noncontrolling interests

     9,873           12,591     
  

 

 

    

 

 

 

Total stockholders’ equity

     673,008           533,486     
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

    $ 5,102,061          $ 4,910,085     
  

 

 

    

 

 

 

See accompanying notes.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2011 and 2010

(in thousands)

(unaudited)

 

    Health Management Associates, Inc.              
                Accumulated                          
                Other      Additional            Non-     Total  
    Common Stock     Comprehensive     Paid-in     Retained      controlling       Stockholders’   
     Shares       Par Value       Income (Loss), net      Capital      Earnings      Interests     Equity  

Balances at January 1, 2011

    250,880         $ 2,509         $ (131,124)        $ 123,040         $ 526,470         $ 12,591         $ 533,486     

Comprehensive income:

             

Net income

    -          -          -          -          104,135          13,310          117,445     

Unrealized gains (losses) on available-for-sale securities, net

    -          -          734          -          -          -          734     

Change in fair value of interest rate swap contract, net

    -          -          15,561          -          -          -          15,561     
             

 

 

 

Total comprehensive income ($120,430 and $13,310 attributable to Health Management Associates, Inc. and noncontrolling interests, respectively)

                133,740     

Exercises of stock options and related tax matters

    1,566          16         -          16,202          -          -          16,218     

Issuances of deferred stock and restricted stock and related tax matters

    1,649          16         -          (7,369)         -          -          (7,353)    

Stock-based compensation expense

    -          -          -          12,945          -          -          12,945     

Distributions to noncontrolling shareholders

    -          -          -          -          -            (16,028)         (16,028)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

    254,095         $ 2,541         $   (114,829)        $ 144,818         $   630,605         $ 9,873         $   673,008     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Health Management Associates, Inc.              
                Accumulated                          
                Other     Additional           Non-     Total  
    Common Stock     Comprehensive     Paid-in     Retained     controlling     Stockholders’  
    Shares     Par Value     Income (Loss), net     Capital     Earnings     Interests     Equity  

Balances at January 1, 2010

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

Comprehensive income:

             

Net income

    -          -          -          -          86,597          12,535          99,132     

Unrealized gains (losses) on available-for-sale securities, net

    -          -          (346)         -          -          -          (346)    

Change in fair value of interest rate swap contract, net

    -          -          (23,022)         -          -          -          (23,022)    
             

 

 

 

Total comprehensive income ($63,229 and $12,535 attributable to Health Management Associates, Inc. and noncontrolling interests, respectively)

                75,764     

Exercises of stock options and related tax matters

    856          9          -          8,740          -          -          8,749     

Issuances of deferred stock and restricted stock and related tax matters

    1,235          12          -          (3,062)         -          -          (3,050)    

Stock-based compensation expense

    -          -          -          8,934          -          -          8,934     

Noncontrolling shareholder interest in an acquired business

    -          -          -          -          -          3,565          3,565     

Distributions to noncontrolling shareholders

    -          -          -          -          -          (9,534)         (9,534)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2010

    250,608         $ 2,506         $ (143,610)        $ 111,143         $ 462,998         $ 13,011         $   446,048     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

             Six Months Ended         
June 30,
 
         2011              2010      

Cash flows from operating activities:

     

Consolidated net income

    $ 117,445          $ 99,132     

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

     

Depreciation and amortization

     132,162           124,165     

Provision for doubtful accounts

     342,856           304,065     

Stock-based compensation expense

     12,945           8,934     

Losses (gains) on sales of assets, net

     794           (1,279)    

Gains on sales of available-for-sale securities, net

     (7)          (2,754)    

Deferred income tax expense (benefit)

     13,615           (8,698)    

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

     

Accounts receivable

     (355,170)          (307,282)    

Supplies, prepaid expenses and other current assets

     (6,722)          (9,078)    

Prepaid and recoverable income taxes

     10,448           14,367     

Deferred charges and other long-term assets

     (3,333)          (7,726)    

Accounts payable

     (6,488)          12,188     

Accrued expenses and other liabilities

     14,434           8,854     

Equity compensation excess income tax benefits

     (2,919)          (1,112)    

Loss from discontinued operations, net

     1,437           424     
  

 

 

    

 

 

 

Net cash provided by continuing operating activities

     271,497           234,200     
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Additions to property, plant and equipment

     (133,034)          (91,428)    

Acquisitions, including ancillary health care businesses

     (42,891)          (10,959)    

Proceeds from sales of assets and insurance recoveries

     1,329           2,189     

Purchases of available-for-sale securities

     (687,218)          (348,549)    

Proceeds from sales of available-for-sale securities

     604,219           248,854     

Increase in restricted funds

     (11,559)          (9,021)    
  

 

 

    

 

 

 

Net cash used in continuing investing activities

     (269,154)          (208,914)    
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Principal payments on debt and capital lease obligations

     (19,741)          (19,992)    

Proceeds from exercises of stock options

     14,067           5,462     

Cash received from noncontrolling shareholders

     -           2,547     

Cash payments to noncontrolling shareholders

     (16,285)          (9,866)    

Equity compensation excess income tax benefits

     2,919           1,112     
  

 

 

    

 

 

 

Net cash used in continuing financing activities

     (19,040)          (20,737)    
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents before discontinued operations

     (16,697)          4,549     

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

     

Operating activities

     5,248           3,128     

Investing activities

     (56)          (1,058)    
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (11,505)          6,619     

Cash and cash equivalents at the beginning of the period

     101,812           106,018     
  

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

    $ 90,307          $ 112,637     
  

 

 

    

 

 

 

See accompanying notes.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

1.

Business and Basis of Presentation

Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) provides 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 June 30, 2011, we operated 60 hospitals in fifteen states with a total of 9,143 licensed beds. At such date, twenty-three and ten of our hospitals were located in Florida and Mississippi, respectively. See Notes 7 and 12 for information about our acquisition and disposition activity after June 30, 2011, including a Florida-based hospital that we no longer operate effective July 1, 2011 and an acquisition we plan to complete during the quarter ending December 31, 2011.

Unless specifically indicated otherwise, all amounts and percentages presented in the notes below are exclusive of our discontinued operations, which are identified at Note 7.

The condensed consolidated balance sheet as of December 31, 2010 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, 2010 (referred to herein as our “2010 Form 10-K”). The interim condensed consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 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 of 2010.

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 2010 Form 10-K. Additionally, see Note 10 for information regarding new accounting guidance that we adopted during the six months ended June 30, 2011.

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.

Certain amounts in the interim condensed consolidated financial statements have been reclassified in the prior year to conform to the current year presentation. Such reclassifications primarily related to discontinued operations.

 

2.

Net Revenue, Cost of Revenue and Related Other

General.    As more fully discussed at Note 1(f) to the audited consolidated financial statements included in our 2010 Form 10-K, net revenue is presented net of provisions for contractual adjustments and uninsured self-pay patient discounts. Specifically, gross charges to uninsured self-pay patients for non-elective procedures are discounted by 60% or more.

In the ordinary course of business, our hospitals and other health care facilities provide services to patients who are financially unable to pay for their care. Accounts identified as charity and indigent care are not recognized in net revenue. We maintain a uniform policy whereby patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and our collection agencies pursue payments on accounts receivable from patients who do not meet such criteria. Most states include an estimate of charity and indigent care costs in the determination of a hospital’s eligibility for Medicaid disproportionate share payments. We monitor the levels of charity and indigent care provided by our hospitals and other health care facilities and the procedures employed to identify and account for those patients.

Uncompensated Patient Care.    To quantify the overall impact of, and trends related to, uninsured accounts, we believe that it is beneficial to view our: (i) foregone/unrecognized revenue for charity and indigent care; (ii) uninsured self-pay patient discounts; and (iii) provision for doubtful accounts, which we collectively refer to as “uncompensated patient care,” in combination rather than separately. We estimate the costs of our uncompensated patient care using a cost-to-charge ratio that is calculated by dividing our patient care costs by gross patient charges. Those costs include select direct and indirect costs such as salaries and benefits, supplies, depreciation and amortization, rent and other operating expenses.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.

Net Revenue, Cost of Revenue and Related Other (continued)

 

The table below sets forth the estimated costs of our uncompensated patient care (in thousands).

