Item 1B.
Unresolved Staff Comments
Not Applicable.
As of December 31, 2013, we leased approximately 95,000 square feet at 265 Brookview Centre Way, Knoxville, Tennessee for our corporate headquarters. We also lease or sublease other facilities for our corporate functions as well as for the operations of our clinics, billing centers and certain regional operations. We believe our present facilities are substantially adequate to meet our current and projected needs. The leases and subleases have various terms primarily ranging from one to fourteen years and monthly rents ranging from approximately $1,000 to $135,000. Our monthly lease payments total approximately $1.3 million. We expect to be able to renew each of our leases or to lease comparable facilities on terms commercially acceptable to us.
Item 3.
Item 3.
Legal Proceedings
We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.
On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Company’s services at hospitals that are affiliated with Health Management Associates, Inc. (HMA) and any of HMA’s affiliates. The Company intends to cooperate with the government in its investigation and is in the process of responding to the government’s request.
Item 4.
Item 4.
Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock is traded on the NYSE under the symbol “TMH.” As of February 7, 2014, there were 183 holders of record of our common stock. This does not include persons who hold our common stock in nominee or “street name” accounts through brokers or banks.
The following table sets forth the high and low sales prices per share of our common stock as reported on the NYSE during the years ended December 31, 2012 and 2013:
Dividend Policy
We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is currently limited by the covenants of our senior secured credit facilities and may be further restricted by the terms of any future debt or preferred securities. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends.
Item 6.
Item 6.
Selected Financial Data
The following table sets forth our selected historical financial data as of the dates and for the periods indicated. The selected historical financial data as of December 31, 2012 and 2013 and for each of the three years in the period ended December 31, 2013 have been derived from our audited consolidated financial statements included elsewhere in this Form 10-K. We derived the selected historical financial data as of December 31, 2009, 2010 and 2011 and for the years ended December 31, 2009 and 2010 from our audited consolidated financial statements that are not included in this Form 10-K.
You should read the data presented below together with, and qualified by reference to, our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this Form 10-K.
(1)
Per share data has been computed based upon the number of shares of common stock outstanding immediately after the corporate conversion in connection with our 2009 initial public offering applied to historical net income
amounts giving retroactive effect to the conversion of our limited liability company interests into shares of common stock.
(2)
Reflects expenditures for property and equipment used in our business.
(3)
Working capital means current assets minus current liabilities.
(4)
Includes current portion of long-term debt. See Note 11 to the consolidated financial statements included elsewhere in the Form 10-K for a discussion of long-term debt.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States, based upon revenues and patient visits. Our regional operating models also include comprehensive programs for inpatient care, pediatrics and other healthcare services, principally within hospital departments and other healthcare treatment facilities. We have focused, however, primarily on providing outsourced services to hospital EDs, which accounts for the majority of our net revenues.
Secondary Offerings
Subsequent to our 2009 initial public offering, our principal shareholder at the time of the offering, Ensemble Parent LLC, an investment fund affiliated with The Blackstone Group L.P. (Ensemble), and certain officers and directors of the Company consummated a series of secondary offerings of the Company's common stock. On February 15, 2013 Ensemble Parent LLC and certain officers and directors sold the remainder of its ownership of the Company's common stock. See Note 1 of the consolidated financial statements included in this Form 10-K for a discussion of the offerings.
Factors and Trends that Affect Our Results of Operations
In reading our financial statements, you should be aware of the following factors and trends that we believe are important in understanding our financial performance.
General Economic Conditions
The lingering effects of the recent economic conditions may adversely impact our ability to collect for the services we provide as higher unemployment and reductions in commercial managed care and governmental healthcare enrollment may increase the number of uninsured and underinsured patients seeking healthcare at one of our staffed EDs or other clinical facilities. We could be negatively affected if the federal government or the states reduce funding of Medicare, Medicaid and other federal and state healthcare programs in response to increasing deficits in their budgets. Also, patient volume trends in our staffed hospital clinical departments could be adversely affected as individuals potentially defer or forgo seeking care in such departments due to the loss or reduction of coverage previously available to such individuals under commercial insurance or governmental healthcare programs.
Healthcare Reform
In 2010, the President of the United States and the U.S. Congress enacted significant reforms to the U.S. healthcare system. The PPACA signed into law on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, collectively referred to as the Healthcare Reform Laws, significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court, responding to legal challenges by private citizens and 26 states, upheld the constitutionality of the requirement in PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. Additionally, the U.S. Supreme Court held in the same ruling that states were not obligated to expand their Medicaid programs as stipulated in the PPACA to eligible recipients based solely on income. Consequently, each state retained the option whether to choose to expand their Medicaid roles.
The Healthcare Reform Laws triggered numerous changes to the U.S. healthcare system, some of which have already gone into effect, some of which will go into effect in 2014, including the individual mandate, and some of which have been delayed until 2015, including the requirement that employers provide health insurance to their employees or pay a per employee fine (the employer mandate).
While the ultimate impact of these laws and regulations will not be known until all provisions are fully implemented, we believe that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. Other provisions, however, such as Medicare payment reforms and reductions that
could reduce provider payments, may have an adverse effect on the reimbursement rates we receive for services provided by affiliated healthcare professionals. Additionally, we could see a reduction in volumes if care moves to alternate care facilities.
Medicaid to Medicare Payment Parity
In November 2012, CMS released final rule CMS-2370-F to implement the Healthcare Reform Laws' provision increasing Medicaid payments for primary care services furnished by certain physicians to the Medicare rates in 2013 and 2014. In December 2012, CMS released technical corrections to the final rule. Additionally, CMS has issued multiple FAQ documents since its publication of the final rule. Furthermore, CMS has advised that, under the final rule, physicians may be eligible for the increased Medicaid payments if they maintain a current board certification in internal medicine, family medicine, or pediatric medicine and greater than 60% of their billings are the qualifying primary care evaluation and management codes. Certain states have imposed additional requirements that affect a physician's eligibility for the increased Medicaid payments even for those physicians who maintain an appropriate board certification, including site of service restrictions that would exclude primary care services rendered in a hospital emergency department. We have received confirmation that a limited number of our providers will qualify for the increased Medicaid rates in certain states and have started to receive payments under this program. As of December 31, 2013, we have recognized $25.9 million of net revenues from the Medicare parity program associated with 2013 services.
2014 Medicare Fee Schedule Changes
CMS reimburses for our services to Medicare beneficiaries based upon the rates in its MPFS, which are updated each year based on the SGR formula enacted under the Balanced Budget Act of 1997. Many private payors use the Medicare fee schedule to determine their own reimbursement rates. CMS updating of the MPFS includes application of the SGR formula. This formula has yielded negative updates every year beginning in 2002. Although CMS was able to take administrative steps to avoid a reduction in 2003 and Congress took a series of legislative actions to prevent reductions each year from 2004 through 2013. In December, Congress passed and the President signed a bipartisan budget bill that included a three month delay in applying the SGR reductions and provided for a 0.5% increase for January through March 2014. Congress is working on legislation to permanently repeal and replace the SGR formula. There is a current bipartisan, bicameral negotiated SGR replacement bill under consideration would repeal the SGR, provide an annual update of 0.5% in each year from 2014 through 2018, maintain the payment rates in 2018 through 2023, implement an incentive payment program that provides professionals with the opportunity to receive additional payment adjustments, and provide financial incentives for professionals who participate in alternative payment models. Absent further changes from Congress with respect to the application of the SGR, Medicare physician services will be subject to significant reductions beginning in April 2014.
In November 2013, CMS released the 2014 MPFS Final Rule. Included in the final rule are changes in reimbursement that are overall budget neutral, but redistribute payments between different medical specialties. We estimate that the final rule will increase 2014 reimbursement rates to emergency medicine providers by over 2% and anesthesiologists by approximately 2%. We estimate an increase of approximately $7.3 million on our 2014 ED fee for service revenue.
Any future reductions in amounts paid by government programs for physician services or changes in methods or regulations governing payment amounts or practices could cause our revenues to decline and we may not be able to offset reduced operating margins through cost reductions, increased volume or otherwise.
Budget Control Act's Medicare Sequestration
In August 2011, Congress enacted the Budget Control Act, which committed the U.S. government to significantly reduce the federal deficit over ten years. The Budget Control Act established caps on discretionary spending through 2021. It also established a Joint Committee of Congress (the Joint Committee) that was responsible for identifying an additional $1.5 trillion in deficit reductions. The Joint Committee was unable to identify the additional deficit reductions by the deadline, thereby triggering a second provision of the Budget Control Act called “sequestration.” Sequestration calls for automatic spending cuts of $1.2 trillion over a nine-year period, beginning January 2, 2013, split between defense and non-defense programs, including spending cuts to Medicare programs averaging 2%.
On January 2, 2013, President Obama signed the American Taxpayor Relief Act of 2012 into law. This legislation delayed the sequestration cuts that would have reduced Medicare payments by 2% until March 1, 2013. Since Congress and the White House failed to act by March 1, 2013, across-the-board cuts to Medicare payments took effect for Medicare services furnished on or after April 1, 2013. Unless Congress takes action to change the law, federal spending on Medicare services will be subject to sequestration until 2022.
