Surgical Care Affiliates
Surgical Care Affiliates, Inc. (Form: 10-Q, Received: 11/03/2016 10:08:53)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 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)

 

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

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       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

 

  

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  

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 October 28, 2016

Common stock, $0.01 par value

  

40,398,172 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 September 30, 2016 and December 31, 2015

1

 

  

 

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

2

 

  

 

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

4

 

  

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 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

31

 

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

52

 

Item 4.

  

 

Controls and Procedures

52

 

PART II.

  

 

OTHER INFORMATION

 

Item 1.

  

 

Legal Proceedings

52

Item 1A.

  

 

Risk Factors

52

Item 2.

  

 

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

  

 

Defaults Upon Senior Securities

54

Item 4.

  

 

Mine Safety Disclosure

54

Item 5.

  

 

Other Information

54

Item 6.

  

 

Exhibits

54

 

 

 

 


 

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)  

 

SEPTEMBER 30,

 

 

DECEMBER 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

41,086

 

 

$

79,269

 

Restricted cash

 

28,216

 

 

 

26,116

 

Accounts receivable, net of allowance for doubtful accounts (2016 - $25,240; 2015 - $17,045)

 

142,271

 

 

 

129,659

 

Receivable from nonconsolidated affiliates

 

42,665

 

 

 

46,949

 

Prepaids and other current assets

 

48,014

 

 

 

32,869

 

Current assets held for sale

 

456

 

 

 

 

Total current assets

 

302,708

 

 

 

314,862

 

Property and equipment, net of accumulated depreciation

 

348,665

 

 

 

296,831

 

Goodwill

 

1,402,718

 

 

 

1,061,088

 

Intangible assets, net of accumulated amortization

 

142,728

 

 

 

109,188

 

Deferred debt issue costs

 

1,052

 

 

 

1,277

 

Investment in and advances to nonconsolidated affiliates

 

190,266

 

 

 

216,111

 

Other long-term assets

 

33,274

 

 

 

2,254

 

Assets held for sale

 

5,577

 

 

 

 

Total assets (a)

$

2,426,988

 

 

$

2,001,611

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

38,690

 

 

$

32,503

 

Accounts payable

 

53,245

 

 

 

37,419

 

Accrued payroll

 

27,664

 

 

 

37,802

 

Accrued interest

 

312

 

 

 

4,173

 

Accrued distributions

 

39,176

 

 

 

37,175

 

Payable to nonconsolidated affiliates

 

83,915

 

 

 

77,683

 

Current liabilities held for sale

 

908

 

 

 

 

Other current liabilities

 

38,847

 

 

 

31,332

 

Total current liabilities

 

282,757

 

 

 

258,087

 

Long-term debt, net of current portion

 

934,523

 

 

 

851,849

 

Deferred income tax liability

 

56,819

 

 

 

44,339

 

Other long-term liabilities

 

33,623

 

 

 

31,615

 

Liabilities held for sale

 

272

 

 

 

 

Total liabilities (a)

 

1,307,994

 

 

 

1,185,890

 

Commitments and contingent liabilities (Note 14)

 

 

 

 

 

 

 

Noncontrolling interests – redeemable (Note 8)

 

14,875

 

 

 

21,989

 

Equity

 

 

 

 

 

 

 

Surgical Care Affiliates’ equity

 

 

 

 

 

 

 

Common stock, $0.01 par value, 180,000 shares authorized, 40,355 and 39,690 shares

   outstanding, respectively

 

403

 

 

 

397

 

Additional paid-in capital

 

459,512

 

 

 

442,678

 

Accumulated deficit

 

(38,033

)

 

 

(60,814

)

Total Surgical Care Affiliates’ equity

 

421,882

 

 

 

382,261

 

Noncontrolling interests – non-redeemable (Note 8)

 

682,237

 

 

 

411,471

 

Total equity

 

1,104,119

 

 

 

793,732

 

Total liabilities and equity

$

2,426,988

 

 

$

2,001,611

 

(a)

Our consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of our variable interest entities (“VIE”) of $387.3 million and $76.1 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of the VIE of $229.0 million and $41.0 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $21.6 million and $4.0 million of debt guaranteed by us at September 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

 

 

SEPTEMBER 30,

 

 

2016

 

 

2015

 

Net operating revenues:

 

 

 

 

 

 

 

Net patient revenues

$

303,775

 

 

$

236,921

 

Management fee revenues

 

12,807

 

 

 

15,807

 

Other revenues

 

6,253

 

 

 

5,059

 

Total net operating revenues

 