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
         2011              2010              2011              2010      

Charity and indigent care foregone/unrecognized revenue (based on established rates)

     $ 23,419           $ 20,144           $ 44,824           $ 40,617     

Uninsured self-pay patient discounts

     232,548           189,408           458,295           367,960     

Provision for doubtful accounts

     170,787           147,906           342,856           304,065     
  

 

 

    

 

 

    

 

 

    

 

 

 
     426,754           357,458           845,975           712,642     

Cost-to-charge ratio

     22.6%         22.1%         22.6%         22.1%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Estimated costs of uncompensated patient care

     $ 96,446           $ 78,998           $ 191,190           $ 157,494     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Revenue.    The presentation of costs and expenses in our consolidated statements of income does not differentiate between costs of revenue and other costs because substantially all of our costs and expenses are related to providing health care services. Furthermore, we believe that the natural classification of expenses is the most meaningful presentation of our operations. Amounts that could be classified as general and administrative expenses include the costs of our home office, which were approximately $38.5 million and $33.8 million during the three months ended June 30, 2011 and 2010, respectively. The corresponding amounts for the six months ended June 30, 2011 and 2010 were $77.2 million and $70.0 million, respectively.

3.    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 2010 Form 10-K. The table below summarizes our long-term debt and capital lease obligations (in thousands).

 

         June 30, 2011              December 31, 2010      

Revolving credit facilities

     $ -            $ -      

Term Loan (as defined below)

     2,467,684            2,481,434      

6.125% Senior Notes due 2016, net of discounts

     398,232            398,047      

3.75% Convertible Senior Subordinated Notes due 2028, net of discounts

     79,835            78,098      

Installment notes and other unsecured long-term debt

     5,257            5,184      

Capital lease obligations

     69,567            55,701      
  

 

 

    

 

 

 
     3,020,575            3,018,464      

Less current maturities

     (35,660)           (34,745)    
  

 

 

    

 

 

 

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

     $ 2,984,915            $ 2,983,719      
  

 

 

    

 

 

 

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. There was no annual Excess Cash Flow generated during the year ended December 31, 2010.

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 currently anticipate nonperformance because the 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 June 30, 2011, approximately $346.6 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 June 30, 2011 and July 29, 2011).

Although there were no amounts outstanding under the Revolving Credit Agreement on June 30, 2011, standby letters of credit in favor of third parties of approximately $49.2 million reduced the amount available for borrowing thereunder to $450.8 million on such date. The effective interest rate on the variable rate Revolving Credit Agreement was approximately 2.0% on both June 30, 2011 and July 29, 2011.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

3.

Long-Term Debt and Capital Lease Obligations (continued)

 

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).

 

         June 30, 2011              December 31, 2010    

Term Loan

    $ 2,401,505          $ 2,448,211     

6.125% Senior Notes due 2016

     417,000           405,000     

3.75% Convertible Senior Subordinated Notes due 2028

     115,590           109,543     

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 six months ended June 30, 2011 and 2010, including amounts that have been capitalized, was approximately $98.7 million and $105.4 million, respectively. Including acquisition transactions, we entered into capital leases for real property and equipment of $19.2 million and $5.4 million during the six months ended June 30, 2011 and 2010, respectively.

At June 30, 2011, we were in compliance with all of the covenants contained in our debt agreements.

 

4.

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 (loss) per share for the common stockholders of Health Management Associates, Inc. (in thousands, except per share amounts).

 

     Three Months Ended
June  30,
         Six Months Ended    
June 30,
 
             2011                      2010                      2011                      2010          

Numerators:

           

Income from continuing operations

     $ 56,916           $ 46,068           $ 118,882           $ 99,556     

Income attributable to noncontrolling interests

     (6,722)          (6,056)          (13,310)          (12,535)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations attributable to

           

Health Management Associates, Inc. common stockholders

     50,194           40,012           105,572           87,021    

Loss from discontinued operations attributable to

           

Health Management Associates, Inc. common stockholders

     (1,583)          (355)          (1,437)          (424)    
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     $ 48,611           $ 39,657           $ 104,135           $ 86,597    
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominators:

           

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

     251,765           248,390           250,898           247,975     

Dilutive securities:

           

Stock-based compensation arrangements

     3,470           2,808           3,580           2,560     
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share

     255,235           251,198           254,478           250,535     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Basic

           

Continuing operations

     $ 0.20           $ 0.16           $ 0.42           $ 0.35     

Discontinued operations

     (0.01)          -           (0.01)          -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     $ 0.19           $ 0.16           $ 0.41           $ 0.35     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Continuing operations

     $ 0.20           $ 0.16           $ 0.42           $ 0.35     

Discontinued operations

     (0.01)          -           (0.01)          -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     $ 0.19           $ 0.16           $ 0.41           $ 0.35     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities excluded from diluted earnings per share because they were antidilutive or performance conditions were not met:

           

Stock options

     2,574           6,229           3,373           6,785     
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred stock and restricted stock

     944           1,027           716           808     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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 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.

We recognize transfers between levels within the fair value hierarchy on the date of the change in circumstances that requires such transfer. The table below summarizes the estimated fair values of our financial assets (liabilities) as of June 30, 2011 (in thousands).

 

             Level 1                      Level 2                      Level 3          

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

     $ 226,797           $ -           $   

Interest rate swap contract

     -           (195,243)            
  

 

 

    

 

 

    

 

 

 

Totals

     $ 226,797           $ (195,243)          $   
  

 

 

    

 

 

    

 

 

 

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, forward 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 3) 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 consisted solely of shares in publicly traded mutual funds that had no withdrawal restrictions, 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 June 30, 2011:

              

Debt-based funds

              

Government

     9          $ 202,157          $ 1,139         $ (184)         $ 203,112     

Corporate

     2           8,311           480          -           8,791     

Equity-based funds

              

Domestic

     2           4,587           906          -           5,493     

International

     4           7,595           1,255          -           8,850     

Commodity-based fund

     1           600                   (49)          551     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     18          $ 223,250          $ 3,780         $ (233)         $ 226,797     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2010:

              

Debt-based funds

              

Government

     8          $ 120,026          $ 326         $ (308)         $ 120,044     

Corporate

     2           6,943           457          -           7,400     

Equity-based funds

              

Domestic

     2           4,840           751          -           5,591     

International

     4           8,147           1,190          -           9,337     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     16          $ 139,956          $ 2,724         $ (308)         $ 142,372     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

5.

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

 

As of June 30, 2011 and December 31, 2010, mutual fund investments with aggregate estimated fair values of approximately $72.1 million (three investments) and $64.5 million (five investments), respectively, generated the nominal gross unrealized losses disclosed in the table on the previous page. Due to recent declines in the value of such securities and/or our brief holding period for the securities, 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.

The weighted average cost method is used to determine the historical cost basis of securities that are sold. A nominal amount of the net realized gain during the six months ended June 30, 2011 was reclassified from our net unrealized gains at December 31, 2010. Approximately $2.1 million of the realized gains during the six months ended June 30, 2010 was reclassified from our net unrealized gains at December 31, 2009. Gross realized gains and losses on sales of available-for-sale securities are summarized in the table below (in thousands).

 

         Three Months Ended June 30,              Six Months Ended June 30,      
     2011      2010      2011      2010  

Realized gains

    $     325          $     1,822          $     325          $     2,754     

Realized losses

     (115)          -           (318)          -     

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

 

         June 30, 2011              December 31, 2010      

Cash and cash equivalents

    $     16,923          $ 5,706     

Available-for-sale securities

     86,367           85,045     
  

 

 

    

 

 

 

Totals

    $ 103,290          $     90,751     
  

 

 

    

 

 

 

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

 

         Six Months Ended June 30,      
     2011      2010  

Proceeds from sales

    $     1,817          $     8,577     

Purchases

     1,979           18,100     

6.     Acquisitions, Joint Ventures and Other Activity

Acquisition Activity. Effective May 1, 2011, one of our subsidiaries acquired a 95% equity interest in a company that owns and operates Tri-Lakes Medical Center, a 112-bed general acute care hospital in Batesville, Mississippi, and certain related health care operations. The purchase price for our 95% equity interest was approximately $38.8 million in cash, excluding transaction-related costs. During the six months ended June 30, 2011, certain of our subsidiaries also acquired three ancillary health care businesses for aggregate cash consideration of $4.1 million. During the six months ended June 30, 2010, certain of our subsidiaries acquired three 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 $3.1 million; (ii) the payment of cash consideration of $11.0 million; and (iii) the assumption of a capital lease agreement. These acquisitions, as well as our pending acquisition that is discussed at Note 12, are in furtherance of the part 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. We use estimated exit price fair values as of the date of acquisition to (i) allocate the related purchase price to the assets acquired and liabilities assumed and (ii) record noncontrolling interests. We recorded incremental goodwill during the six months ended June 30, 2011 and 2010 because the final negotiated purchase price in certain of our completed acquisitions exceeded the fair value of the net tangible and intangible assets acquired. Most of the goodwill that was added during those periods is expected to be tax deductible.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6.