Military and Government Healthcare Staffing
Through our subsidiary, Spectrum Healthcare Resources, Inc., we are a provider of healthcare professionals serving patients eligible to receive care in military treatment facilities nationwide administered by the DOD and beneficiaries of other government agencies in their respective clinical locations. Our revenues derived from military and government facility healthcare staffing totaled $106.8 million and $121.6 million for the years ended December 31, 2012 and 2013, respectively. These revenues are generated from contracts that are subject to a competitive bidding process which primarily takes place during the third quarter of each year. A portion of the contracts awarded during the third quarter of 2012 expired during 2013 and were subject to a competitive rebidding and award process. We were successful in retaining existing business or winning new bids following completion of the bidding process as of October 1, 2013, in the estimated annualized amount of $119.7 million. The estimated annualized amount of $119.7 million included $15.5 million awarded under one-year contracts.
In addition, the process of awarding military and government facility healthcare staffing contracts has shifted in recent years toward intentionally awarding certain contracts to qualified small and minority owned businesses. Although we participate in such small and minority owned business awards to the extent we can serve as a sub-contractor, our revenues from these arrangements are limited compared to a contract award we retain through the regular competitive bidding process. Approximately 28.6% and 27.0% of our military staffing revenue for each of the years ended December 31, 2012 and 2013, respectively, was derived through sub-contracting agreements with small business prime contractors.
Critical Accounting Policies and Estimates
The following discussion provides an assessment of our results of operations, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and assumptions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Net Revenues Before Provision for Uncollectibles. Net revenues before provision for uncollectibles consist of fee for service revenue, contract revenue and other revenue. Net revenues before provision for uncollectibles are recorded in the period services are rendered. Our net revenues before provision for uncollectibles are principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of our billing arrangements and how net revenues before provision for uncollectibles are recognized for each.
A significant portion (approximately 84% of our net revenues before provision for uncollectibles in the years ended December 31, 2013 and December 31, 2012) resulted from fee for service patient visits. Fee for service revenue represents revenue earned under contracts in which we bill and collect the professional component of charges for medical services rendered by our contracted and employed physicians. Under the fee for service arrangements, we bill patients for services provided and receive payment from patients or their third-party payors. Fee for service revenue is reported net of contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as net revenues before provision for uncollectibles in the financial statements. Fee for service revenue is recognized in the period that the services are rendered to specific patients and reduced immediately for the estimated impact of contractual allowances in the case of those patients having third-party payor coverage. The recognition of net revenues before provision for uncollectibles (gross charges less contractual allowances) from such visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to one of our billing centers for medical coding and entering into our billing systems and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Net revenues before provision for uncollectibles are recorded based on the information known at the time of entering such information into our billing systems as well as an estimate of the net revenues before provision for uncollectibles associated with medical charts for a given service period that have not yet been processed into our billing systems. The above factors and estimates are subject to change. For example, patient payor information may change following an initial attempt to bill for services due to a change in payor status. Such changes in payor status have an impact on recorded net revenues before provision for uncollectibles due to differing payors being subject to different contractual allowance amounts. Such changes in net revenues before provision for uncollectibles are recognized in the period that such changes in the payor become known. Similarly, the actual volume of medical charts not processed into our billing systems may be different from the amounts estimated. Such differences in net revenues before provision for uncollectibles are adjusted the following month based on actual chart volumes processed.
Contract revenue represents revenue generated under contracts in which we provide physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. In these types of arrangements we are the principal in the transaction and therefore recognize contract revenue on a gross basis. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed upon hourly rates. Revenue in such cases is recognized as the hours worked by our staff and contractors. Additionally, contract revenue includes supplemental revenue from hospitals where we may have a fee for service contract arrangement. Contract revenue for the supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either provide for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed, patient visits or actual patient collections compared to a minimum activity threshold. Such supplemental revenues based on variable arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors negotiated in each such arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement.
Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. Generally, such contracts consist of fixed monthly amounts with revenue recognized in the month services are rendered or as hourly consulting fees recognized as revenue as hours worked in accordance with such arrangements. Additionally, we derive a portion of our revenues from providing billing services that are contingent upon the collection of third-party physician billings by us on behalf of such customers. Revenues are not considered earned and therefore not recognized as revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.
Net Revenues. Net revenues reflect management’s estimate of billed amounts to ultimately be collected. Management, in estimating the amounts to be collected resulting from approximately eleven million annual fee for service patient visits and procedures, considers such factors as prior contract collection experience, current period changes in payor mix and patient acuity indicators, reimbursement rate trends in governmental and private sector insurance programs, resolution of overprovision account balances, the estimated impact of billing system effectiveness improvement initiatives, and trends in collections from self-pay patients and external collection agencies. In developing our estimate of collections per visit or procedure, we consider the amount of outstanding gross accounts receivable by period of service, but do not use an accounts receivable aging schedule to establish estimated collection valuations. Individual estimates of net revenues by contractual location are monitored and refreshed each month as cash receipts are applied to existing accounts receivable and other current trends that have an impact upon the estimated collections per visit are observed. Such estimates are substantially formulaic in nature. In the ordinary course of business we experience changes in our initial estimates of net revenues during the year following commencement of services. Such provisions and any subsequent changes in estimates may result in adjustments to our operating results with a corresponding adjustment to our accounts receivable allowance for uncollectibles on our balance sheet. Differences between amounts ultimately realized and the initial estimates of net revenues have historically not been material.
The table below summarizes our approximate payor mix as a percentage of consolidated fee for service patient volume for the periods indicated:
Estimated net revenues derived from commercial and managed care plans was approximately 38% and 37% in 2012 and 2013, respectively. Estimated net revenues derived from the Medicare program were approximately 17% and 16% of total net revenues in 2012 and 2013, respectively. Estimated net revenues derived from the Medicaid program were approximately 10% of total net revenues in both 2012 and 2013. In addition, net revenues derived from within the Military Health System (MHS), which is the U.S. military’s dependent healthcare program, and other government agencies was approximately 5% in both 2012 and 2013.
Accounts Receivable. As described above and below, we determine the estimated value of our accounts receivable based on estimated cash collection run rates of estimated future collections, by facility contract, for patient visits under our fee for service contract revenue. Accordingly, we are unable to report the payor mix composition on a dollar basis of our outstanding
net accounts receivable. However, a 1% change in the estimated carrying value of our net fee for service patient accounts receivable before consideration of the allowance for uncollectible accounts at December 31, 2013 could have an after tax effect of approximately $4.1 million on our financial position and results of operations. Our days of revenue outstanding at December 31, 2012 and at December 31, 2013, were 61.5 days and 58.2 days, respectively. The number of days outstanding will fluctuate over time due to a number of factors, including the timing of cash collections and valuation adjustments recorded during the period and changes in average revenue per day that are primarily attributed to changes in gross charges, patient volumes, and changes in pricing with managed care plans. Our allowance for doubtful accounts totaled $377.6 million as of December 31, 2013.
Approximately 98% of our allowance for doubtful accounts is related to gross fees for fee for service patient visits. Our principal exposure for uncollectible fee for service visits is centered in self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance. While we do not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of December 31, 2013 was equal to approximately 92% of outstanding self-pay fee for service patient accounts.
The majority of our fee for service patient visits are for the provision of emergency care in hospital settings. Due to federal government regulations governing the provision of such care, we are obligated to provide emergency care regardless of the patient’s ability to pay or whether or not the patient has insurance or other third-party coverage for the costs of the services rendered. While we attempt to obtain all relevant billing information at the time emergency care services are rendered, there are numerous patient encounters where such information is not available at time of discharge. In such cases where detailed billing information relative to insurance or other third-party coverage is not available at discharge, we attempt to obtain such information from the patient or client hospital billing record information subsequent to discharge to facilitate the collections process. Collections at the time of rendering such services (emergency room discharge) are not significant. Primary responsibility for collection of fee for service accounts receivable resides within our internal billing operations. Once a claim has been submitted to a payor or an individual patient, employees within our billing operations are responsible for the follow-up collection efforts. The protocol for follow-up differs by payor classification. For self-pay patients, our billing system will automatically send a series of dunning letters on a prescribed time frame requesting payment or the provision of information reflecting that the balance due is covered by another payor, such as Medicare or a third-party insurance plan. Generally, the dunning cycle on a self-pay account will run from 90 to 120 days. At the end of this period, if no collections or additional information is obtained from the patient, the account is no longer considered an active account and is transferred to a collection agency. Upon transfer to a collection agency, the patient account is written-off as a bad debt. Any subsequent cash receipts on accounts previously written-off are recorded as a recovery. For non-self-pay accounts, billing personnel will follow-up and respond to any communication from payors such as requests for additional information or denials until collection of the account is obtained or other resolution has occurred. At the completion of our collection cycle, selected accounts may be transferred to collection agencies under a contingent collection basis. The projected value of future contingent collection proceeds expected to be collected over a multi-year period are considered in the estimation of our overall accounts receivable valuation. For contract accounts receivable, invoices for services are prepared in our various operating areas and mailed to our customers, generally on a monthly basis. Contract terms under such arrangements generally require payment within 30 days of receipt of the invoice. Outstanding invoices are periodically reviewed and operations personnel with responsibility for the customer relationship will contact the customer to follow-up on any delinquent invoices. Contract accounts receivable will be considered as bad debt and written-off based upon the individual circumstances of the customer situation after all collection efforts have been exhausted, including legal action if warranted, and it is the judgment of management that the account is not expected to be collected.
