Surgical Care Affiliates
Surgical Care Affiliates, Inc. (Form: 10-Q, Received: 08/03/2016 11:23:59)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2016

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: 001-36154

 

SURGICAL CARE AFFILIATES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8740447

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

510 Lake Cook Road, Suite 400

Deerfield, IL

 

60015

(Address of principal executive offices)

 

(Zip Code)

(847) 236-0921

(Registrant’s telephone number, including area code)

 

520 Lake Cook Road, Suite 250

Deerfield, IL 60015

(Former address, 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

 

¨

  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class of Common Stock

  

Outstanding at July 29, 2016

Common stock, $0.01 par value

  

40,205,234 shares

 

 

 

 


SURGICAL CARE AFFILIATES, INC.

FORM 10-Q

INDEX

 

PART I.

  

FINANCIAL INFORMATION

 

 

Item 1.

  

Financial Statements (Unaudited):

1

 

  

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

1

 

  

 

Condensed Consolidated Statements of Operations for the Three- and Six-Months Ended June 30, 2016 and 2015

2

 

  

 

Condensed Consolidated Statements of Changes in Equity for the Six-Months Ended June 30, 2016 and 2015

4

 

  

 

Condensed Consolidated Statements of Cash Flows for the Six-Months Ended June 30, 2016 and 2015

5

 

  

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

  

 

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

30

 

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

50

 

Item 4.

  

 

Controls and Procedures

51

 

PART II.

  

 

OTHER INFORMATION

 

Item 1.

  

 

Legal Proceedings

51

Item 1A.

  

 

Risk Factors

51

Item 2.

  

 

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

  

 

Defaults Upon Senior Securities

51

Item 4.

  

 

Mine Safety Disclosure

51

Item 5.

  

 

Other Information

51

Item 6.

  

 

Exhibits

52

 

 

 

 


 

GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “Surgical Care Affiliates,” the “Company,” “we,” “us” and “our” refer to Surgical Care Affiliates, Inc. and its consolidated affiliates. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases or expressions with similar meaning.

Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 under Part I, “Item 1A. Risk Factors.”

 

 

 

ii


 

PA RT I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amount)

(Unaudited)  

 

JUNE 30,

 

 

DECEMBER 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

37,838

 

 

$

79,269

 

Restricted cash

 

20,571

 

 

 

26,116

 

Accounts receivable, net of allowance for doubtful accounts (2016 - $18,620; 2015 - $17,045)

 

124,861

 

 

 

129,659

 

Receivable from nonconsolidated affiliates

 

49,897

 

 

 

46,949

 

Prepaids and other current assets

 

49,862

 

 

 

32,869

 

Total current assets

 

283,029

 

 

 

314,862

 

Property and equipment, net of accumulated depreciation

 

320,209

 

 

 

296,831

 

Goodwill

 

1,209,863

 

 

 

1,061,088

 

Intangible assets, net of accumulated amortization

 

123,942

 

 

 

109,188

 

Deferred debt issue costs

 

1,127

 

 

 

1,277

 

Investment in and advances to nonconsolidated affiliates

 

206,678

 

 

 

216,111

 

Other long-term assets

 

34,769

 

 

 

2,254

 

Total assets (a)

$

2,179,617

 

 

$

2,001,611

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

36,684

 

 

$

32,503

 

Accounts payable

 

41,437

 

 

 

37,419

 

Accrued payroll

 

30,592

 

 

 

37,802

 

Accrued interest

 

4,382

 

 

 

4,173

 

Accrued distributions

 

36,851

 

 

 

37,175

 

Payable to nonconsolidated affiliates

 

87,482

 

 

 

77,683

 

Other current liabilities

 

35,728

 

 

 

31,332

 

Total current liabilities

 

273,156

 

 

 

258,087

 

Long-term debt, net of current portion

 

867,679

 

 

 

851,849

 

Deferred income tax liability

 

49,963

 

 

 

44,339

 

Other long-term liabilities

 

32,631

 

 

 

31,615

 

Total liabilities (a)

 

1,223,429

 