Acquisitions, Joint Ventures and Other Activity (continued)

 

The table below summarizes the purchase price allocations for the acquisitions that we completed during the six months ended June 30, 2011 and 2010; however, in some cases, such purchase price allocations are preliminary and remain subject to future refinement as we gather supplemental information.

 

         Six Months Ended June 30,      
     2011      2010  
     (in thousands)  

Assets acquired:

     

Current and other assets

    $ 4,201          $ 1,125     

Property, plant and equipment

     42,488           7,041     

Goodwill

     2,162           17,856     
  

 

 

    

 

 

 

Total assets acquired

     48,851           26,022     

Liabilities assumed

     (3,914)          (5,657)    
  

 

 

    

 

 

 

Net assets acquired

    $     44,937          $     20,365     
  

 

 

    

 

 

 

Joint Ventures and Redeemable Equity Securities.    As of June 30, 2011, we had established joint ventures to own/lease and operate 28 of our hospitals. Local physicians and/or other health care entities 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 the noncontrolling shareholders with a unilateral right to require our subsidiary to redeem such securities (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 Health, Inc. and Shands HealthCare, which are described below. As of June 30, 2011 and through July 29, 2011, the mandatory 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).

 

         Six Months Ended June 30,      
     2011      2010  

Balances at the beginning of the period

    $ 201,487          $ 182,473     

Noncontrolling shareholder interests in an acquired business

     2,204           -     

Investments by noncontrolling shareholders

     -           5,679     

Purchases of subsidiary shares from noncontrolling shareholders

     (257)          (332)    
  

 

 

    

 

 

 

Balances at the end of the period

    $ 203,434          $ 187,820     
  

 

 

    

 

 

 

Novant Health, Inc. may require us to purchase its 30% equity interest in 123-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 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 Health, Inc. 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, insofar as the contingent rights are concerned, the carrying values of the related redeemable equity securities have not been adjusted since being initially recorded.

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7.

Discontinued Operations

Our discontinued operations during the periods presented herein included (i) 140-bed Riley Hospital in Meridian, Mississippi and its related health care operations (collectively, “Riley Hospital”) and (ii) 25-bed Fishermen’s Hospital in Marathon, Florida (“Fishermen’s Hospital”). The operating results and cash flows of discontinued operations are included in our consolidated financial statements up to the date of disposition. Additionally, as provided by GAAP, the operating results and cash flows of the abovementioned entities have been separately presented as discontinued operations in the interim condensed consolidated financial statements. Because Riley Hospital and Fishermen’s Hospital became discontinued operations subsequent to June 30, 2010, our 2010 interim condensed consolidated financial statements have been retroactively adjusted in accordance with GAAP to conform to the current period presentation.

Effective December 31, 2010, certain of our subsidiaries sold Riley Hospital, which included the hospital’s supplies and long-lived assets (primarily property, plant and equipment). During the six months ended June 30, 2011, our discontinued operations included a Riley Hospital post-closing purchase price adjustment of approximately $0.3 million attributable to working capital, which effectively increased our loss on the 2010 sale of such hospital. One of our subsidiaries entered into a lease termination agreement for Fishermen’s Hospital in May 2011 and such agreement was effective on July 1, 2011. As part of the agreement, the hospital’s remaining equipment, as well as certain working capital items, were sold to our former lessor for $1.5 million in cash. The Fishermen’s Hospital lease termination resulted in a goodwill impairment charge of $3.6 million during the six months ended June 30, 2011.

The table below sets forth the underlying details of our discontinued operations (in thousands).

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Net revenue

    $     6,886          $     17,686          $     13,603          $     37,551     

Operating expenses and other:

           

Salaries and benefits

     2,226           7,184           4,535           14,931     

Provision for doubtful accounts

     1,343           1,825           2,741           4,471     

Depreciation and amortization

     438           1,603           1,182           3,196     

Other operating expenses

     1,850           7,653           3,563           15,644     

Goodwill impairment charge

     3,614           -           3,614           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses and other

     9,471           18,265           15,635           38,242     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (2,585)          (579)          (2,032)          (691)    

Loss on sale of assets

     -           -           (315)          -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations before income taxes

     (2,585)          (579)          (2,347)          (691)    

Income tax benefit

     1,002           224           910           267     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from discontinued operations

    $         (1,583)         $ (355)         $ (1,437)         $ (424)    
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to certain tangible and intangible assets pertaining to Fishermen’s Hospital, our assets of discontinued operations at both June 30, 2011 and December 31, 2010 included the remaining real property at Gulf Coast Medical Center (“GCMC”) in Biloxi, Mississippi and the Woman’s Center at Dallas Regional Medical Center (the “Woman’s Center”) in Mesquite, Texas, which were closed on January 1, 2008 and June 1, 2008, respectively. On July 18, 2011, GCMC was sold for cash consideration of approximately $4.0 million, less selling and other related costs. Although we are currently evaluating various disposal alternatives for the Woman’s Center, the timing of such divestiture has not yet been determined. The table below summarizes the principal components of our assets of discontinued operations (in thousands).

 

       June 30, 2011          December 31, 2010    

Supplies, prepaid expenses and other assets

    $ 922          $ 1,082     

Property, plant and equipment, net

     5,608           6,688     

Goodwill

     -           3,614     
  

 

 

    

 

 

 

Total assets of discontinued operations

    $     6,530          $     11,384     
  

 

 

    

 

 

 

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8.

Income Taxes

Our effective income tax rates were approximately 36.0% and 35.6% during the six months ended June 30, 2011 and 2010, respectively, and 35.8% and 35.5% during the three months ended June 30, 2011 and 2010, 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 310 basis points during the six months ended June 30, 2011 and 2010, respectively. The corresponding impact was 290 basis points and 330 basis points during the three months ended June 30, 2011 and 2010, respectively.

Our net federal and state income tax payments during the six months ended June 30, 2011 and 2010 approximated $42.7 million and $48.5 million, respectively.

 

9.

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. Supplemental information regarding our comprehensive income is set forth in the table below (in thousands).

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Consolidated net income

    $     55,333          $     45,713          $     117,445          $     99,132     

Components of other comprehensive income:

           

Unrealized gains (losses) on available-for-sale securities, net

     196           (980)          734           (346)    

Changes in fair value of interest rate swap contract, net

     (227)          (12,775)          15,561           (23,022)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     (31)          (13,755)          16,295           (23,368)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated comprehensive income

     55,302           31,958           133,740           75,764     

Total comprehensive income attributable to noncontrolling interests

     (6,722)          (6,056)          (13,310)          (12,535)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income attributable to Health

           

Management Associates, Inc. common stockholders

    $ 48,580         $ 25,902          $ 120,430          $ 63,229     
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes 3 and 5 for information regarding our interest rate swap contract and available-for-sale securities, respectively. Also, see Note 10 for information regarding future changes in the presentation of comprehensive income.

10.  Recent Accounting Standards Updates

During August 2010, the Financial Accounting Standards Board (the “FASB”) approved a change to certain accounting standards. That change prohibits health care entities from netting projected insurance recoveries against the related liabilities and/or reserves in their balance sheets (e.g., professional liability claims and expenses, workers’ compensation, health and welfare benefits, etc.). The modified accounting standard, which permitted early adoption, was required to be adopted for fiscal years and interim periods that began after December 15, 2010. Additionally, such accounting standard permitted adoption on either a prospective or a retrospective basis. Effective January 1, 2011, we adopted the modified accounting standard on a prospective basis. The only impact of such adoption was an increase of approximately $15.4 million in our deferred charges and other assets and a corresponding increase in the related liabilities. That “gross-up” amount did not materially change during the six months ended June 30, 2011. We do not believe that retrospective application of the modified accounting standard to any period prior to January 1, 2011 would have resulted in a material change to any of our historical interim or annual consolidated financial statements.