Methodology for Computing Allowance for Doubtful Accounts. We employ several methodologies for determining our allowance for doubtful accounts depending on the nature of the net revenues before provision for uncollectibles recognized. We initially determine gross revenue for our fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in net revenues before provision for uncollectibles. Net revenues before provision for uncollectibles are then reduced for our estimate of uncollectible amounts. Fee for service net revenues represent our estimated cash to be collected from such patient visits and is net of our estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately eleven million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each of our fee for service contracts by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by our billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that
contract’s accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenues are billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon specific accounts and invoice periodic reviews once it is concluded that such amounts are not likely to be collected. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2013 and 2012.
Insurance Reserves
The nature of our business is such that it is subject to professional liability claims and lawsuits. Historically, to mitigate a portion of this risk, we have maintained insurance for individual professional liability claims with per incident and annual aggregate limits per physician for all incidents. Prior to March 12, 2003, we obtained such insurance coverage from commercial insurance providers. Effective March 12, 2003, we have provided for a significant portion of our professional liability loss exposures through the use of a captive insurance company and through greater utilization of self-insurance reserves. Since March 12, 2003, the most significant cost element within our professional liability program has consisted of the actuarial estimates of losses by occurrence period. In addition to the estimated actuarial losses, other costs that are considered by management in the estimation of professional liability costs include program costs such as brokerage fees, claims management expenses, program premiums and taxes, and other administrative costs of operating the program, such as the costs to operate the captive insurance subsidiary. Net costs in any period reflect our estimate of net losses to be incurred in that period as well as any changes to our estimates of the reserves established for net losses of prior periods.
Our commercial insurance policy for professional liability losses for the period March 12, 1999 through March 11, 2003 included insured limits applicable to such coverage in the period. Effective April 2006, we executed an agreement with the commercial insurance provider that issued the policy that ended March 11, 2003 to increase the existing $130.0 million aggregate limit of coverage. Under the terms of the agreement, we will make periodic premium payments to the commercial insurance company and the total aggregate limit of coverage under the policy will be increased by a portion of the premiums paid. We have committed to fund premiums such that the total aggregate limit of coverage under the program remains greater than the paid losses at any point in time.
The accounts of the captive insurance company are fully consolidated with those of our other operations in the accompanying financial statements.
The estimation of medical professional liability losses is inherently complex. Medical professional liability claims are typically resolved over an extended period of time, often as long as ten years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. A report of actuarial loss estimates is prepared at least semi-annually. Management’s estimate of our professional liability costs resulting from such actuarial studies is significantly influenced by assumptions and assessments regarding expectations of several factors. These factors include, but are not limited to: historical paid and incurred loss development trends; hours of exposure as measured by hours of physician and related professional staff services; trends in the frequency and severity of claims, which can differ significantly by jurisdiction due to the legislative and judicial climate in such jurisdictions; coverage limits of third-party insurance; the effectiveness of our claims management process; and the outcome of litigation. As a result of the variety of factors that must be considered by management, there is a risk that actual incurred losses may develop differently from estimates.
The underlying information that serves as the foundational basis for making our actuarial estimates of professional liability losses is our internal database of incurred professional liability losses. We have captured extensive professional liability loss data going back, in some cases, over twenty years, that is maintained and updated on an ongoing basis by our internal claims management personnel. Our database contains comprehensive incurred loss information for our existing operations as far back as fiscal year 1997 (reflecting the initial timeframe in which we migrated to a consolidated professional liability program concurrent with the consummation of several significant acquisitions) and, in addition, we possess additional loss data that predates 1997 dates of occurrence for certain of our operations. Loss information reflects both paid and reserved losses incurred when we were covered by outside commercial insurance programs as well as paid and reserved losses incurred under our self-insurance program. Because of the comprehensive nature of the loss data and our comfort with the completeness and reliability of the loss data, this is the information that is used in the development of our actuarial loss estimates. We believe this database is one of the largest repositories of physician professional liability loss information available in our industry and provides us and our actuarial consultants with sufficient data to develop reasonable estimates of the ultimate losses under our self-insurance program. In addition to the estimated losses, as part of the actuarial process, we obtain revised payment pattern assumptions that are based upon our historical loss and related claims payment experience. Such payment patterns reflect estimated cash outflows for aggregate incurred losses by period based upon the occurrence date of the loss as well as the report date of the loss. Although variances have been observed in the actuarial estimate of ultimate losses by occurrence period
between actuarial studies, the estimated payment patterns have shown much more limited variability. We use these payment patterns to develop our estimate of the discounted reserve amounts. The relative consistency of the payment pattern estimates provides us with a foundation in which to develop a reasonable estimate of the discount value of the professional liability reserves based upon the most current estimate of ultimate losses to be paid and the reasonable likelihood of the related cash flows over the payment period. As of December 31, 2012 and December 31, 2013, our estimated loss reserves were discounted at 0.7% and 1.4%, respectively, which was the current weighted average Treasury rate, over a 10 year period at December 31, 2012 and 2013, which reflects the risk free interest rate over the expected period of claims payments.
In establishing our initial reserves for a given loss period, management considers the results of the actuarial loss estimates for such periods as well as assumptions regarding loss retention levels and other program costs to be incurred. On a semi-annual basis, we will review our professional liability reserves considering not only the reserves and loss estimates associated with the current period, but also the reserves established in prior periods based upon revised actuarial loss estimates. The actuarial estimation process employed utilizes a frequency severity simulation model to estimate the ultimate cost of claims for each loss period. The results of the simulation model are then validated by a comparison to the results from several different actuarial methods (paid loss development, incurred loss development, incurred Bornhuetter-Ferguson method, paid Bornhuetter-Ferguson method) for reasonableness. Each method contains assumptions regarding the underlying claims process. Actuarial loss estimates at various confidence levels capture the variability in the loss estimates for process risk but assume that the underlying model and assumptions are correct. Adjustments to professional liability loss reserves will be made as needed to reflect revised assumptions and emerging trends and data. Any adjustments to reserves are reflected in the current operations. Due to the size of our reserve for professional liability losses, even a small percentage adjustment to these estimates can have a material effect on the results of operations for the period in which the adjustment is made. Given the number of factors considered in establishing the reserves for professional liability losses, it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item. The actuarial reports provide a variety of loss estimates based upon statistical confidence levels reflecting the inherent uncertainty of the medical professional liability claims environment in which we operate. Initial year loss estimates are generally recorded using the actuarial expected loss estimate, but aggregate professional liability loss reserves may be carried at amounts in excess of the expected loss estimates provided by the actuarial reports due to the relatively short time period in which we have provided for our losses on a self-insured basis and the expectation that we believe additional adjustments to prior year estimates may occur as our reporting history and loss portfolio matures. In addition, we are subject to the risk of claims in excess of insured limits as well as unlimited aggregate risk of loss in certain loss periods. As our self-insurance program continues to mature and additional stability is noted in the loss development trends in the initial years of the program, we expect to continue to review and evaluate the carried level of reserves and make adjustments as needed.
Based on the results of the 2013 semi-annual actuarial studies completed in April 2013 and October 2013, management determined no change was necessary in the consolidated reserves for professional liability losses related to prior year loss estimates.
The following reflects the current reserves for professional liability costs as of December 31, 2013 (in millions) as well as the sensitivity of the reserve estimates at a 75% and 90% confidence level:
It is not possible to quantify the amount of the change in our estimate of prior year losses by individual fiscal period due to the nature of the professional liability loss estimates that are provided to us on an occurrence period basis and the nature of the coverage that is obtained in the commercial insurance market which is generally underwritten on a claims made or report period basis. Even though we are self-insured for a significant portion of our risk, due to customer contracting requirements and state insurance regulations, we still, at times, must place coverage on a claims made or report period basis with commercial insurance carriers. When evaluating the appropriate carrying level of our self-insured professional liability reserves, management considers the current estimates of occurrence period loss estimates as well as how such loss estimates and related future claims will interact with previous or current commercial insurance programs when projecting future cash flows. However, the complexity that is associated with multiple occurrence periods interacting with multiple report periods that contain risks and related reserves retained by us, as well as transferred to commercial insurance carriers, makes it impossible to allocate the change in prior year loss estimates to individual occurrence periods. Instead, we evaluate the future expected cash flows for all historical loss periods in the aggregate and compare such estimates to the current carrying value of our professional liability reserves. This process provides the basis for us to conclude that our reserves for professional liability losses are reasonable and properly stated. Management considers the results of actuarial studies when estimating the appropriate
level of professional liability reserves and no adjustments to prior year loss estimates were made in periods where updated actuarial loss estimates were not available.
Due to the complexity of the actuarial estimation process, there are many factors, trends, and assumptions that must be considered in the development of the actuarial loss estimates and we are not able to quantify and disclose which specific elements are primarily contributing to changes in revised loss estimates of historical occurrence periods when such adjustments may be recorded. However, we believe that our internal investments in enhanced risk management and claims management resources and initiatives, such as the employment of additional claims and litigation management personnel and practices and an expansion of programs such as root cause loss analysis, early claim evaluation, and litigation support for insured providers, as well as the improved legal environment resulting from professional liability tort reform efforts in certain key jurisdictions such as Florida and Texas have allowed the Company to manage this risk in a cost effective manner since 2003.
Impairment of Intangible Assets
In assessing the recoverability of our intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. Specifically, in estimating the fair value of a reporting unit, we use valuation techniques based on the historical and expected future performance of the specific reporting units and the current valuation multiples of entities that have comparable operations and economic characteristics. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.