322,835

 

 

 

257,787

 

Equity in net income of nonconsolidated affiliates

 

12,554

 

 

 

12,299

 

Operating expenses:

 

 

 

 

 

 

 

Salaries and benefits

 

108,775

 

 

 

86,285

 

Supplies

 

76,066

 

 

 

54,615

 

Other operating expenses

 

54,376

 

 

 

40,462

 

Depreciation and amortization

 

22,849

 

 

 

16,554

 

Occupancy costs

 

12,143

 

 

 

9,063

 

Provision for doubtful accounts

 

5,369

 

 

 

4,264

 

Loss on disposal of assets

 

84

 

 

 

103

 

Total operating expenses

 

279,662

 

 

 

211,346

 

Operating income

 

55,727

 

 

 

58,740

 

Interest expense

 

14,822

 

 

 

10,828

 

Interest income

 

(5,231

)

 

 

(181

)

Gain on sale of investments

 

(20,223

)

 

 

(3,377

)

Income from continuing operations before income tax expense

 

66,359

 

 

 

51,470

 

Provision (benefit) for income taxes

 

7,242

 

 

 

(104,616

)

Income from continuing operations

 

59,117

 

 

 

156,086

 

(Loss) income from discontinued operations, net of income tax expense

 

(21

)

 

 

983

 

Net income

 

59,096

 

 

 

157,069

 

Less: Net income attributable to noncontrolling interests

 

(45,772

)

 

 

(38,430

)

Net income attributable to Surgical Care Affiliates

$

13,324

 

 

$

118,639

 

Basic net income per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.33

 

 

$

2.97

 

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

.03

 

Net income per share attributable to Surgical Care Affiliates

$

.33

 

 

$

3.00

 

Basic weighted average shares outstanding

 

40,328

 

 

 

39,585

 

Diluted net income per share attributable to Surgical Care Affiliates:

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.32

 

 

$

2.88

 

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

.02

 

Net income per share attributable to Surgical Care Affiliates

$

.32

 

 

$

2.90

 

Diluted weighted average shares outstanding

 

41,174

 

 

 

40,921

 

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)

 

 

NINE-MONTHS ENDED

 

 

SEPTEMBER 30,

 

 

2016

 

 

2015

 

Net operating revenues:

 

 

 

 

 

 

 

Net patient revenues

$

843,404

 

 

$

687,416

 

Management fee revenues

 

41,018

 

 

 

44,320

 

Other revenues

 

17,983

 

 

 

13,828

 

Total net operating revenues

 

902,405

 

 

 

745,564

 

Equity in net income of nonconsolidated affiliates

 

35,451

 

 

 

36,001

 

Operating expenses:

 

 

 

 

 

 

 

Salaries and benefits

 

308,720

 

 

 

254,609

 

Supplies

 

212,366

 

 

 

155,876

 

Other operating expenses

 

145,884

 

 

 

115,279

 

Depreciation and amortization

 

65,456

 

 

 

47,678

 

Occupancy costs

 

33,721

 

 

 

26,474

 

Provision for doubtful accounts

 

15,972

 

 

 

12,943

 

Loss on disposal of assets

 

1,192

 

 

 

299

 

Total operating expenses

 

783,311

 

 

 

613,158

 

Operating income

 

154,545

 

 

 

168,407

 

Interest expense

 

40,396

 

 

 

30,367

 

HealthSouth option expense

 

 

 

 

11,702

 

Debt modification expense

 

 

 

 

5,032

 

Loss on extinguishment of debt

 

 

 

 

544

 

Interest income

 

(13,928

)

 

 

(253

)

Gain on sale of investments

 

(30,211

)

 

 

(4,971

)

Income from continuing operations before income tax expense

 

158,288

 

 

 

125,986

 

Provision (benefit) for income taxes

 

13,466

 

 

 

(96,536

)

Income from continuing operations

 

144,822

 

 

 

222,522

 

Loss from discontinued operations, net of income tax expense

 

(35

)

 

 

(658

)

Net income

 

144,787

 

 

 

221,864

 

Less: Net income attributable to noncontrolling interests

 

(123,346

)

 

 

(107,831

)

Net income attributable to Surgical Care Affiliates

$

21,441

 

 

$

114,033

 

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

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.54

 

 

$

2.92

 

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

(.01

)

Net income per share attributable to Surgical Care Affiliates

$

.54

 

 

$

2.91

 

Basic weighted average shares outstanding

 

40,114

 

 

 

39,246

 

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

 

 

 

 

 

 

 