 

 

1,185,890

 

Commitments and contingent liabilities (Note 14)

 

 

 

 

 

 

 

Noncontrolling interests – redeemable (Note 8)

 

16,806

 

 

 

21,989

 

Equity

 

 

 

 

 

 

 

Surgical Care Affiliates’ equity

 

 

 

 

 

 

 

Common stock, $0.01 par value, 180,000 shares authorized, 40,127 and 39,690 shares

   outstanding, respectively

 

401

 

 

 

397

 

Additional paid-in capital

 

456,546

 

 

 

442,678

 

Accumulated deficit

 

(51,357

)

 

 

(60,814

)

Total Surgical Care Affiliates’ equity

 

405,590

 

 

 

382,261

 

Noncontrolling interests – non-redeemable (Note 8)

 

533,792

 

 

 

411,471

 

Total equity

 

939,382

 

 

 

793,732

 

Total liabilities and equity

$

2,179,617

 

 

$

2,001,611

 

(a)

Our consolidated assets as of June 30, 2016 and December 31, 2015 include total assets of our variable interest entities (“VIE”) of $375.5 million and $76.1 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of June 30, 2016 and December 31, 2015 include total liabilities of the VIE of $209.8 million and $41.0 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $24.0 million and $4.0 million of debt guaranteed by us at June 30, 2016 and December 31, 2015, respectively. See further description in Note 4, Variable Interest Entities .

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1


 

SURGIC AL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

THREE-MONTHS ENDED

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Net operating revenues:

 

 

 

 

 

 

 

Net patient revenues

$

280,466

 

 

$

233,860

 

Management fee revenues

 

14,180

 

 

 

14,391

 

Other revenues

 

5,205

 

 

 

5,435

 

Total net operating revenues

 

299,851

 

 

 

253,686

 

Equity in net income of nonconsolidated affiliates

 

11,083

 

 

 

11,631

 

Operating expenses:

 

 

 

 

 

 

 

Salaries and benefits

 

100,944

 

 

 

84,932

 

Supplies

 

70,062

 

 

 

51,841

 

Other operating expenses

 

46,617

 

 

 

38,121

 

Depreciation and amortization

 

20,353

 

 

 

15,897

 

Occupancy costs

 

11,012

 

 

 

9,190

 

Provision for doubtful accounts

 

6,708

 

 

 

4,455

 

Loss (gain) on disposal of assets

 

166

 

 

 

(35

)

Total operating expenses

 

255,862

 

 

 

204,401

 

Operating income

 

55,072

 

 

 

60,916

 

Interest expense

 

12,776

 

 

 

10,710

 

HealthSouth option expense

 

 

 

 

1,873

 

Debt modification expense

 

 

 

 

154

 

Interest income

 

(4,259

)

 

 

(42

)

(Gain) loss on sale of investments

 

(5,837

)

 

 

272

 

Income from continuing operations before income tax expense

 

52,392

 

 

 

47,949

 

Provision for income tax expense

 

4,304

 

 

 

4,267

 

Income from continuing operations

 

48,088

 

 

 

43,682

 

Income (loss) from discontinued operations, net of income tax expense

 

2

 

 

 

(172

)

Net income

 

48,090

 

 

 

43,510

 

Less: Net income attributable to noncontrolling interests

 

(42,386

)

 

 

(38,950

)

Net income attributable to Surgical Care Affiliates

$

5,704

 

 

$

4,560

 

Basic net income per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.14

 

 

$

.12

 

Net income per share attributable to Surgical Care Affiliates

$

.14

 

 

$

.12

 

Basic weighted average shares outstanding

 

40,139

 

 

 

39,383

 

Diluted net income per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.14

 

 

$

.11

 

Net income per share attributable to Surgical Care Affiliates

$

.14

 

 

$

.11

 

Diluted weighted average shares outstanding

 

41,045

 

 

 

40,797

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2


 

 

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

SIX-MONTHS ENDED

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Net operating revenues:

 

 

 

 

 

 

 

Net patient revenues

$

539,629

 

 

$

450,495

 