All reporting units that have recorded goodwill, based on the results of our annual impairment test, are not considered to be at risk as of December 31, 2013. The results of step one of the annual impairment test completed as of October 31, 2013, and as prescribed by the provisions of ASC 350 “Intangibles-Goodwill and Other,” which is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill, indicated there had been no impairment and the fair value exceeded the carrying value for the respective reporting units.
Results of Operations
The following discussion provides an analysis of our results of operations and should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K. The operating results of the periods presented were not significantly affected by general inflation in the U.S. economy. Net revenues are an estimate of future cash collections and as such it is a key measurement by which management evaluates performance of individual contracts as well as our company as a whole. The following table sets forth the components of net earnings as a percentage of net revenues for the periods indicated:
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Net Revenues Before Provision for Uncollectibles. Net revenues before provision for uncollectibles in the year ended December 31, 2013 increased $575.2 million, or 15.4%, to $4.31 billion from $3.74 billion in the year ended December 31, 2012. The increase in net revenues before provision for uncollectibles resulted primarily from increases in fee for service
revenue of $475.3 million, contract revenue of $96.9 million and other revenue of $2.9 million. The increase in fee for service revenue was a result of a 5.2% increase in total fee for service visits and procedures and increases in estimated collections per billed visit. Estimated collections per visit increased due to annual increases in gross charges and managed care pricing improvements as well as increases in average patient acuity levels. The increase in contract revenue was due primarily to the impact of new and acquired contracts.
Provision for Uncollectibles. The provision for uncollectibles was $1.93 billion in the year ended December 31, 2013 compared to $1.67 billion in the corresponding period in 2012, an increase of $260.6 million, or 15.6%. The provision for uncollectibles as a percentage of net revenues before provision for uncollectibles was 44.7% in 2013 and 2012. The provision for uncollectibles was primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The increase in the provision was due to annual increases in gross fee schedules and increases in patient volume and procedures. Changes in payor mix, particularly the level of self-pay fee for service visits, also had an impact on the provision for uncollectibles. Self-pay fee for service visits were approximately 21.2% and 21.5% of the total fee for service visits for the years ended December 31, 2013 and 2012, respectively.
Net Revenues. Net revenues in the year ended December 31, 2013 increased $314.6 million, or 15.2%, to $2.38 billion from $2.07 billion in the year ended December 31, 2012. Acquisitions contributed 9.1% of our year over year growth, new contracts, net of terminations, contributed an additional 3.3% of growth in net revenues, and same contract revenue contributed 2.9% of the increase in year over year net revenues growth.
Total same contract revenue, which consists of contracts under management that have been in effect for prior periods, increased $59.0 million, or 3.5%, to $1.73 billion in 2013 compared to $1.67 billion in 2012. For the year ended December 31, 2013, increases in same contract estimated collections on fee for service visits of 6.7% provided a 5.0% increase in same contract revenue growth. The increase in the estimated collections per visit is attributable to annual increases in gross charges and managed care pricing improvements as well as increases in average patient acuity levels and Medicaid parity revenue, partially offset by changes in same contract payor mix and Medicare reductions between years. Fee for service volume declines of 1.6% reduced same contract revenue growth by 1.2% between years. Contract and other revenue constrained same contract revenue growth between years by 0.3%. Acquisitions contributed $187.9 million of growth between periods, while net new contract revenue increased $67.6 million. Medicaid parity revenue contributed 1.3% to both consolidated revenue growth and same contract revenue growth between years.
We typically gain new contracts by replacing competitors at hospitals that currently outsource such services, obtaining new contracts from facilities that do not currently outsource and responding to contracting opportunities within the military healthcare system. Factors influencing new contracting opportunities include the depth and breadth of our service offerings, our reputation and experience, our ability to recruit and retain qualified clinicians, and pricing considerations when a subsidy or contract payment is required. Contracts are typically terminated due to economic considerations, a change in hospital administration or ownership, dissatisfaction with our service offerings or, primarily relating to our military staffing arrangements, at the end of the contract term.
The components of net revenues include revenue from contracts that have been in effect for prior periods (same contracts) and from new and acquired contracts during the periods, as set forth in the table below:
The following table reflects the visits and procedures included within fee for service revenues described in the table above:
Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $1.87 billion for the year ended December 31, 2013 compared to $1.61 billion for the year ended December 31, 2012, an increase of $255.9 million, or 15.9%. The increase between years is attributable to an increase of approximately $208.9 million related to our acquisitions and net new contract growth and $47.0 million associated with increases in the average rates paid per hour of provider service and increased hours of coverage on a same contract basis. Increases in average rates paid reflect wage and benefit increases associated with the provision of clinical services. Professional service expenses as a percentage of net revenues were 78.4% for the year ended December 31, 2013 compared to 77.9% for the year ended December 31, 2012.
Professional Liability Costs. Professional liability costs were $74.2 million in the year ended December 31, 2013 compared to $71.6 million in the year ended December 31, 2012, an increase of $2.6 million or 3.7%. Professional liability costs for the year ended December 31, 2012 included an increase in the discounted carrying value of professional liability reserves related to prior years of $5.2 million. Excluding the actuarial adjustment in 2012 professional liability costs increased $7.8 million, or 11.7%, between years. The increase was primarily attributable to an increase in provider hours due to acquisitions and net contract growth. Excluding the prior year reserve adjustment in 2012, professional liability costs as a percentage of net revenues were 3.1% in 2013 and 3.2% in 2012.
General and Administrative Expenses. General and administrative expenses increased $8.1 million, or 3.7% to $228.9 million for the year ended December 31, 2013 from $220.8 million in the year ended December 31, 2012. Included in the 2013 and 2012 general and administrative expenses are $24.0 million and $36.9 million, respectively, of contingent purchase and other acquisition compensation expense incurred in connection with acquisitions. Excluding these charges, general and administrative expenses increased $21.0 million, or 11.4%, in 2013 from 2012. The increase in general and administrative expense was due primarily to inflationary growth in salaries and new positions, increases in equity compensation, commissions and deferred compensation expenses as well as the impact of recent acquisitions. Total general and administrative expenses as
a percentage of net revenues were 9.6% in 2013 and 10.7% in 2012. Excluding contingent purchase and other acquisition compensation expense, general and administrative expenses as a percentage of net revenues were 8.6% in 2013 and 8.9% in 2012.
Other Income. For the year ended December 31, 2013, we recognized $4.5 million of other income compared to $4.8 million in 2012. The income recognized in 2013 primarily related to the change in the fair value of assets related to our non-qualified deferred compensation plan. The income recognized in 2012 was primarily related to the realized gains on the sale of investments of $2.7 million, and an increase in the fair value of assets held related to the non-qualified deferred compensation plan.
Depreciation. Depreciation expense was $17.1 million in the year ended December 31, 2013 compared to $14.5 million for the year ended December 31, 2012. The increase of $2.6 million was primarily due to capital expenditures in 2013 and 2012.
Amortization. Amortization expense was $37.6 million in the year ended December 31, 2013 compared to $29.8 million for the year ended December 31, 2012. The increase of $7.8 million was result of an increase in other intangibles recognized in connection with our acquisitions in 2013 and 2012.
Interest Expense, Net. Net interest expense decreased $1.4 million to $14.9 million in the year ended December 31, 2013, compared to $16.3 million in 2012. Net interest expense in 2013 was impacted by reduced interest on revolver usage partially offset by increased interest associated with increased term borrowings compared to 2012.
Loss on Refinancing of Debt. In 2012, we recognized a loss of $0.2 million in connection with the refinancing of the term loan facility in November 2012. The loss consists of the write-off of previously deferred financing costs as well as fees and expenses associated with the refinancing.
Transaction Costs. Transaction costs were $3.8 million for the year ended December 31, 2013 compared to $4.4 million for the year ended December 31, 2012. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the respective years.
Earnings Before Income Taxes. Earnings before income taxes in the year ended December 31, 2013 were $143.9 million compared to $104.4 million in 2012.
Provision for Income Taxes. The provision for income taxes was $56.3 million in the year ended December 31, 2013 compared to $40.6 million in 2012. The effective tax rate was 39.1% in 2013 compared to 38.9% in 2012. The increase in the effective tax rate between years was primarily a result of an increase in nondeductible expenses, such as contingent compensation on stock transactions.
Net Earnings. Net earnings were $87.6 million in the year ended December 31, 2013 compared to $63.8 million in the year ended December 31, 2012.
Net Earnings Attributable to Noncontrolling Interests. Earnings attributable to noncontrolling interests were $157,000 for the year ended December 31, 2013 compared to $37,000 for the year ended December 31, 2012.
Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $87.4 million and $63.8 million for the years ended December 31, 2013 and 2012, respectively.
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
Net Revenues Before Provision for Uncollectibles. Net revenues before provision for uncollectibles in the year ended December 31, 2012 increased $597.0 million, or 19.0%, to $3.74 billion from $3.14 billion in the year ended December 31, 2011. The increase in net revenues before provision for uncollectibles resulted primarily from increases in fee for service revenue of $492.1 million, contract revenue of $99.3 million and other revenue of $5.7 million. The increase in fee for service revenue was a result of a 12.1% increase in total fee for service visits and procedures and increases in estimated collections per billed visit. Estimated collections billed per visit increased due to annual increases in gross charges, managed care pricing, increases in average patient acuity levels, and revenue cycle improvements. The increase in contract revenue was due primarily to the impact of new and acquired contracts.