During May 2011, the FASB amended and updated the existing accounting standards in GAAP insofar as they relate to fair value measurement (the “Fair Value Update”). The FASB’s primary objective was to collaborate with the International Accounting Standards Board to develop common requirements for measuring fair value and disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The Fair Value Update (i) expands and enhances GAAP’s current disclosures about fair value measurements and (ii) clarifies the FASB’s intent about the application of existing fair value measurement requirements in certain circumstances. Public companies are required to adopt the provisions of the Fair Value Update on a prospective basis during interim and annual periods beginning after December 15, 2011. Early adoption of the amended accounting guidance is not permitted. Although we continue to review the Fair Value Update, we do not believe that it will have a material impact on our consolidated financial statements or the notes thereto.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10.  Recent Accounting Standards Updates (continued)

 

During June 2011, the FASB amended and updated the existing accounting standards in GAAP regarding the presentation of comprehensive income (the “OCI Update”). Among other things, the OCI Update (i) eliminates the current option to report total comprehensive income and its components in the statement of changes in stockholders’ equity and (ii) requires the presentation of net income/loss, items of other comprehensive income and total comprehensive income in one continuous financial statement or two separate but consecutive financial statements. The OCI Update does not change the accounting for any items of other comprehensive income. Public companies are required to adopt the provisions of the OCI Update on a retrospective basis during interim and annual periods beginning after December 15, 2011. Early adoption of the OCI Update is permitted. We are currently evaluating our timeline for adoption of the OCI Update, which only affects the presentation of our consolidated financial statements.

During July 2011, the FASB amended and updated the existing accounting standards in GAAP regarding the income statement presentation and related disclosures of net revenue for health care entities (the “Net Revenue Update”). Among other things, the Net Revenue Update requires health care entities to (i) present the provision for doubtful accounts as a reduction of net patient service revenue in the income statement if the entity does not assess a patient’s ability to pay prior to rendering services or determine that collection of the related revenue is reasonably assured and (ii) provide enhanced disclosures about major sources of revenue by payor and the activity in the allowance for doubtful accounts. The Net Revenue Update does not otherwise change the revenue recognition criteria for health care entities. Public companies are required to adopt the provisions of the Net Revenue Update during interim and annual periods beginning after December 15, 2011. The income statement presentation change must be adopted on a retrospective basis but the enhanced disclosures may be adopted either retrospectively or prospectively. Early adoption of the Net Revenue Update is permitted. We are currently evaluating our timeline for adoption of the Net Revenue Update, which only affects the presentation of our consolidated income statement and certain disclosures.

11.  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 June 30, 2011, we were committed to non-cancelable guarantees of approximately $41.2 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 $15.4 million and $10.3 million at June 30, 2011 and December 31, 2010, respectively, are adequate and reasonable; however, there can be no assurances that the ultimate liability will not exceed our estimates.

Ascension Health Lawsuit.    On February 14, 2006, Health Management Associates, Inc. (referred to as “Health Management” for the remainder of this Note 11) 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 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 $40 million in damages. Health Management removed the case to the U. S. 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. On March 30, 2011, Health Management’s motion for summary judgment was granted as to all of plaintiffs’ claims, except for the breach of confidentiality claim, and plaintiffs’ motion for partial summary judgment was denied. On June 15, 2011, the case was stayed pending resolution of the appellate process. On July 8, 2011, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit (Appeal Number: 11-13069-B).

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 will continue to vigorously defend Health Management against the allegations, including any appeal that may be filed by the plaintiffs.

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. in the U.S. District Court for the Middle District of Florida, Tampa Division. The plaintiff’s complaint alleged that, among other things, the defendants erroneously submitted claims to Medicare and that those 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

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11. Commitments and Contingencies (continued)

 

plaintiff’s complaint further alleged that the defendants’ conduct violated the False Claims Act. On August 18, 2010, the plaintiff filed a first amended complaint that was similar to the original complaint. On September 27, 2010, the defendants moved to dismiss the first amended 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 11, 2010, the plaintiff filed a memorandum of law in opposition to the defendants’ motion to dismiss. On February 23, 2011, the case was transferred to the U.S. District Court for the Middle District of Florida, Fort Myers Division (No. 2:11-cv-00089-JES-DNF). On May 5, 2011, the plaintiff filed a second amended complaint, which was similar to the first amended complaint. On May 17, 2011, the defendants moved to dismiss the second amended complaint on the same bases set forth in their earlier motion to dismiss. On June 21, 2011, the United States filed a Statement of Interest to address certain propositions of law raised in the defendants’ motion to dismiss the second amended complaint but took no position as to whether the plaintiff’s complaint should be dismissed. We intend to vigorously defend Health Management and its subsidiary against the allegations in this matter.

Governmental Matters.    Several of our hospitals received letters during the second half of 2009 requesting information in connection with a U.S. 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 Health Management hospitals subject to the DOJ’s inquiry, we do not believe that the final outcome of this matter will be material.

During September 2010, Health Management received a letter from the DOJ indicating that an investigation was being conducted to determine whether certain Health Management hospitals improperly submitted claims for the implantation of implantable cardioverter defibrillators (“ICDs”). The DOJ’s investigation covers the period commencing with Medicare’s expansion of coverage for ICDs in 2003 to the present. The letter from the DOJ further indicates that the claims submitted by Health Management’s hospitals for ICDs and related services need to be reviewed to determine if Medicare coverage and payment was appropriate. During 2010, the DOJ sent similar letters and other requests to a large number of unrelated hospitals and hospital operators across the country as part of a nation-wide review of ICD billing under the Medicare program. We have, and will continue to, fully cooperate with the DOJ in its ongoing investigation, which could potentially give rise to claims against Health Management and/or certain of its subsidiary hospitals under the False Claims Act or other statutes, regulations or laws. Additionally, we recently commenced an internal review of hospital medical records related to ICDs that are the subject of the DOJ investigation. To date, the DOJ has not asserted any monetary or other claims against Health Management or its hospitals; however; this matter is in its early stages and we are unable to determine the potential impact, if any, that will result from the final resolution of the investigation.

Health Management and certain of its subsidiaries have also received subpoenas from the U.S. Department of Health and Human Services, Office of Inspector General on May 16, 2011 and on July 21, 2011. The May subpoena requested information on our physician referrals as well as ownership and management at our whole-hospital physician joint ventures, among other items. The July subpoena requested information on emergency room management including the use of Pro-Med software. We are cooperating with the government and are in the process of responding to the subpoenas. These matters are in their early stages and we are unable to determine the potential impact, if any, that will result from the investigations.

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.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Subsequent Event

On July 1, 2011, we announced that one of our subsidiaries signed a definitive asset purchase agreement to acquire from Catholic Health Partners and its subsidiary Mercy Health Partners, Inc. (“Mercy”) substantially all of the assets of Mercy’s seven general acute care hospitals in east Tennessee. Those hospitals are as follows:

 

   

Mercy Medical Center St. Mary’s in Knoxville (401 licensed beds);

   

Mercy Medical Center North in Powell (108 licensed beds);

   

St. Mary’s Jefferson Memorial Hospital in Jefferson City (58 licensed beds);

   

St. Mary’s Medical Center of Campbell County in LaFollette (66 licensed beds);

   

St. Mary’s Medical Center of Scott County in Oneida (25 licensed beds);

   

Mercy Medical Center West in Knoxville (101 licensed beds); and

   

Baptist Hospital of Cocke County in Newport (74 licensed beds).

Pursuant to the definitive asset purchase agreement, our subsidiary will also acquire (i) substantially all of Mercy’s ancillary health care operations that are affiliated with the aforementioned Tennessee-based hospitals (collectively those ancillary facilities are licensed to operate 197 beds) and (ii) Mercy’s former Riverside hospital campus (which is licensed to operate 293 beds). The purchase price for this acquisition is expected to be $525.0 million in cash, plus adjustments for working capital. Additionally, our subsidiary will assume certain long-term lease obligations and make maintenance and capital expenditures at the acquired hospitals. The acquired assets and assumed liabilities will include, among other things, supply inventories, property, plant and equipment, select employee benefit liabilities and certain long-term lease obligations.