Management fee revenues

 

28,210

 

 

 

28,513

 

Other revenues

 

11,730

 

 

 

8,769

 

Total net operating revenues

 

579,569

 

 

 

487,777

 

Equity in net income of nonconsolidated affiliates

 

22,897

 

 

 

23,702

 

Operating expenses:

 

 

 

 

 

 

 

Salaries and benefits

 

199,945

 

 

 

168,325

 

Supplies

 

136,300

 

 

 

101,262

 

Other operating expenses

 

91,508

 

 

 

74,815

 

Depreciation and amortization

 

42,608

 

 

 

31,123

 

Occupancy costs

 

21,578

 

 

 

17,410

 

Provision for doubtful accounts

 

10,602

 

 

 

8,679

 

Loss on disposal of assets

 

1,107

 

 

 

197

 

Total operating expenses

 

503,648

 

 

 

401,811

 

Operating income

 

98,818

 

 

 

109,668

 

Interest expense

 

25,573

 

 

 

19,538

 

HealthSouth option expense

 

 

 

 

11,702

 

Debt modification expense

 

 

 

 

5,032

 

Loss on extinguishment of debt

 

 

 

 

544

 

Interest income

 

(8,697

)

 

 

(71

)

Gain on sale of investments

 

(9,988

)

 

 

(1,594

)

Income from continuing operations before income tax expense

 

91,930

 

 

 

74,517

 

Provision for income tax expense

 

6,224

 

 

 

8,080

 

Income from continuing operations

 

85,706

 

 

 

66,437

 

Loss from discontinued operations, net of income tax expense

 

(15

)

 

 

(1,642

)

Net income

 

85,691

 

 

 

64,795

 

Less: Net income attributable to noncontrolling interests

 

(77,574

)

 

 

(69,401

)

Net income (loss) attributable to Surgical Care Affiliates

$

8,117

 

 

$

(4,606

)

Basic net income (loss) per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.20

 

 

$

(.08

)

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

(.04

)

Net income (loss) per share attributable to Surgical Care Affiliates

$

.20

 

 

$

(.12

)

Basic weighted average shares outstanding

 

40,006

 

 

 

39,073

 

Diluted net income (loss) per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.20

 

 

$

(.08

)

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

(.04

)

Net income (loss) per share attributable to Surgical Care Affiliates

$

.20

 

 

$

(.12

)

Diluted weighted average shares outstanding

 

40,930

 

 

 

39,073

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

3


 

SURG ICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surgical Care

 

Noncontrolling

 

 

 

 

 

Common Stock

 

Additional

 

Accumulated

 

 

Affiliates

 

Interests-

 

Total

 

 

Shares

 

 

Amount

 

Paid-in Capital

 

Deficit

 

 

Equity

 

Non-redeemable

 

Equity

 

Balance at December 31, 2014

 

38,648

 

 

$

386

 

$

419,088

 

$

(176,135

)

 

$

243,339

 

$

323,627

 

$

566,966

 

Net (loss) income

 

 

 

 

 

 

 

 

(4,606

)

 

 

(4,606

)

 

58,198

 

 

53,592

 

Issuance of stock pursuant to teammate equity plans

 

484

 

 

 

6

 

 

5,626

 

 

 

 

 

5,632

 

 

 

 

5,632

 

HealthSouth stock option

 

326

 

 

 

3

 

 

11,699

 

 

 

 

 

 

11,702

 

 

 

 

11,702

 

Stock compensation

 

 

 

 

 

 

3,761

 

 

 

 

 

3,761

 

 

 

 

3,761

 

Net change in equity related to purchase of ownership interests

 

 

 

 

 

 

304

 

 

 

 

 

304

 

 

43,982

 

 

44,286

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

5,208

 

 

5,208

 

Change in distribution accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,294

)

 

(4,294

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(61,367

)

 

(61,367

)

Balance at June 30, 2015

 

39,458

 

 

$

395

 

$

440,478

 

$

(180,741

)

 

$

260,132

 

$

365,354

 

$

625,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surgical Care

 