Provision for Uncollectibles. The provision for uncollectibles was $1.67 billion in the year ended December 31, 2012 compared to $1.40 billion in the corresponding period in 2011, an increase of $273.3 million, or 19.6%. The provision for uncollectibles as a percentage of net revenues before provision for uncollectibles were 44.7% in 2012 compared with 44.4% in 2011. The provision for uncollectibles was primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The period over period increase in the provision was due to annual increases in gross fee schedules and increases in patient volume and procedures. Self-pay fee for service visits were approximately 21.5% of the total fee for service visits for each of the years ended December 31, 2012 and 2011.
Net Revenues. Net revenues in the year ended December 31, 2012 increased $323.7 million, or 18.5%, to $2.07 billion from $1.75 billion in the year ended December 31, 2011. Acquisitions contributed 11.0% of our year over year growth, new contracts, net of terminations, contributed an additional 4.0% of growth in net revenues, and same contract revenue contributed 3.5% of the increase in year over year net revenues growth.
Total same contract revenue, which consists of contracts under management that have been in effect for prior periods, increased $61.6 million, or 4.2%, to $1.54 billion in 2012 compared to $1.48 billion in 2011. For the year ended December 31, 2012, same contract revenue benefited from an increase in fee for service volume of 3.1%, which contributed 2.5% of same contract revenue growth between years and increases in estimated collections on fee for service visits of 2.3% which provided approximately 1.5% of same contract growth between periods. Increases in contract and other revenue contributed to same contract revenue growth by 0.2%. The increase in the estimated collections per visit is attributable to annual increases in gross charges, managed care pricing improvements, increases in average patient acuity levels, and ongoing improvements in revenue cycle processes. Acquisitions contributed $191.7 million of growth between periods, while net new contract revenue increased $70.4 million. We typically gain new contracts by replacing competitors at hospitals that currently outsource such services, obtaining new contracts from facilities that do not currently outsource and responding to contracting opportunities within the military healthcare system. Factors influencing new contracting opportunities include the depth and breadth of our service offerings, our reputation and experience, our ability to recruit and retain qualified clinicians, and pricing considerations when a subsidy or contract payment is required. Contracts are typically terminated due to economic considerations, a change in hospital administration or ownership, dissatisfaction with our service offerings or, primarily relating to our military staffing arrangements, at the end of the contract term.
The components of net revenues include revenue from contracts that have been in effect for prior periods (same contracts) and from new and acquired contracts during the periods, as set forth in the table below:
The following table reflects the visits and procedures included within fee for service revenues described in the table above:
Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $1.61 billion in the year ended December 31, 2012 compared to $1.35 billion in the year ended December 31, 2011, an increase of $263.6 million, or 19.6%. The increase between periods is attributable to an increase of approximately $204.3 million related to our acquisitions and net new contract growth and $59.4 million associated with increases in the average rates paid per hour of provider service and increased hours of coverage on a same contract basis. Increases in average rates paid reflect period over period wage and benefit increases associated with the provision of clinical services. Professional service expenses as a percentage of net revenues were 77.9% in the year ended December 31, 2012 compared to 77.2% in the year ended December 31, 2011.
Professional Liability Costs. Professional liability costs were $71.6 million in the year ended December 31, 2012 compared to $66.0 million in the year ended December 31, 2011, an increase of $5.6 million or 8.4%. Professional liability costs for the year ended December 31, 2012 and 2011 included an increase in the discounted carrying value of professional liability reserves related to prior years of $5.2 million and $5.3 million, respectively. Excluding the actuarial adjustments in both periods, professional liability costs increased $5.8 million, or 9.5%, between periods. The increase was primarily attributable to an increase in provider hours due to acquisitions and net contract growth. Excluding the prior year reserve adjustments in each year, professional liability costs as a percentage of net revenues were 3.2% in 2012 and 3.5% in 2011.
General and Administrative Expenses. General and administrative expenses increased $51.7 million, or 30.5% to $220.8 million for the year ended December 31, 2012 from $169.1 million in the year ended December 31, 2011. Included in the 2012 and 2011 general and administrative expenses are $36.9 million and $13.6 million, respectively, of contingent purchase compensation expense incurred in connection with acquisitions. Excluding these charges, general and administrative expenses
increased $28.4 million, or 18.2%, in 2012 from 2011. The increase in general and administrative expense was due primarily to increases in salary and benefit costs, the impact of recent acquisitions and increases in deferred compensation and equity-based compensation costs. Total general and administrative expenses as a percentage of net revenues were 10.7% in 2012 and 9.7% in 2011 and were 8.9% in 2012 and 2011 excluding contingent purchase compensation expense.
Other (Income) Expenses. For the year ended December 31, 2012, we recognized $4.8 million of other income compared to $0.2 million of other expense in 2011. The income recognized in 2012 primarily related to the net realized gains on the sale of investments of $2.7 million, and an increase in the fair value of assets held related to the non-qualified deferred compensation plan compared to a decrease in the fair value of such assets in 2011.
Depreciation. Depreciation expense was $14.5 million in the year ended December 31, 2012 compared to $12.2 million for the year ended December 31, 2011. The increase of $2.3 million between periods was primarily due to higher depreciation expense related to an increase in capital expenditures.
Amortization. Amortization expense was $29.8 million in the year ended December 31, 2012 compared to $17.8 million for the year ended December 31, 2011. The increase of $12.0 million between periods was primarily due to increased amortization expense associated with acquisitions completed in 2011 and 2012.
Interest Expense, Net. Net interest expense increased $3.6 million to $16.3 million in the year ended December 31, 2012, compared to $12.8 million in 2011, primarily due to an increased LIBOR spread on our credit facility compared to the previous credit facility pricing and an increase in interest costs from utilization of the revolver partially offset by a reduction in interest rate hedging and deferred financing costs.
Loss on Refinancing of Debt. In 2012, we recognized a loss of $0.2 million in connection with the refinancing of the term loan facility in November 2012. We recognized a loss of $6.0 million in connection with the refinancing of the term loan facility in 2011. The losses in both years consist of the write-off of previously deferred financing costs as well as certain fees and expenses associated with the refinancings.
Transaction Costs. Transaction costs were $4.4 million for the year ended December 31, 2012 compared to $4.1 million for the year ended December 31, 2011. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the period.
Earnings Before Income Taxes. Earnings before income taxes in the year ended December 31, 2012 were $104.4 million compared to $108.8 million in 2011.
Provision for Income Taxes. The provision for income taxes was $40.6 million in the year ended December 31, 2012 compared to $43.3 million in 2011. The effective tax rate was 38.9% in 2012 compared to 39.8% in 2011. The decrease in the effective tax rate between years was primarily a result of a decrease in state tax liabilities.
Net Earnings. Net earnings were $63.8 million in the year ended December 31, 2012 compared to $65.5 million in the year ended December 31, 2011.
Net Earnings Attributable to Noncontrolling Interests. Earnings attributable to noncontrolling interests were $37,000 for the year ended December 31, 2012.
Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $63.8 million and $65.5 million for the years ended December 31, 2012 and 2011, respectively.
Liquidity and Capital Resources
Our principal ongoing uses of cash are to meet working capital requirements, fund debt obligations and to finance our acquisitions and capital expenditures. We believe that our cash needs, other than for significant acquisitions, will continue to be met through the use of existing available cash, cash flows derived from future operating results and borrowings under our senior secured revolving credit facility.
As of December 31, 2013, we had total cash and cash equivalents of approximately $32.3 million. There are no known liquidity restrictions or impairments on our cash and cash equivalents as of December 31, 2013. Our ongoing cash needs for the year ended December 31, 2013 were met from internally generated operating sources. As of December 31, 2013, there were no amounts outstanding under the revolving credit facility.
Cash provided by operating activities in the year ended December 31, 2013 was $154.4 million compared to $71.6 million in 2012. Contingent purchase price payments of $29.1 million in 2013 and $31.4 million in 2012 were included in cash
provided by operating activities. Also included in cash provided by operating activities in 2012 were $37.3 million in premium payments related to a portfolio loss transfer of specific professional liability reserves to a commercial insurance carrier. Excluding the impact of contingent purchase and portfolio loss transfer payments, operating cash flow in 2013 was $183.5 million compared to $140.2 million in 2012, reflecting an increase of $43.3 million between years. Cash used in investing activities in the year ended December 31, 2013 was $194.1 million compared to $171.9 million in the year ended December 2012. The $22.1 million increase was principally due to a decrease in proceeds from investments by our insurance subsidiary offset by a decrease in cash used for acquisitions. For the years ended December 31, 2013 and 2012, total cash used for acquisitions, including contingent payments reported in cash provided by operating activities, was $188.2 million in 2013 and $199.0 million, in 2012. Cash provided by financing activities in the year ended December 31, 2013 was $30.8 million compared to $131.8 million in the year ended December 31, 2012. The change in cash provided by financing activities was primarily due to proceeds from term debt borrowings related to our November 2012 refinancing and an increase in term debt payments in 2013, partially offset by a decline in payments on the Revolver and an increase in proceeds from stock option exercises in 2013.
We spent $21.4 million in 2013 and $22.0 million in 2012 for capital expenditures. These expenditures were primarily for billing and information technology investments and related development projects along with projects in support of operational initiatives.