Continuing operations attributable to Surgical Care Affiliates

$

.52

 

 

$

2.82

 

Discontinued operations attributable to Surgical Care Affiliates

$

 

 

$

(.02

)

Net income per share attributable to Surgical Care Affiliates

$

.52

 

 

$

2.80

 

Diluted weighted average shares outstanding

 

41,023

 

 

 

40,667

 

 

 

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 income

 

 

 

 

 

 

 

 

114,033

 

 

 

114,033

 

 

89,768

 

 

203,801

 

Issuance of stock pursuant to teammate equity plans

 

605

 

 

 

7

 

 

6,300

 

 

 

 

 

6,307

 

 

 

 

6,307

 

HealthSouth stock option

 

326

 

 

 

3

 

 

11,699

 

 

 

 

 

11,702

 

 

 

 

11,702

 

Stock compensation

 

 

 

 

 

 

6,020

 

 

 

 

 

6,020

 

 

 

 

6,020

 

Net change in equity related to purchase of ownership interests

 

 

 

 

 

 

(2,510

)

 

 

 

 

(2,510

)

 

58,722

 

 

56,212

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

6,276

 

 

6,276

 

Change in distribution accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,630

)

 

(1,630

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(94,869

)

 

(94,869

)

Balance at September 30, 2015

 

39,579

 

 

$

396

 

$

440,597

 

$

(62,102

)

 

$

378,891

 

$

381,894

 

$

760,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

21,441

 

 

 

21,441

 

 

110,701

 

 

132,142

 

Issuance of stock pursuant to teammate equity plans

 

665

 

 

 

6

 

 

 

5,178

 

 

 

 

 

 

5,184

 

 

 

 

 

5,184

 

Stock compensation

 

 

 

 

 

 

9,504

 

 

 

 

 

9,504

 

 

 

 

9,504

 

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

 

 

 

 

 

 

2,152

 

 

1,340

 

 

 

3,492

 

 

262,598

 

 

 

266,090

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

2,266

 

 

2,266

 

Change in distribution accrual

 

 

 

 

 

 

 

 

 

 

 

 

 

(210

)

 

(210

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(107,890

)

 

(107,890

)

Balance at September 30, 2016

 

40,355

 

 

$

403

 

$

459,512

 

$

(38,033

)

 

$

421,882

 

$

682,237

 

$

1,104,119

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

4


 

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

NINE-MONTHS ENDED

 

 

SEPTEMBER 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

144,787

 

 

$

221,864

 

Loss from discontinued operations

 

35

 

 

 

658

 

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

 

 

 

 

 

 

 

Provision for doubtful accounts

 

15,972

 

 

 

12,943

 

Depreciation and amortization

 

65,456

 

 

 

47,678

 

Amortization of deferred issuance costs

 

919

 

 

 

1,034

 

Impairment of intangible and long-lived assets

 

2,795

 

 

 

 

Gain on sale of investments

 

(30,211

)

 

 

(4,971

)

Loss on disposal of assets

 

1,192

 

 

 

299

 

Equity in net income of nonconsolidated affiliates

 

(35,451

)

 

 

(36,001

)

Distributions from nonconsolidated affiliates

 

50,192

 

 

 

35,063

 

Deferred income tax

 

12,505

 

 

 

(97,534

)

Stock compensation

 

9,504

 

 

 

6,020

 

Change in fair value of interest rate swap

 

1,411

 

 

 

326

 

Loss on extinguishment of debt

 

 

 

 

544

 

HealthSouth option expense

 

 

 

 

11,702

 

(Increase) decrease in assets, net of business combinations

 

 

 

 

 

 

 

Accounts receivable

 

(9,576

)

 

 

(11,016

)

Other assets

 

(3,098

)

 

 

30,385

 

(Decrease) increase in liabilities, net of business combinations

 

 

 

 

 

 

 

Accounts payable

 

2,132

 

 

 

(6,414

)

Accrued payroll

 

(12,674

)

 

 

4,802

 

Accrued interest

 

(3,861

)

 

 

8,124

 

Other liabilities

 

4,957

 

 

 

(29,296

)

Other

 

478

 

 

 

(505

)

Net cash used in operating activities of discontinued operations

 

(394

)

 

 

(1,570

)

Net cash provided by operating activities

 

217,070

 

 

 

194,135

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(58,837

)

 

 

(30,248

)

Proceeds from disposal of assets

 

18,207

 

 

 

273

 

Proceeds from sale of business

 

442

 

 

 

6,884

 

Proceeds from sale of equity interests of nonconsolidated affiliates

 