Noncontrolling

 

 

 

 

 

Common Stock

 

Additional

 

Accumulated

 

 

Affiliates

 

Interests-

 

Total

 

 

Shares

 

 

Amount

 

Paid-in Capital

 

Deficit

 

 

Equity

 

Non-redeemable

 

Equity

 

Balance at December 31, 2015

 

39,690

 

 

$

397

 

$

442,678

 

$

(60,814

)

 

$

382,261

 

$

411,471

 

$

793,732

 

Net income

 

 

 

 

 

 

 

 

8,117

 

 

 

8,117

 

 

69,289

 

 

77,406

 

Issuance of stock pursuant to teammate equity plans

 

437

 

 

 

4

 

 

4,389

 

 

 

 

 

4,393

 

 

 

 

4,393

 

Stock compensation

 

 

 

 

 

 

6,156

 

 

 

 

 

6,156

 

 

 

 

6,156

 

Net change in equity related to amendments in agreements with noncontrolling interests    (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

3,301

 

 

3,301

 

Net change in equity related to purchase of ownership interests

 

 

 

 

 

 

3,323

 

 

1,340

 

 

 

4,663

 

 

112,822

 

 

117,485

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

2,118

 

 

2,118

 

Change in distribution accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

532

 

 

532

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(65,741

)

 

(65,741

)

Balance at June 30, 2016

 

40,127

 

 

$

401

 

$

456,546

 

$

(51,357

)

 

$

405,590

 

$

533,792

 

$

939,382

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

4


 

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

SIX-MONTHS ENDED

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

85,691

 

 

$

64,795

 

Loss from discontinued operations

 

15

 

 

 

1,642

 

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

 

 

 

 

 

 

 

Provision for doubtful accounts

 

10,602

 

 

 

8,679

 

Depreciation and amortization

 

42,608

 

 

 

31,123

 

Amortization of deferred issuance costs

 

615

 

 

 

720

 

Gain on sale of investments

 

(9,988

)

 

 

(1,594

)

Loss on disposal of assets

 

1,107

 

 

 

197

 

Equity in net income of nonconsolidated affiliates

 

(22,897

)

 

 

(23,702

)

Distributions from nonconsolidated affiliates

 

34,703

 

 

 

27,507

 

Deferred income tax

 

5,634

 

 

 

7,495

 

Stock compensation

 

6,156

 

 

 

3,761

 

Change in fair value of interest rate swap

 

1

 

 

 

287

 

Loss on extinguishment of debt

 

 

 

 

544

 

HealthSouth option expense

 

 

 

 

11,702

 

(Increase) decrease in assets, net of business combinations

 

 

 

 

 

 

 

Accounts receivable

 

(594

)

 

 

(5,743

)

Other assets

 

(13,688

)

 

 

30,098

 

(Decrease) increase in liabilities, net of business combinations

 

 

 

 

 

 

 

Accounts payable

 

(2,450

)

 

 

(3,635

)

Accrued payroll

 

(8,292

)

 

 

(4,590

)

Accrued interest

 

209

 

 

 

4,403

 

Other liabilities

 

10,002

 

 

 

(34,020

)

Other

 

(175

)

 

 

(534

)

Net cash used in operating activities of discontinued operations

 

(373

)

 

 

(2,389

)

Net cash provided by operating activities

 

138,886

 

 

 

116,746

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(41,292

)

 

 

(19,023

)

Proceeds from disposal of assets

 

18,109

 

 

 

256

 

Proceeds from sale of business

 

150

 

 

 

Proceeds from sale of equity interests of nonconsolidated affiliates

 

 

 

 

20,138

 

Repurchase of equity interests of nonconsolidated affiliates

 

(444

)

 

 

 

Decrease in cash related to conversion of consolidated affiliates to equity method affiliates

 

(56

)

 

 

Increase in cash related to conversion of equity method affiliates to consolidated affiliates

 

46

 

 

 

 

Increase in restricted cash

 

8,399

 

 

 

(310

)

Net settlements on interest rate swap

 

(723

)

 

 

(727

)