On June 29, 2011, we completed the financing of our then new senior secured credit facilities, consisting of a $175.0 million Revolving Credit Facility, a $150.0 million Five-Year Term Loan A Facility (Term Loan A Facility) and a $250.0 million Seven-Year Term Loan B Facility (Term Loan B Facility), with a syndicate of financial institutions. We used borrowings under the credit facilities and existing cash to repay the outstanding balance of $402.7 million under the term loan as well as $7.8 million of fees and expenses associated with the refinancing. In December 2011, under the provisions of the accordion feature of our senior credit agreement, we increased the amount of our revolving credit facility to $225.0 million. On November 1, 2012, we entered into an amendment to our senior secured credit facilities which, among other things, increased our existing Term Loan A Facility from $150.0 million ($140.6 million outstanding at November 1, 2012) to $275.0 million, (2) increased our existing Revolving Credit Facility to $250 million, (3) increased our option to exercise our Incremental Facility for an amount up to the greater of (x) $250 million (increased from $150 million) and (y) an amount such that, after giving pro forma effect to the increase, the first lien leverage ratio does not exceed 3.75:1.00, subject to the consent of lenders and the satisfaction of certain conditions. In addition, the amendment extended the maturities of the Term Loan A Facility and the Revolving Credit Facility from June 29, 2016 to November 1, 2017. The existing $250 million Term Loan B Facility was not subject to the amendment and remains in place with current terms and conditions.
The proceeds from the increased Term A Loan Facility were used to pay $85.0 million that was outstanding under the revolver and accrued interest of $0.6 million, as well as $2.8 million of fees and expenses associated with the amendment. Remaining proceeds of $46.3 million were retained for other general corporate purposes.
As of December 31, 2013, we had $501.6 million in aggregate indebtedness consisting of our Term Loan A Facility and Term Loan B Facility with an additional $250.0 million of borrowing capacity available under our Revolving Credit Facility (without giving effect to $6.1 million of undrawn letters of credit which reduces availability).
Our senior credit facility agreement, as amended, contains both affirmative and negative covenants, including limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business and pay dividends, and require us to comply with a maximum first lien net leverage ratio, tested quarterly. At December 31, 2013, we were in compliance with all covenants under the senior credit facility agreement. The senior credit facility is secured by substantially all of our and our U.S. subsidiaries’ assets.
Subject to any contractual restrictions, we and our subsidiaries or affiliates may from time to time, in their sole discretion, purchase, repay, redeem or retire any of our outstanding equity securities in privately negotiated or open market transactions, by tender offer or otherwise.
We have historically been an acquirer of other physician staffing businesses and related interests. During 2013, total cash used related to acquisitions totaled $188.2 million, which consisted of $159.1 million for the acquisitions reported in investing cash flows and $29.1 million of contingent payments related to prior year acquisitions and other acquisition-related non shareholder payments that were reported in operating cash flows.
For the year ended December 31, 2012, total cash used related to acquisitions totaled $199.0 million consisting of $167.6 million for the acquisitions that were reported in investing cash flows and $31.4 million of contingent payments related to prior year acquisitions that were reported in cash provided by operating activities.
During 2011, total cash used in acquisitions was $141.3 million, which consisted of $125.8 million of payments for the acquisitions that were reported in investing cash flows and $15.5 million of contingent payments on prior year acquisitions reported in cash provided by operating activities.
Generally our acquisitions contain a contingent payment provision that is based on the achievement of certain financial targets. We estimate future contingent payment obligations to be approximately $34.4 million for acquisitions made prior to December 31, 2013, which we expect to fund over a period of three years based upon current projected achievement of defined performance objectives of the acquired operations. $17.5 million was recorded as a liability on our consolidated balance sheet as of December 31, 2013, while the remaining estimated liability of $16.9 million will be recorded as contingent purchase or other acquisition compensation expense over the remaining performance period. In addition, we had a prepaid contingent purchase obligation of $1.8 million that will be amortized as contingent purchase and other acquisition compensation expense over the remaining performance period. See Note 3 of the consolidated financial statements included in this Form 10-K for a detailed discussion of our acquisitions and contingent payment obligations.
We are currently in discussions with certain physician staffing businesses regarding potential acquisition opportunities. If we consummate any of these potential acquisitions, we would expect to fund such acquisitions using our existing cash, or borrowings under our revolving credit facility, or the issuance of new debt or equity.
Effective March 12, 2003, we began providing for professional liability risks in part through a captive insurance company. Prior to such date we insured such risks principally through the commercial insurance market. The change in the professional liability insurance program initially resulted in increased cash flow due to the retention of cash formerly paid out in the form of insurance premiums to a commercial insurance company coupled with a long period (typically 2-4 years or longer on average) before cash payout of such losses occurs. A portion of such cash retained is retained within our captive insurance company and invested and therefore not immediately available for general corporate purposes. As of December 31, 2013, the current value of cash or cash equivalents and related investments held within the captive insurance company totaled $84.1 million. Investments of captive insurance are carried at fair market value and as of December 31, 2013, reflected $0.7 million of net unrealized gains. See Note 9 of the consolidated financial statements included in this Form 10-K for a discussion of the investments held by our captive insurance subsidiary.
Effective June 1, 2013, we renewed our fronting carrier program with a commercial insurance carrier through May 31, 2014. In connection with this renewal, we paid cash premiums of $12.2 million to the commercial insurance carrier. For the year ended December 31, 2013, we funded approximately $38.7 million of premiums to our captive subsidiary.
Effective July 31, 2012, the Company entered into a contract with a commercial reinsurance carrier to provide coverage for professional liability claims for the first $0.5 million of indemnity and allocated expense exposure for such claims. The program provides coverage of net obligations on a reported basis for claims reported between March 12, 2003 and June 1, 2011 but unpaid as of July 31, 2012. It will remain effective until all obligations have been satisfied. Under the terms of the policy, the commercial reinsurance carrier will insure any incurred indemnity up to certain limits per claim based on a 70%/30% quota share. The total commercial reinsurance carrier exposure is subject to a total aggregate limit of 130% of the net premium paid. The total net premium paid for this program was $37.3 million.
The following tables reflect a summary of obligations and commitments outstanding as of December 31, 2013:
We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings attributable to Team Health Holdings, Inc. before interest expense, taxes, depreciation and amortization, as further adjusted to exclude the non-cash items and the other adjustments shown in the table below. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.
Adjusted EBITDA is not a measurement of financial performance or liquidity under generally accepted accounting principles. In evaluating our performance as measured by Adjusted EBITDA, management recognizes and considers the limitations of this measure. Adjusted EBITDA does not reflect certain cash expenses that we are obligated to make, and although depreciation and amortization are non-cash charges, assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles.
The following table sets forth a reconciliation of net earnings attributable Team Health Holdings, Inc. to Adjusted EBITDA.
(a)
Reflects gain or loss on sale of assets, realized gains on investments, and changes in fair value of investments associated with the Company's non-qualified retirement plan in 2011, 2012 and 2013.
(b)
For 2011, reflects the write-off of deferred financing costs of $1,654 from the previous term loan as well as certain fees and expenses associated with the debt refinancing in 2011. For 2012, reflects the write-off of deferred financing costs of $50 from the previous term loan as well as certain fees and expenses associated with the debt amendment in 2012.
(c)
Reflects expense recognized for historical and estimated future contingent payments and other compensation expense activity associated with acquisitions.
(d)
Reflects expenses associated with accounting, legal, due diligence and other transaction fees related to acquisition activities.
(e)
Reflects costs related to options and restricted shares granted under the Team Health Holdings, Inc. 2009 Amended and Restated Stock Incentive Plan.
Inflation
We do not believe that general inflation in the U.S. economy has had a material impact on our financial position or results of operations.
Seasonality
Historically, our revenues and operating results have reflected minimal seasonal variation due to the significance of revenues derived from patient visits to EDs, which are generally open on a 365/366 day basis, and also due to our geographic diversification. However, the timing, severity, and geographical impact of influenza activity within the United States will generally impact fee for service visits and related net revenues. Revenue from our non-ED staffing lines is dependent on a healthcare facility being open during selected time periods. Revenue in such instances will fluctuate depending upon such factors as the number of holidays in the period.
Recently Issued Accounting Standards
See Note 2 of the consolidated financial statements included in this Form 10-K for a discussion of recently issued accounting standards.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes.
Our earnings are affected by changes in short-term interest rates as a result of borrowings under our senior secured credit facilities. Interest rate swap agreements have been used to manage a portion of our interest rate exposure, however, no swap agreements are currently in effect as of December 31, 2013.
At December 31, 2012, the fair value of our total debt approximated the carrying value of $517.8 million. At December 31, 2013, the estimated fair value of the Company’s outstanding debt was $501.1 million compared to a carrying value of $501.6 million. We had $517.8 million of variable debt outstanding at December 31, 2012 and $501.6 million outstanding at December 31, 2013. If the market interest rates for our variable rate borrowings had averaged 1% more subsequent to December 31, 2012 and 2013, our interest expense would have increased, and earnings before income taxes would have decreased, by approximately $3.5 million and $3.2 million, respectively, for the year ended December 31, 2012 and 2013. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could take actions in an attempt to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The financial statements and schedules are listed in Part IV Item 15 of this Form 10-K and are incorporated herein by reference.
Item 9.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired objectives. As of December 31, 2013, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of December 31, 2013, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of its internal control over financial reporting as of December 31, 2013. The assessment was based on criteria established in the framework Internal Control-Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm. Their report appears with the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Item 9B.
Item 9B.