St. Mary’s Medical Center of Scott County is a leased facility and pursuant to the terms of such lease, Mercy previously notified the lessor of its intent to terminate the lease in May 2012. We do not intend to extend or otherwise modify the lease.

Subject to (i) approvals by the Vatican and certain governmental authorities and (ii) other conditions customary to closing, we anticipate that this acquisition will close during the quarter ending December 31, 2011. We plan to fund this acquisition with available cash balances, proceeds from sales of available-for-sale securities and new bank financing.

 

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

Results of Operations

Overview

As of June 30, 2011, Health Management Associates, Inc. by and through its subsidiaries (collectively, “we,” “our” or “us”) operated 60 hospitals with a total of 9,143 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 Notes 7 and 12 to the Interim Condensed Consolidated Financial Statements in Item 1 for information about our acquisition and disposition activity after June 30, 2011, including a Florida-based hospital that we no longer operate effective July 1, 2011 and an acquisition we plan to complete during the quarter ending December 31, 2011. 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 7 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 of 2010 (collectively, the “Health Care Reform Act”) were signed into law by President Obama. The primary goals of the Health Care Reform Act are to: (i) provide coverage by January 1, 2014 to an estimated 32 to 34 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 Health Care Reform Act 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 Health Care Reform Act 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 Health Care Reform Act have already become effective, it will be several years before most of the far-reaching and innovative provisions of the new legislation are fully implemented. While we continue to evaluate the provisions of the Health Care Reform Act, 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 Health Care Reform Act. Additionally, the Health Care Reform Act remains subject to significant legislative debate, including possible repeal and/or amendment, and there are substantial legal challenges to various aspects of the law that have been made on constitutional grounds. For further discussion of the Health Care Reform Act and its possible impact on our business and results of operations, see “Business – Sources of Revenue” in Item 1 of Part I and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010.

During the three months ended June 30, 2011, which we refer to as the 2011 Three Month Period, we experienced net revenue growth over the three months ended June 30, 2010, which we refer to as the 2010 Three Month Period, of approximately 13.4%. Such growth principally resulted from: (i) our acquisition of a 60% equity interest in each of three Florida-based general acute care hospitals with a total of 139 licensed beds and certain related health care operations (collectively, “Shands”) in July 2010; (ii) our acquisition of two Florida-based general acute care hospitals with a total of 413 licensed beds and certain related health care operations (collectively, “Wuesthoff”) in October 2010; (iii) our acquisition of a 95% equity interest in a Mississippi-based general acute care hospital with a total of 112 licensed beds and certain related health care operations (collectively, “Tri-Lakes”) in May 2011; (iv) physician recruitment and market service development (e.g., ambulatory surgical centers, etc.) at certain of our hospitals and other health care facilities; and (iv) improvements in reimbursement rates. Primarily because of the growth in net revenue, income from operations increased approximately $18.4 million, or 15.2%, during the 2011 Three Month Period and income from continuing operations increased during the same period by $10.8 million, or 23.5%.

Our strategic operational objectives include increasing patient volume and operating margins, while decreasing uninsured/underinsured patient levels and the provision for doubtful accounts. Our specific 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. We also seek opportunities for market service development in the communities that we serve, including establishing ambulatory surgical centers, urgent care centers, cardiac cath labs, angiography suites and orthopedic, cardiology and neurology/neurosurgery centers of excellence. Furthermore, we are investing significant resources in physician

 

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recruitment and retention (primary care physicians and specialists), emergency room operations, advanced robotic surgical systems, replacement hospital construction and other capital projects. For example, we continue to implement ER Extra®, which is our signature patient-centered emergency room program that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. During 2011, we also opened a hospital that we built to replace Madison County Medical Center in Canton, Mississippi and deployed new MAKOplasty® and da Vinci® robotic surgical systems at many of our hospitals. 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, joint ventures and partnerships in 2011 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.

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. 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 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 resulted in a large number of uninsured and underinsured patients seeking health care in the United States. Self-pay admissions as a percent of total admissions at our hospitals were approximately 7.2% and 7.4% during the 2011 Three Month Period and the 2010 Three Month Period, respectively. 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 Health Care Reform Act 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 believe that Adjusted EBITDA provides (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
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Consolidated net income

     $ 55,333            $         45,713            $         117,445              $ 99,132      

Adjustments:

           

Interest expense

     51,033            52,530            102,070            106,104      

Provision for income taxes

     31,757            25,318            66,791            55,061      

Depreciation and amortization

     64,201            60,280            128,829            120,802      

Loss from discontinued operations

     1,583            355            1,437            424      

Losses (gains) on sales of assets, net

     854            (84)           794            (1,279)     

Interest and other income, net

     (993)           (2,651)           (1,127)           (3,922)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjustments

     148,435            135,748            298,794            277,190      
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     $         203,768            $         181,461            $         416,239            $         376,322      
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA as a percent of net revenue

     14.6%          14.8%          14.7%          15.1%    
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2010, 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 2011 Three Month Period. See Note 10 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding recent accounting standards updates issued by the Financial Accounting Standards Board and new accounting guidance that we adopted during 2011. Such new accounting guidance did not have a material impact on our consolidated financial statements.

Goodwill.    We review our goodwill for impairment on an annual basis (i.e., each October 1) and 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.

 

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2011 Three Month Period Compared to the 2010 Three Month Period

The tables below summarize our operating results for the 2011 Three Month Period and the 2010 Three Month Period. Hospitals that were owned/leased and operated by us for one year or more as of June 30, 2011 are referred to as same three month hospitals. For all year-over-year comparative discussions herein, the operating results of our same three month hospitals are only considered to the extent that there was a similar period of operation in both years.

 

     Three Months Ended June 30,  
     2011      2010  
     Amount      Percent
of Net
Revenue
     Amount           Percent
of Net
Revenue
 
     (in thousands)               (in thousands)                

Net revenue

       $   1,395,353            100.0%            $   1,230,101               100.0%    

Operating expenses:

              

Salaries and benefits

     546,198            39.1           483,423               39.3     

Supplies

     185,789            13.3           175,036               14.2     

Provision for doubtful accounts

     170,787            12.2           147,906               12.0     

Depreciation and amortization

     64,201            4.6           60,280               4.9     

Rent expense

     36,774            2.7           30,042               2.4     

Other operating expenses

     252,037            18.1           212,233               17.3     
  

 

 

    

 

 

    

 

 

       

 

 

 

Total operating expenses

     1,255,786            90.0           1,108,920               90.1     
  

 

 

    

 

 

    

 

 

       

 

 

 

Income from operations

     139,567            10.0           121,181               9.9     

Other income (expense):

              

Gains (losses) on sales of assets, net

     (854)           (0.1)          84               -     

Interest and other income, net

     993            0.1           2,651               0.2     

Interest expense

     (51,033)           (3.6)          (52,530)              (4.3)    
  

 

 

    

 

 

    

 

 

       

 

 

 

Income from continuing operations before income taxes

     88,673            6.4           71,386               5.8     

Provision for income taxes

     (31,757)           (2.3)          (25,318)              (2.1)    
  

 

 

    

 

 

    

 

 

       

 

 

 

Income from continuing operations

       $   56,916            4.1%            $   46,068               3.7%    
  

 

 

    

 

 

    

 

 

       

 

 

 

 

     Three Months Ended June 30,      Change          Percent
Change
 
     2011      2010          

Same Three Month Hospitals*

             

Occupancy

     41.7%         43.9%         (220)      bps**      n/a   

Patient days

     311,890          326,981          (15,091)           (4.6)%   

Admissions

     73,936          79,028          (5,092)           (6.4)%   

Adjusted admissions †

     139,201          143,338          (4,137)           (2.9)%   

Emergency room visits

     344,483          345,077          (594)           (0.2)%   

Surgeries

     78,233          78,116          117            0.1%   

Outpatient revenue percent

     52.2%         49.9%         230      

bps

     n/a   

Inpatient revenue percent

     47.8%         50.1%         (230)     

bps

     n/a   

Total Hospitals

             