Business acquisitions, net of cash acquired (2016 - $2,388; 2015 - $1,188)

 

(72,011

)

 

 

(54,731

)

Purchase of equity interests in nonconsolidated affiliates

 

(3,205

)

 

 

(30,272

)

Net cash provided by investing activities of discontinued operations

 

 

 

 

11,000

 

Other

 

(6,823

)

 

 

(3,017

)

Net cash used in investing activities

$

(97,850

)

 

$

(76,686

)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


 

 

 

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

(Unaudited)

 

 

SIX-MONTHS ENDED

 

 

JUNE 30,

 

 

2016

 

 

2015

 

Cash flows from financing activities

 

 

 

 

 

 

 

Borrowings under line of credit arrangements and long-term debt, net of issuance costs

$

82,227

 

 

$

703,648

 

Payment of debt acquisition costs

 

 

 

 

(3,238

)

Principal payments on line of credit arrangements and long-term debt

 

(86,319

)

 

 

(604,063

)

Principal payments under capital lease obligations

 

(6,130

)

 

 

(5,097

)

Distributions to noncontrolling interests of consolidated affiliates

 

(76,648

)

 

 

(73,695

)

Contributions from noncontrolling interests of consolidated affiliates

 

2,914

 

 

 

5,208

 

Proceeds from sale of equity interests of consolidated affiliates

 

5,847

 

 

 

4,399

 

Repurchase of equity interests of consolidated affiliates

 

(8,873

)

 

 

(3,499

)

Proceeds from teammate equity plans

 

10,016

 

 

 

8,195

 

Tax payments on options and awards

 

(5,499

)

 

 

(2,795

)

Net cash (used in) provided by financing activities

 

(82,465

)

 

$

29,063

 

Change in cash and cash equivalents

 

(41,429

)

 

 

69,123

 

Cash and cash equivalents at beginning of period

 

79,269

 

 

 

8,731

 

Cash and cash equivalents of discontinued operations at beginning of period

 

2

 

 

 

37

 

Less: Cash and cash equivalents of discontinued operations at end of period

 

(4

)

 

 

(53

)

Cash and cash equivalents at end of period

$

37,838

 

 

$

77,838

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Property and equipment acquired through capital leases and installment purchases

$

19,851

 

 

$

9,291

 

Net investment in consolidated affiliates that became equity method facilities

 

590

 

 

 

 

Accrued capital expenditures at end of period

 

3,326

 

 

 

3,476

 

Equity interest purchase in nonconsolidated affiliates via withheld distributions

 

 

 

 

5,259

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

6


 

SURG ICAL CARE AFFILIATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in tables are in thousands of U.S. dollars unless otherwise indicated)

 

NOTE 1 — DESCRIPTION OF BUSINESS

Nature of Operations and Ownership of the Company

Surgical Care Affiliates, Inc. (“Surgical Care Affiliates” or the “Company”), a Delaware corporation, was formed primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) and surgical hospitals in the United States of America. We do this through our direct operating subsidiary, Surgical Care Affiliates, LLC (“SCA”). As of June 30, 2016, the Company operated in 33 states and had an interest in and/or operated 193 freestanding ASCs, seven surgical hospitals and one sleep center with 11 locations, with a concentration of facilities in California, Texas, Florida, Indiana and New Jersey. Our ASCs and surgical hospitals primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. At our surgical hospitals, physicians perform a broader range of surgical procedures, and patients may stay in the hospital for several days.

During the six-months ended June 30, 2016, our portfolio of facilities changed as follows:

 

·

we acquired a controlling interest in 12 ASCs that we consolidate, five of which did not affect our total facility count (one of them was previously a managed-only facility, three of them were previously held as equity method investments and one of them combined its operations into an existing SCA facility);

 

·

we acquired a noncontrolling interest in two ASCs that we hold as equity method investments (one of them combined its operations into an existing SCA facility and therefore did not increase our total facility count);

 

·

we deconsolidated one ASC as a result of the adoption of ASU No. 2015-02, which required a change in the accounting treatment of the facility from consolidated to equity method;

 

·

we entered into agreements to manage three ASCs; and

 

·

we terminated management agreements with three managed-only ASCs.