Other Information
Members of the Company’s board of directors and certain employees, including senior executives and others who regularly have access to material non-public information, may enter into trading plans (Plan) designed to comply with the Company’s Securities Trading Policy and the requirements of Rule 10b5-1 promulgated by the Securities and Exchange Commission under Section 10(b) of the Securities Exchange Act of 1934, as amended.
As of December 31, 2013 , Greg Roth, our Chief Executive Officer, had an outstanding Plan for the purpose of long-term asset diversification. His Plan extends through June 15, 2014.
The Company does not undertake to report other Rule 10b5-1 plans that may be adopted by any officers or directors of the Company in the future, or to report any modifications or termination of any publicly announced plan or to report any plan adopted by an employee who is not an executive officer.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated herein by reference from the sections captioned “Proposal No. 1-Election of Directors,” “The Board of Directors and Certain Governance Matters-Committee Membership-Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive proxy statement for the 2014 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2013 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the 2014 Proxy Statement).
Set forth below is information as of January 31, 2014 regarding our executive officers:
Name
Age
Position
Lynn Massingale, M.D.
Executive Chairman and Director
Greg Roth
Chief Executive Officer and Director
Michael D. Snow
President
David P. Jones
Executive Vice President and Chief Financial Officer
Heidi S. Allen
Senior Vice President, General Counsel
Lynn Massingale, M.D., has been a member of our board since November 2005 and was named Executive Chairman in May 2008. Prior to that, Dr. Massingale had been the Chief Executive Officer and director of the Company since 1994 and also held the title of President until October 2004. Dr. Massingale previously served as President and Chief Executive Officer of Southeastern Emergency Physicians, a provider of emergency physician services to hospitals in the Southeast and the predecessor of TeamHealth, Inc., which Dr. Massingale co-founded in 1979. Dr. Massingale served as the director of Emergency Services for the state of Tennessee from 1989 to 1993. Dr. Massingale is a graduate of the University of Tennessee Medical Center for Health Services.
Greg Roth has been a member of our board since May 2008 when he was named Chief Executive Officer. He also served as President of the Company from November 2004 when he joined the Company until April 2013. Prior to joining the Company, Mr. Roth had been employed by HCA-Hospital Corporation of America, a provider of healthcare services, since January 1995. Beginning in July 1998, Mr. Roth served as President of HCA, Ambulatory Surgery Division. Prior to his appointment as President, Mr. Roth served in the capacity of Senior Vice President of Operations, Western Region from May 1997 to July 1998 and the Division’s Chief Financial Officer from January 1995 to May 1997. Prior to these positions, Mr. Roth held various positions in the healthcare industry. On January 9, 2014, the Company announced that Mr. Roth will transition out of his role as Chief Executive Officer of the Company in accordance with the terms of a Transition Services Agreement with the Company.
Michael D. Snow joined the Company as President in April 2013. Throughout his career, Mr. Snow has held numerous executive-level positions in the healthcare arena. Mr. Snow served as President of HCA’s Gulf Coast Division from 1996 to 2004. From 2004 to 2007, Mr. Snow served as Executive Vice President and Chief Operating Officer of HealthSouth Corporation. From 2007 to 2008, Mr. Snow served as President and Chief Executive Officer of Surgical Care Affiliates. Mr. Snow served as President and Chief Executive Officer of Wellmont Health System from 2008 to 2009. From 2010 to 2011, Mr. Snow served as Chief Operating Officer of Amedisys, Inc. Mr. Snow earned his Bachelor of Science degree from the University of Alabama and a Master's Degree in Business Administration from Troy State University.
David P. Jones has been our Chief Financial Officer since May 1996. In November 2010, Mr. Jones assumed the title of Executive Vice President and Chief Financial Officer. From 1994 to 1996, Mr. Jones was our Controller. Prior to that, Mr. Jones worked at Pershing, Yoakley and Associates, a regional healthcare audit and consulting firm, as a Supervisor. Before joining Pershing, Yoakley and Associates, Mr. Jones worked at KPMG Peat Marwick as an Audit Senior. Mr. Jones received a B.S. in Business Administration from the University of Tennessee.
Heidi Solomon Allen joined the Company in June 2008 as Senior Vice President and General Counsel. From February 2003 to June 2008, Ms. Allen was Associate General Counsel, U.S. Litigation and Investigations, for Sanofi, a major global pharmaceutical company. Admitted to and a member in good standing of the legal bars of Tennessee, South Carolina and New Jersey, Ms. Allen has more than 15 years of experience advising corporations on healthcare law, including a position as Associate General Counsel, Head of Litigation, for Blue Cross Blue Shield of New Jersey. She also served as an Assistant
United States Attorney for 11 years. Ms. Allen received a B.A. from the University of Pennsylvania and a J.D. from Rutgers School of Law.
Code of conduct
Information regarding our code of conduct (TeamHealth, Inc. Code of Conduct) applicable to our principal executive officer, our principal financial officer, our controller and other senior financial officers is available on the Investor Relations page of our internet website at www.teamhealth.com. If we ever were to amend or waive any provision of our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations with respect to any such waiver or amendment by posting such information on our internet website set forth above rather than by filing a Form 8-K.
The information required by this Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated herein by reference from the sections captioned “Ownership of Securities” and “Equity Compensation Plan Information” of the 2014 Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference from the section captioned “Transactions with Related Person” and “The Board of Directors and Certain Governance Matters” of the 2014 Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference from the sections captioned “Proposal No. 2-Ratification of Independent Registered Public Accounting Firm” of the 2014 Proxy Statement.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a)
(1) Consolidated Financial Statements of Team Health Holdings, Inc.
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Earnings
Consolidated Statements of Shareholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts of Team Health Holdings, Inc.
The following schedules are omitted as not applicable or not required under the rules of Regulation S-X: I, III, IV and V.
(3) Exhibits
See Exhibit Index following this report, which is incorporated herein by reference.
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2011, 2012 and 2013
CONTENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Team Health Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Team Health Holdings, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive earnings, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Team Health Holdings, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Team Health Holdings, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 13, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 13, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Team Health Holdings, Inc.
We have audited Team Health Holdings, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Team Health Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Team Health Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive earnings, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013 of Team Health Holdings Inc. and our report dated February 13, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 13, 2014
Team Health Holdings, Inc.
Consolidated Balance Sheets
See accompanying notes to the consolidated financial statements.
Team Health Holdings, Inc.
Consolidated Statements of Comprehensive Earnings
See accompanying notes to the consolidated financial statements.
Team Health Holdings, Inc.
Consolidated Statements of Shareholders’ Equity (Deficit)
(In thousands)
See accompanying notes to the consolidated financial statements.
Team Health Holdings, Inc.
Consolidated Statements of Cash Flows
See accompanying notes to the consolidated financial statements.
Team Health Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2013
1. Organization and Basis of Presentation
The Company, as used herein, refers to Team Health Holdings, Inc. and its consolidated subsidiaries. The Company is one of the largest providers of outsourced physician staffing and administrative services to hospitals and other healthcare providers in the United States, based upon revenues and patient visits. We serve approximately 860 civilian and military hospitals, clinics and physician groups in 46 states with a team of more than 9,700 affiliated healthcare professionals including physicians, advanced practice clinicians (consisting of physician assistants, nurse practitioners, and CRNAs), and registered nurses. Since our inception in 1979, we have focused primarily on providing outsourced services to hospital emergency departments, which accounted for 69% of our net revenues in 2013. We also provide comprehensive programs for inpatient care (hospitalists comprising the specialties of internal medicine, orthopedic surgery, general surgery and OB/GYN), anesthesiology, urgent care, pediatrics and other healthcare services, principally within hospitals and other healthcare facilities.
Secondary Offerings
Subsequent to the Company's 2009 initial public offering, its principal shareholder at the time of the offering, Ensemble Parent LLC, an investment fund affiliated with The Blackstone Group L. P. (Ensemble), and certain officers and directors of the Company consummated a series of secondary offerings of the Company's common stock as follows:
•
March 8, 2011 - 8,830,000 shares sold by Ensemble and the Company’s chief financial officer;
•
July 5, 2012 - 9,200,000 shares sold by Ensemble and certain officers and directors. As a result of this offering, the Company ceased to be a "controlled company" within the meaning of Section 303A of the NYSE Listed Company Manual;
•
September 17, 2012 - 8,000,000 shares sold by Ensemble;
•
December 24, 2012 - 8,792,572 shares sold by Ensemble;
•
February 15, 2013 - 9,633,107 shares sold by Ensemble and certain officers and directors. Of the total shares sold in this secondary offering 9,588,990 shares were sold by Ensemble which represented the remainder of its ownership of the Company's common stock.
The Company did not receive any proceeds from the sales of shares in any of these secondary offerings.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States. All intercompany and inter-affiliate accounts and transactions have been eliminated.
The Company consolidates its subsidiaries in accordance with the nominee shareholder model of Accounting Standards Codification (ASC) 810-10-15 (formerly Emerging Issues Task Force (EITF) No. 97-2 “Application of FASB No. 94 and APB Opinion No. 16 to Physician Practice Entities and Certain Other Entities with Contractual Management Arrangements”). The Company’s arrangements with associated professional corporations (PC) are captive in nature as a majority of the outstanding voting equity instruments of the different PCs are owned by a nominee shareholder appointed at the sole discretion of the Company. The Company has a contractual right to transfer the ownership of the PC at any time to any person it designates as the nominee shareholder. This transfer can occur without cause and any cost incurred as a result of the transfer is minimal. There would be no significant impact on the PC or the Company as a result of the transfer of ownership. The Company provides staffing services to its client hospitals through management services agreements between subsidiaries of the Company and the PCs.