Occupancy

     42.7%         43.9%         (120)     

bps

     n/a   

Patient days

     343,107          326,981          16,126            4.9%   

Admissions

     80,753          79,028          1,725            2.2%   

Adjusted admissions †

     152,216          143,338          8,878            6.2%   

Emergency room visits

     378,125          345,077          33,048            9.6%   

Surgeries

     82,502          78,116          4,386            5.6%   

Outpatient revenue percent

     52.4%         49.9%         250      

bps

     n/a   

Inpatient revenue percent

     47.6%         50.1%         (250)     

bps

     n/a   

* Includes acquired hospitals to the extent we operated them for comparable periods

** basis points

† Admissions adjusted for outpatient volume

 

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Net revenue during the 2011 Three Month Period was approximately $1,395.4 million as compared to $1,230.1 million during the 2010 Three Month Period. This change represented an increase of $165.3 million, or 13.4%. Our same three month hospitals provided $51.6 million, or 31.2%, of the increase in net revenue as a result of (i) increased outpatient volume from, among other things, market service development activity and (ii) improvements in reimbursement rates. These items were partially offset by a decrease in hospital admissions, primarily due to a reduction in admissions of uninsured patients and certain weather-related disruptions. The remaining 2011 net revenue increase of $113.7 million was due to our acquisitions of Shands in July 2010, Wuesthoff in October 2010 and Tri-Lakes in May 2011.

Net revenue per adjusted admission increased approximately 6.8% during the 2011 Three Month Period as compared to the 2010 Three Month Period. The factors contributing to such change included higher patient acuity, increased surgical volume and the favorable effects of renegotiated agreements with certain commercial health insurance providers.

Our provision for doubtful accounts during the 2011 Three Month Period increased 20 basis points to 12.2% of net revenue as compared to 12.0% of net revenue during the 2010 Three Month Period. This change was primarily due to amounts considered to be patient responsibility (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 2011 Three Month Period and the 2010 Three Month Period, our Uncompensated Patient Care Percentage was 25.8% and 24.8%, respectively. This 100 basis point increase during the 2011 Three Month Period primarily reflects greater uninsured self-pay patient revenue discounts.

Salaries and benefits as a percent of net revenue decreased from 39.3% during the 2010 Three Month Period to 39.1% during the 2011 Three Month Period. This decrease was primarily due to cost containment measures such as flexible staffing and new hire limitations.

Supplies as a percent of net revenue decreased from 14.2% during the 2010 Three Month Period to 13.3% during the 2011 Three Month Period. This decrease was primarily due to improved pricing and greater discounts from our group purchasing agreement and a change in the mix of our surgeries during the 2011 Three Month Period.

Rent expense as a percent of net revenue increased during the 2011 Three Month Period as compared to the 2010 Three Month Period while depreciation and amortization expense as a percent of net revenue declined. In recent years, we have entered into more operating lease arrangements. As our use of operating leases has increased, depreciation and amortization expense has declined and rent expense has increased. Additionally, certain of our hospitals reached the end of their depreciable lives during 2010, which further reduced depreciation and amortization expense in 2011.

Other operating expenses as a percent of net revenue increased from 17.3% during the 2010 Three Month Period to 18.1% during the 2011 Three Month Period. This change was primarily due to (i) higher state-mandated provider taxes and increased repairs and maintenance costs during the 2011 Three Month Period and (ii) certain services at our hospitals that have been recently outsourced and/or contracted to third parties.

Interest and other income decreased from approximately $2.7 million during the 2010 Three Month Period to $1.0 million during the 2011 Three Month Period. This decrease primarily related to a net realized gain on sales of available-for-sale securities of $0.2 million during the 2011 Three Month Period as compared to realized gains of $1.8 million during the 2010 Three Month Period.

Interest expense decreased from approximately $52.5 million during the 2010 Three Month Period to $51.0 million during the 2011 Three Month Period. Such decrease was primarily due to a lower overall effective interest rate on our $2.75 billion seven-year term loan because less of the outstanding balance thereunder was covered by our interest rate swap contract. We also maintained a lower average outstanding principal balance on such term loan during the 2011 Three Month Period as compared to the 2010 Three Month Period and recorded a greater amount of capitalized interest during the 2011 Three Month Period. See “Liquidity, Capital Resources and Capital Expenditures” below and Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.

Our effective income tax rates were approximately 35.8% and 35.5% during the 2011 Three Month Period and the 2010 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 290 basis points and 330 basis points during the 2011 Three Month Period and the 2010 Three Month Period, respectively.

 

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2011 Six Month Period Compared to the 2010 Six Month Period

The tables below summarize our operating results for the six months ended June 30, 2011 and 2010, which we refer to as the 2011 Six Month Period and the 2010 Six Month Period, respectively. Hospitals that were owned/leased and operated by us for one year or more as of June 30, 2011 are referred to as same six month hospitals. For all year-over-year comparative discussions herein, the operating results of our same six month hospitals are only considered to the extent that there was a similar period of operation in both years.

 

     Six Months Ended June 30,  
     2011      2010  
     Amount      Percent
of Net
      Revenue      
     Amount         Percent
of Net
      Revenue      
 
     (in thousands)             (in thousands)            

Net revenue

    $ 2,822,182           100.0%         $ 2,495,255            100.0%    

Operating expenses:

            

Salaries and benefits

     1,115,236           39.5           983,443            39.4     

Supplies

     380,255           13.5           353,491            14.2     

Provision for doubtful accounts

     342,856           12.1           304,065            12.2     

Depreciation and amortization

     128,829           4.6           120,802            4.8     

Rent expense

     72,621           2.6           59,594            2.4     

Other operating expenses

     494,975           17.5           418,340            16.8     
  

 

 

    

 

 

    

 

 

     

 

 

 

Total operating expenses

     2,534,772           89.8           2,239,735            89.8     
  

 

 

    

 

 

    

 

 

     

 

 

 

Income from operations

     287,410           10.2           255,520            10.2     

Other income (expense):

            

Gains (losses) on sales of assets, net

     (794)          -           1,279            0.1     

Interest and other income, net

     1,127           -           3,922            0.2     

Interest expense

     (102,070)          (3.6)          (106,104)           (4.3)    
  

 

 

    

 

 

    

 

 

     

 

 

 

Income from continuing operations before income taxes

     185,673           6.6           154,617            6.2     

Provision for income taxes

     (66,791)          (2.4)          (55,061)           (2.2)    
  

 

 

    

 

 

    

 

 

     

 

 

 

Income from continuing operations

    $ 118,882           4.2%         $ 99,556            4.0%    
  

 

 

    

 

 

    

 

 

     

 

 

 

 

     Six Months Ended June 30,                Percent  
     2011      2010      Change         Change  

Same Six Month Hospitals*

            

Occupancy

     44.2%          46.2%          (200)       bps**     n/a    

Patient days

     660,845           688,461           (27,616)           (4.0)%    

Admissions

     155,196           163,557           (8,361)           (5.1)%    

Adjusted admissions †

     285,646           290,105           (4,459)           (1.5)%    

Emergency room visits

     702,328           686,075           16,253            2.4%    

Surgeries

     156,709           155,773           936            0.6%    

Outpatient revenue percent

     50.7%          48.9%          180        bps     n/a    

Inpatient revenue percent

     49.3%          51.1%          (180)       bps     n/a    

Total Hospitals

            

Occupancy

     44.8%          46.2%          (140)       bps     n/a    

Patient days

     723,650           688,461           35,189            5.1%    

Admissions

     168,896           163,557           5,339            3.3%    

Adjusted admissions †

     311,390           290,105           21,285            7.3%    

Emergency room visits

     768,862           686,075           82,787            12.1%    

Surgeries

     165,348           155,773           9,575            6.1%    

Outpatient revenue percent

     51.0%          48.9%          210        bps     n/a    

Inpatient revenue percent

     49.0%          51.1%          (210)       bps     n/a    

* Includes acquired hospitals to the extent we operated them for comparable periods

** basis points

† Admissions adjusted for outpatient volume

 

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Table of Contents

Net revenue during the 2011 Six Month Period was approximately $2,822.2 million as compared to $2,495.3 million during the 2010 Six Month Period. This change represented an increase of $326.9 million, or 13.1%. Our same six month hospitals provided $112.5 million, or 34.4%, of the increase in net revenue as a result of: (i) increased outpatient and surgical volume from, among other things, market service development activity; (ii) an increase in emergency room visits; and (iii) improvements in reimbursement rates. These items were partially offset by a decrease in hospital admissions, primarily due to a reduction in admissions of uninsured patients and certain weather-related disruptions. The remaining 2011 net revenue increase of $214.4 million was due to our acquisitions of Shands in July 2010, Wuesthoff in October 2010 and Tri-Lakes in May 2011.