 

 

 

20,513

 

Prepayment for sale of equity method investments

 

7,016

 

 

 

 

Repurchase of equity interests of nonconsolidated affiliates

 

(444

)

 

 

 

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

 

(56

)

 

 

(37

)

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

 

124

 

 

 

 

Increase in restricted cash

 

7,896

 

 

 

4,111

 

Net settlements on interest rate swap

 

(1,086

)

 

 

(1,090

)

Business acquisitions, net of cash acquired (2016 - $3,197; 2015 - $1,695)

 

(131,711

)

 

 

(72,134

)

Purchase of equity interests in nonconsolidated affiliates

 

(9,488

)

 

 

(35,642

)

Net cash provided by investing activities of discontinued operations

 

 

 

 

11,000

 

Other

 

(10,348

)

 

 

(3,017

)

Net cash used in investing activities

$

(178,285

)

 

$

(99,387

)

 

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)

 

 

NINE-MONTHS ENDED

 

 

SEPTEMBER 30,

 

 

2016

 

 

2015

 

Cash flows from financing activities

 

 

 

 

 

 

 

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

$

168,800

 

 

$

711,852

 

Payment of debt acquisition costs

 

 

 

 

(3,238

)

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

 

(117,583

)

 

 

(608,953

)

Principal payments under capital lease obligations

 

(10,335

)

 

 

(6,304

)

Distributions to noncontrolling interests of consolidated affiliates

 

(123,394

)

 

 

(112,720

)

Contributions from noncontrolling interests of consolidated affiliates

 

2,914

 

 

 

5,286

 

Proceeds from sale of equity interests of consolidated affiliates

 

9,850

 

 

 

4,853

 

Repurchase of equity interests of consolidated affiliates

 

(12,398

)

 

 

(5,226

)

Proceeds from teammate equity plans

 

14,463

 

 

 

9,505

 

Other

 

(9,283

)

 

 

(4,423

)

Net cash used in financing activities

 

(76,966

)

 

 

(9,368

)

Change in cash and cash equivalents

 

(38,181

)

 

 

85,380

 

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

)

 

 

(3

)

Cash and cash equivalents at end of period

$

41,086

 

 

$

94,145

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

Property and equipment acquired through capital leases and installment purchases

$

25,630

 

 

$

11,646

 

Goodwill attributable to sale of surgery centers

 

 

 

$

2,503

 

Net investment in consolidated affiliates that became equity method facilities

 

590

 

 

 

164

 

Noncontrolling interest associated with conversion of consolidated affiliates to equity method affiliates

 

 

 

 

1,179

 

Accrued capital expenditures at end of period

 

2,040

 

 

 

3,000

 

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 September 30, 2016, the Company operated in 33 states and had an interest in and/or operated 197 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 nine-months ended September 30, 2016, our portfolio of facilities changed as follows:

 

we acquired a controlling interest in 12 new ASCs that we consolidate (one of which closed as a result of an acquisition and combined its operations into an existing SCA facility and did not increase our total facility count);

 

we acquired a controlling interest in 11 ASCs that were previously held in our portfolio (one was previously a managed-only facility and 10 were previously held as equity method investments);

 

we acquired a noncontrolling interest in four ASCs that we hold as equity method investments (one of which closed as a result of an acquisition and combined its operations into an existing SCA facility and 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 closed one consolidated ASC, sold our interest in an ASC that we held as an equity method investment and 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 invest in, develop and optimize facilities in an aligned economic model that enables better access to high-quality surgical care at lower cost. As of September 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 205 facilities as follows:

 

 

AS OF

 

 

SEPTEMBER 30, 2016

 

Consolidated facilities (1)

 

124

 

Equity method facilities

 

61

 

Managed-only facilities

 

20

 

Total facilities

 

205

 

 

(1)

As of September 30, 2016, we consolidated 105 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

7


 

o f 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 s ubsidiaries, subsidiaries over which we exercise control and, when applicable, affiliates in which we have a controlling financial interest. These interim financial statements do not include all of the disclosures required by GAAP for complete financial st atements. In the opinion of management, the accompanying 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 per ating results for the three- and nine - month period s ended September 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 an d related notes should be read in conjunction with the Company’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 nine-months ended September 30, 2016, we obtained a controlling interest in 23 ASCs for total consideration of $140.8 million.  One of the 23 ASCs was previously a managed-only facility, and 10 of the 23 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 $149.6 million.

 

 

 

 

8


 

The details of the 23 consolidated ac quisitions closed during the nine -months ended September 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

 

Q1 Transactions