Business Structure

Our business model is focused on building strategic relationships with health plans, medical groups and health systems to acquire, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of June 30, 2016, we owned and operated facilities in partnership with approximately 3,000 physician partners. The facilities in which we hold an ownership interest are owned by general partnerships, limited partnerships (“LP”), limited liability partnerships (“LLP”) or limited liability companies (“LLC”) in which a subsidiary of the Company typically serves as the general partner, limited partner, managing member or member. We account for our 201 facilities as follows:

 

 

AS OF

 

 

JUNE 30, 2016

 

Consolidated facilities (1)

 

114

 

Equity method facilities

 

67

 

Managed-only facilities

 

20

 

Total facilities

 

201

 

 

(1)

As of June 30, 2016, we consolidated 97 facilities as Variable Interest Entities (“VIE”) (see Note 4) .

Basis of Presentation

The Company maintains its books and records on the accrual basis of accounting, and the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions for Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Such financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, subsidiaries over which we exercise control and, when applicable, affiliates in which we have a controlling

7


 

financial interest. These interim financial statements do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanyi ng unaudited financial statements of the Company reflect all adjustments (consisting only of normal, recurring items) necessary for a fair statement of the results for the interim period presented. O perating results for the three- and six - month period s end ed June 30 , 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 6 . The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Compa ny’s audited December 31, 201 5 consolidated financial statements included in our 201 5 Annual Report on Form 10-K.

 

NOTE 2 — TRANSACTIONS

Acquisitions of Consolidated Facilities   

During the six-months ended June 30, 2016, we obtained a controlling interest in 12 ASCs for total consideration of $78.2 million.  One of the 12 ASCs was previously a managed-only facility, and three of the 12 ASCs were previously held as equity method investments.  These acquisitions are described in further detail below.

We accounted for these transactions under the acquisition method of accounting and reported the results of operations from the date of acquisition. The assets acquired, liabilities assumed and any noncontrolling interest in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. The fair value of identifiable intangible assets was based on valuations using the cost and income approaches. The cost approach is based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. Factors contributing to the recognition of goodwill include the centers’ favorable reputations in their markets, their market positions, their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model and synergistic benefits that are expected to be realized as a result of the acquisitions. The total amount of goodwill that is expected to be tax deductible as a result of these 2016 transactions is approximately $74.6 million.

 

 

 

 

8


 

The details of the 12 consolidated acquisitions closed during the six-months ended June 30, 2016 are as follows:  

  

 

 

 

 

 

 

 

 

 

 

 

 

Cash Consideration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

Facility (1)

 

Location

 

Transaction Date

 

SCA Effective Ownership

 

 

Number of Facilities

 

Equity Interest (2)

 

Management Agreement (3)

 

Total

 

Southwest Surgery Center, LLC ("Center for Minimally Invasive Surgery" or "CMIS")

 

Mokena, IL

 

1/1/2016

 

 

60.0

%

 

1

 

$

30.0

 

$

 

$

30.0

 

Winchester Endoscopy, LLC ("Winchester")

 

Libertyville, IL

 

1/21/2016

 

 

51.0

%

 

1

 

$

15.3

 

$

 

$

15.3

 

Opthalmology Surgery Center of Dallas, LLC ("OSCD") (4)

 

Dallas, TX

 

3/1/2016

 

 

25.0

%

 

1

 

$

3.7

 

$

3.4

 

$

7.1

 

Space Coast Surgery Center, Ltd. ("Merritt Island")

 

Merritt Island, FL

 

3/1/2016

 

 

50.9

%

 

1

 

$

4.5

 

$

 

$

4.5

 

Midway Surgery Center ("Midway") (5)

 

St. Paul, MN

 

3/1/2016

 

 

26.0

%

 

1

 

$

0.6

 

$

 

$

0.6

 

HealthEast Surgery Center-Maplewood, LLC ("Maplewood") (6)

 

Maplewood, MN