Net revenue per adjusted admission increased approximately 5.4% during the 2011 Six Month Period as compared to the 2010 Six Month Period. The factors contributing to such change included higher patient acuity, increased surgical volume and the favorable effects of renegotiated agreements with certain commercial health insurance providers.

Our provision for doubtful accounts during the 2011 Six Month Period decreased 10 basis points to 12.1% of net revenue as compared to 12.2% of net revenue during the 2010 Six Month Period. This improvement in our provision for doubtful accounts during the 2011 Six Month Period was primarily due to a decrease in uninsured patients in the mix of patients that we serve (approximately 6.8% and 6.9% of total hospital admissions during the 2011 Six Month Period and the 2010 Six Month Period, respectively). During the 2011 Six Month Period and the 2010 Six Month Period, our Uncompensated Patient Care Percentage, which is described above under the heading “2011 Three Month Period Compared to the 2010 Three Month Period,” was 25.4% and 24.5%, respectively. This 90 basis point increase during the 2011 Six Month Period primarily reflects greater uninsured self-pay patient revenue discounts.

Salaries and benefits as a percent of net revenue increased to 39.5% during the 2011 Six Month Period from 39.4% during the 2010 Six Month Period. This increase was primarily due to (i) routine salary and wage increases and (ii) disproportionately higher salaries and benefits at our recent acquisitions. These items were partially offset by cost containment measures such as flexible staffing and new hire limitations.

Supplies as a percent of net revenue decreased from 14.2% during the 2010 Six Month Period to 13.5% during the 2011 Six Month Period. This decrease was primarily due to improved pricing and greater discounts from our group purchasing agreement and a change in the mix of our surgeries during the 2011 Six Month Period.

Rent expense as a percent of net revenue increased during the 2011 Six Month Period as compared to the 2010 Six Month Period while depreciation and amortization expense as a percent of net revenue declined. In recent years, we have entered into more operating lease arrangements. As our use of operating leases has increased, depreciation and amortization expense has declined and rent expense has increased. Additionally, certain of our hospitals reached the end of their depreciable lives during 2010, which further reduced depreciation and amortization expense in 2011.

Other operating expenses as a percent of net revenue increased from 16.8% during the 2010 Six Month Period to 17.5% during the 2011 Six Month Period. This change was primarily due to: (i) higher state-mandated provider taxes and increased repairs and maintenance costs during the 2011 Six Month Period; (ii) certain services at our hospitals that have been recently outsourced and/or contracted to third parties; and (iii) disproportionately higher costs at our recent acquisitions.

Interest and other income decreased from approximately $3.9 million during the 2010 Six Month Period to $1.1 million during the 2011 Six Month Period. This decrease primarily related to a nominal net realized gain on sales of available-for-sale securities during the 2011 Six Month Period as compared to realized gains of $2.8 million during the 2010 Six Month Period.

Interest expense decreased from approximately $106.1 million during the 2010 Six Month Period to $102.1 million during the 2011 Six Month Period. Such decrease was primarily due to a lower overall effective interest rate on our $2.75 billion seven-year term loan because less of the outstanding balance thereunder was covered by our interest rate swap contract. We also maintained a lower average outstanding principal balance on such term loan during the 2011 Six Month Period as compared to the 2010 Six Month Period and recorded a greater amount of capitalized interest during the 2011 Six Month Period. See “Liquidity, Capital Resources and Capital Expenditures” below and Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.

Our effective income tax rates were approximately 36.0% and 35.6% during the 2011 Six Month Period and the 2010 Six 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 310 basis points during the 2011 Six Month Period and the 2010 Six Month Period, respectively.

 

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Table of Contents

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. Additionally, at June 30, 2011 approximately $101.0 million of our available-for-sale securities and $450.8 million of borrowing capacity under our long-term revolving credit facility 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 12 to the Interim Condensed Consolidated Financial Statements in Item 1, we plan to fund the acquisition of seven Tennessee-based hospitals and certain affiliated ancillary health care operations during the quarter ending December 31, 2011 with available cash balances, proceeds from sales of available-for-sale securities and new bank financing. Below is a summary of our recent cash flow activity (in thousands).

 

         Six Months Ended June 30,      
     2011      2010  

Sources (uses) of cash and cash equivalents:

     

Operating activities

    $ 271,497          $ 234,200     

Investing activities

     (269,154)          (208,914)    

Financing activities

     (19,040)          (20,737)    

Discontinued operations

     5,192           2,070     
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

    $ (11,505)         $ 6,619     
  

 

 

    

 

 

 

Operating Activities

Our cash flows from continuing operating activities increased approximately $37.3 million, or 15.9%, during the 2011 Six Month Period as compared to the 2010 Six Month Period. This increase primarily related to improved profitability (i.e., an increase of $31.9 million in income from operations during the 2011 Six Month Period compared to the 2010 Six Month Period). Additionally, both our interest payments and our net federal and state income tax payments were lower during the 2011 Six Month Period when compared to the 2010 Six Month Period.

Investing Activities

Cash used in investing activities during the 2011 Six Month Period included: (i) approximately $133.0 million of additions to property, plant and equipment, consisting primarily of new medical equipment (including $20.7 million to purchase da Vinci® robotic surgical systems), information technology hardware and software upgrades, renovation and expansion projects at certain of our facilities and construction of a hospital that opened in May 2011 to replace Madison County Medical Center in Canton, Mississippi; (ii) $38.8 million to acquire a 95% equity interest in a Mississippi-based hospital (Tri-Lakes); (iii) $4.1 million to acquire three ancillary health care businesses; and (iv) an $11.6 million increase in our restricted funds. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding certain of our acquisitions. Excluding the available-for-sale securities in restricted funds, we had a net cash outlay of $83.0 million from buying and selling such securities during the 2011 Six Month Period.

Cash used in investing activities during the 2010 Six Month Period included: (i) approximately $91.4 million of additions to property, plant and equipment, consisting primarily of new medical equipment, information technology hardware and software upgrades, renovation and expansion projects at certain of our facilities and construction of a hospital to replace Madison County Medical Center; (ii) $11.0 million to acquire three ancillary health care businesses; and (iii) a $9.0 million increase in our restricted funds. Excluding the available-for-sale securities in restricted funds, we had a net cash outlay of $99.7 million from buying and selling such securities during the 2010 Six Month Period. Partially offsetting the abovementioned cash outlays was $2.2 million of proceeds from sales of assets and insurance recoveries.

Financing Activities

During the 2011 Six Month Period, we made principal payments on long-term debt and capital lease obligations of approximately $19.7 million. We also paid $16.3 million to noncontrolling shareholders primarily for recurring distributions. Partially offsetting these cash outlays were (i) $14.1 million of cash proceeds from exercises of stock options and (ii) $2.9 million of excess income tax benefits from our stock-based compensation arrangements. See Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt and capital lease arrangements.

During the 2010 Six Month Period, we made principal payments on long-term debt and capital lease obligations of approximately $20.0 million. We also paid $9.9 million to noncontrolling shareholders primarily for recurring distributions. 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.

 

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Table of Contents

Days Sales Outstanding

To calculate days sales outstanding, or DSO, we initially divide 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 49 days at June 30, 2011, which compares to 49 days at December 31, 2010 and 48 days at June 30, 2010.

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, no such payment was required for the year ended December 31, 2010. Our mandatory principal payments under the Credit Facilities for the twelve months ending June 30, 2012 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 2011 Six 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 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 currently 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 for information regarding the estimated fair value of our interest rate swap contract. At June 30, 2011, approximately $346.6 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 June 30, 2011 and July 29, 2011).

Although there were no amounts outstanding under the Revolving Credit Agreement on July 29, 2011, standby letters of credit in favor of third parties of approximately $49.2 million reduced the amount available for borrowing thereunder to $450.8 million on such date. Our effective interest rate on the variable rate Revolving Credit Agreement was approximately 2.0% on July 29, 2011.

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 2011 Six Month Period. The demand promissory note’s effective interest rate on July 29, 2011 was approximately 2.3%; however, there were no amounts outstanding thereunder on such date.

 

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Table of Contents

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 June 30, 2011, 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 June 30, 2011. 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

   2.85 to 1.00    3.63 to 1.00

Maximum permitted consolidated leverage ratio

   4.60 to 1.00    3.93 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 July 29, 2011, we maintained approximately $49.2 million of standby letters of credit in favor of third parties with various expiration dates through May 14, 2012. 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, 2011, which is within the capital expenditure limitations of the Credit Facilities. As of June 30, 2011, we had started (i) several hospital renovation and expansion projects and (ii) various information technology hardware and software upgrades. Additionally, we estimate that the remaining cost to build and equip a replacement hospital for Walton Regional Medical Center in Monroe, Georgia will range from $40 million to $45 million. We are currently obligated to complete construction of this replacement hospital no later than December 31, 2012. We do not believe that any of our construction, renovation and/or 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 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 revolving credit agreements and proceeds from long-term debt issuances, or a combination thereof. Specifically, we plan to fund the acquisition of seven Tennessee-based hospitals and certain affiliated ancillary health care operations during the quarter ending December 31, 2011 with available cash balances, proceeds from sales of available-for-sale securities and new bank financing. This pending acquisition is discussed at Note 12 to the Interim Condensed Consolidated Financial Statements in Item 1.

Divestitures of Idle Property

Gulf Coast Medical Center, which was a general acute care hospital in Biloxi, Mississippi that we closed on January 1, 2008, was sold on July 18, 2011 for cash consideration of approximately $4.0 million, less selling and other related costs. We also intend to sell the Woman’s Center at Dallas Regional Medical Center, which was a specialty women’s hospital in Mesquite, Texas that we closed on June 1, 2008; however, the timing of such divestiture has not yet been determined. We intend to use the proceeds from the sales of these closed hospitals for general business purposes.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

During the 2011 Six 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, 2010.

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 and operating statistics, statements regarding our plans and objectives for future operations, acquisitions, acquisition financing, 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 our 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, 2010. Furthermore, we operate in a continually changing business and regulatory 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 our risk factors or to publicly announce updates 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 2011 Six 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, 2010.

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.

Health Management Associates, Inc. and its subsidiaries (collectively, “we,” “our” and “us”) operate in a highly regulated and litigious industry. As a result, we have been, and expect to continue to be, subject to various claims, lawsuits and regulatory proceedings. The ultimate resolution of these matters, individually or in the aggregate, could have a materially adverse effect on our business, financial condition, results of operations and/or cash flows. We are currently a party to a number of legal and regulatory proceedings, including those described below.

Ascension Health Lawsuit.    On February 14, 2006, Health Management Associates, Inc. (referred to as “Health Management” for the remainder of this Item 1) 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 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 $40 million in damages. Health Management removed the case to the U. S. 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. On March 30, 2011, Health Management’s motion for summary judgment was granted as to all of plaintiffs’ claims, except for the breach of confidentiality claim, and plaintiffs’ motion for partial summary judgment was denied. On June 15, 2011, the case was stayed pending resolution of the appellate process. On July 8, 2011, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit (Appeal Number: 11-13069-B).

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 will continue to vigorously defend Health Management against the allegations, including any appeal that may be filed by the plaintiffs.

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. in the U.S. District Court for the Middle District of Florida, Tampa Division. The plaintiff’s complaint alleged that, among other things, the defendants erroneously submitted claims to Medicare and that those 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 alleged that the defendants’ conduct violated the False Claims Act. On August 18, 2010, the plaintiff filed a first amended complaint that was similar to the original complaint. On September 27, 2010, the defendants moved to dismiss the first amended 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 11, 2010, the plaintiff filed a memorandum of law in opposition to the defendants’ motion to dismiss. On February 23, 2011, the case was transferred to the U.S. District Court for the Middle District of Florida, Fort Myers Division (No. 2:11-cv-00089-JES-DNF). On May 5, 2011, the plaintiff filed a second amended complaint, which was similar to the first amended complaint. On May 17, 2011, the defendants moved to dismiss the second amended complaint on the same bases set forth in their earlier motion to dismiss. On June 21, 2011, the United States filed a Statement of Interest to address certain propositions of law raised in the defendants’ motion to dismiss the second amended complaint but took no position as to whether the plaintiff’s complaint should be dismissed. We intend to vigorously defend Health Management and its subsidiary against the allegations in this matter.

Governmental Matters.    Several of our hospitals received letters during the second half of 2009 requesting information in connection with a U.S. 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 Health Management hospitals subject to the DOJ’s inquiry, we do not believe that the final outcome of this matter will be material.

 

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During September 2010, Health Management received a letter from the DOJ indicating that an investigation was being conducted to determine whether certain Health Management hospitals improperly submitted claims for the implantation of implantable cardioverter defibrillators (“ICDs”). The DOJ’s investigation covers the period commencing with Medicare’s expansion of coverage for ICDs in 2003 to the present. The letter from the DOJ further indicates that the claims submitted by Health Management’s hospitals for ICDs and related services need to be reviewed to determine if Medicare coverage and payment was appropriate. During 2010, the DOJ sent similar letters and other requests to a large number of unrelated hospitals and hospital operators across the country as part of a nation-wide review of ICD billing under the Medicare program. We have, and will continue to, fully cooperate with the DOJ in its ongoing investigation, which could potentially give rise to claims against Health Management and/or certain of its subsidiary hospitals under the False Claims Act or other statutes, regulations or laws. Additionally, we recently commenced an internal review of hospital medical records related to ICDs that are the subject of the DOJ investigation. To date, the DOJ has not asserted any monetary or other claims against Health Management or its hospitals; however; this matter is in its early stages and we are unable to determine the potential impact, if any, that will result from the final resolution of the investigation.

Health Management and certain of its subsidiaries have also received subpoenas from the U.S. Department of Health and Human Services, Office of Inspector General on May 16, 2011 and on July 21, 2011. The May subpoena requested information on our physician referrals as well as ownership and management at our whole-hospital physician joint ventures, among other items. The July subpoena requested information on emergency room management including the use of Pro-Med software. We are cooperating with the government and are in the process of responding to the subpoenas. These matters are in their early stages and we are unable to determine the potential impact, if any, that will result from the investigations.

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.

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

The table below summarizes the number of shares of our common stock that were withheld to satisfy tax withholding obligations for stock-based compensation awards that vested during the three months ended June 30, 2011.

 

Month Ended

   Total Number of
Shares Purchased
     Average Price
Per Share
 

April 30, 2011

     1,030         $        10.69   

May 31, 2011

     405         11.29   

June 30, 2011

     1,640         11.10   
  

 

 

    

Total

     3,075      
  

 

 

    

Item 5.  Other Information.

On July 29, 2011, the Compensation Committee of the Board of Directors of Health Management Associates, Inc. approved an increase of $100,000 in the annual base salary of Gary D. Newsome, our President and Chief Executive Officer, to $1,000,000. Such change became effective on August 1, 2011. There were no other changes to his compensation arrangements.

Item 6.  Exhibits.

See Index to Exhibits on page 32 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: August 3, 2011

 

By:

 

/s/ Gary S. Bryant

   

Gary S. Bryant

   

Vice President and Controller

   

(Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

†   10.1

  

Asset Purchase Agreement, dated June 30, 2011, between Health Management Associates, Inc., Knoxville HMA Holdings, LLC, Catholic Health Partners and Mercy Health Partners, Inc., previously filed on August 1, 2011 and included as Exhibit 2.1 to the Company’s Current Report on Form 8-K/A dated June 30, 2011, is incorporated herein by reference.

     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

†  Health Management Associates, Inc. has requested confidential treatment of certain information contained in this exhibit. Such information was filed separately with the Securities and Exchange Commission pursuant to an application for confidential treatment under 17 C.F.R. §§ 200.80(b)(4) and 240.24b-2.

*  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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