Cash and Cash Equivalents
Cash consists primarily of funds on deposit in commercial banks. Cash equivalents are highly liquid investments with maturities of three months or less when acquired.
Marketable Securities
In accordance with ASC 320, “Debt and Equity Securities” (formerly Statement of Financial Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt and Equity Securities,”) management determines the appropriate classification of the Company’s investments at the time of purchase and reevaluates such determination at each balance sheet date. As of December 31, 2012 and 2013, the Company has classified all marketable debt securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive earnings. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recognized in earnings.
Accounts Receivable
Accounts receivable are primarily due from hospitals and clinics, third-party payors, such as insurance companies, government-sponsored healthcare programs, including Medicare and Medicaid, and self-insured employers and patients. Accounts receivable are stated net of reserves for amounts estimated by management to not be collectible. Concentration of credit risk relating to accounts receivable is somewhat limited by the diversity and number of hospitals, patients, payors and by the geographic dispersion of the Company’s operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives, which generally range from 3 to 10 years for furniture and equipment, from 3 to 5 years for software and from 10 to 40 years for buildings and leasehold improvements. Property under capital lease is amortized using the straight-line method over the life of the respective lease and such amortization is included in depreciation expense.
Intangible Assets
The Company’s intangible assets include goodwill and other intangibles that consist primarily of the fair value of service contracts acquired. Goodwill represents the excess of purchase price over the fair value of net assets acquired.
In accordance with the provisions of ASC 350, “Intangibles-Goodwill and other” (formerly SFAS No. 142, Goodwill and Other Intangible Assets) (ASC 350) goodwill and intangible assets deemed to have indefinite lives are not amortized. The cost of service contracts and other intangibles acquired is amortized using the straight-line method over their estimated lives to match the estimated cash flow generated by such assets.
Goodwill is evaluated for possible impairment on an annual basis or more frequently if events and circumstances occur that may indicate the potential for impairment. Goodwill assigned to a reporting unit is evaluated for potential impairment following a two-step procedure. Reporting units as defined by ASC 350 may be operating segments as a whole or an operation one level below an operating segment referred to as a component. The Company has determined that the reporting units used to assess potential goodwill impairment in fiscal year 2013 are the same as the Company's operating segments. The fair value of the reporting unit is calculated by using a weighted average income and market approach and then compared to the carrying amount of the reporting unit. If the carrying value exceeds the fair value of the applicable reporting unit, the implied fair value of the goodwill of the reporting unit is then determined. If it is determined that the implied fair value of the goodwill of the reporting unit is less than the carrying value of goodwill, an impairment loss is recorded equal to such difference.
Historically, goodwill was tested annually for impairment as of December 31 of each fiscal year. Effective in the quarter ended June 30, 2013, the Company voluntarily changed the date of its annual goodwill impairment test to the first day of the fourth quarter. This voluntary change is preferable under the circumstances as it provides the Company with additional time to prepare and complete the impairment test, including measurement of any indicated impairment of goodwill, as necessary, prior to filing of the Form 10-K. This voluntary change in accounting principle was not made to delay, accelerate or avoid an impairment charge. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require the application of significant estimates and assumptions with the use of hindsight. In line with this change, the Company performed the annual goodwill impairment test as of October 1, 2013. Based on the assessment, the Company has determined that for all reporting units no indications of impairment existed.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases the fair value estimates on assumptions believed to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from these estimates.
The carrying value of other finite lived intangibles is evaluated when indicators are present to determine whether such intangibles may be impaired with respect to their recorded values. If this review indicates that certain intangibles will not be recoverable, as determined based on the undiscounted cash flows derived from the assets acquired over the remaining estimated asset life, the carrying value of the intangibles is reduced by the estimated shortfall of discounted cash flows.
Deferred Financing Costs
Deferred financing costs, which are included in other noncurrent assets and are amortized over the term of the related debt using the effective interest method, consisted of the following as of December 31 (in thousands):
Risk Management
Although the Company does not principally engage in the practice of medicine or provide medical services, it does require the physicians with whom it contracts to obtain professional liability insurance coverage and makes this insurance available to these physicians. The Company typically provides claims-made coverage on a per incident and annual aggregate limit per physician to affiliated physicians and other healthcare practitioners. In addition, the Company has claims-made coverage on a per incident basis and annual aggregate limit for all corporate entities.
The Company provides for its professional liability losses principally under a program of self-insurance, including the use of a wholly owned captive insurance company. The Company's estimated losses under the self-insurance program are determined using periodic actuarial estimates of losses and related expenses, adjusted on an interim basis for actual provider hours worked and loss development trends. Any differences between amounts previously recorded and the results of updated actuarial loss estimates of prior periods are recorded in the period when such differences are known.
Professional liability insurance expense consists of premium costs, an accrual to establish reserves for future payments under the self-insured retention component, an accrual to establish a reserve for future claims incurred but not reported, and other administrative costs of operating the insurance program.
Income Taxes
The Company calculates its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects of amounts expensed in the Company’s income statement for which tax deductions will be claimed in future periods.
Although the Company believes taxable income has been properly reported and the taxes have been paid in accordance with applicable laws, federal or state taxing authorities may challenge the Company’s tax positions upon audit. Significant judgment is required in determining and assessing the impact of uncertain tax positions. The Company reports a liability for unrecognized tax benefits from uncertain tax positions taken or expected to be taken in its income tax return. During each reporting period, the Company assesses the facts and circumstances related to uncertain tax positions. If the realization of unrecognized tax benefits is deemed probable based upon new facts and circumstances, the estimated liability and the provision for income taxes are reduced in the current period. Final audit results may vary from the Company’s estimates.
Derivatives
The Company may from time to time utilize derivative financial instruments to reduce interest rate risks. The Company does not hold or issue derivative financial instruments for trading purposes. As of December 31, 2012 and 2013, the Company was not a party to any derivative agreements.
Revenue Recognition
Net revenues before provision for uncollectibles consist of fee for service revenue, contract revenue and other revenue. Net revenues before provision for uncollectibles are recorded in the period services are rendered.
Net revenues before provision for uncollectibles are principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of the Company’s billing arrangements and how net revenues before provision for uncollectibles is recognized for each. A significant portion (85%, 84% and 84% of the Company’s net revenues before provision for uncollectibles in 2011, 2012 and 2013, respectively) resulted from fee for service patient visits. Fee for service revenue represents revenue earned under contracts in which the Company bills and collects the professional component of charges for medical services rendered by the Company’s contracted and employed physicians. Under the fee for service arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. Fee for service revenue is reported net of contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore, reflected as net revenues before provision for uncollectibles in the financial statements. Fee for service revenue is recognized in the period that the services are rendered to specific patients and reduced immediately for the estimated impact of contractual allowances in the case of those patients having third-party payor coverage. The recognition of net revenues before provision for uncollectibles (gross charges less contractual allowances) from such visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to one of the Company’s billing centers for medical coding and entering into the Company’s billing systems and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Net revenues before provision for uncollectibles are recorded based on the information known at the time of entering of such information into the Company’s billing systems as well as an estimate of the net revenues before provision for uncollectibles associated with medical charts for a given service period that have not been processed yet into the Company’s billing systems. The above factors and estimates are subject to change. For example, patient payor information may change following an initial attempt to bill for services due to a change in payor status. Such changes in payor status have an impact on recorded net revenues before provision for uncollectibles due to differing payors being subject to different contractual allowance amounts. Such changes in net revenues before provision for uncollectibles are recognized in the period that such changes in payor become known. Similarly, the actual volume of medical charts not processed into the billing systems may be different from the amounts estimated. Such differences in net revenues before provision for uncollectibles are adjusted in the following month based on actual chart volumes processed.
Contract revenue represents revenue generated under contracts in which the Company provides physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. In these types of arrangements the Company is the principal in the transaction and therefore recognizes contract revenue on a gross basis. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed to hourly rates. Revenue in such cases is recognized as the hours are worked by the Company’s staff. Additionally, contract revenue also includes supplemental revenue from hospitals where the Company may have a fee for service contract arrangement. Contract revenue for the supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either provide for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed, patient visits or actual patient collections compared to a minimum activity threshold. Such supplemental revenues based on variable arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors negotiated in each such arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are determined to be fixed and therefore, contractually obligated as payable by the customer under the terms of the respective agreement.
Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. Generally, such contracts consist of fixed monthly amounts with revenue recognized in the month services are rendered or as hourly consulting fees recognized as revenue as hours are worked in accordance with such arrangements. Additionally, the Company derives a small percentage of revenue from providing administrative and billing services that are contingent upon the collection of third-party physician billings, either by us on their behalf or other third-party billing companies. Such revenues are not considered earned and therefore, not recognized as revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.
Net revenues before provision for uncollectibles are reduced for management’s estimates of amounts that will not be collected. The resulting net revenues reflect net cash collections for services rendered in the period, plus management’s estimate of the remaining collections to be realized for services rendered in the period. Such estimates of amounts to be collected are subject to adjustment as actual experience is realized. If subsequent collections experience indicates that an adjustment to previously recorded collection estimates is necessary, such change of estimate adjustment is recorded in the current period in which such assessment is made.
Management in estimating the amounts to be collected resulting from its approximately eleven million annual fee for service patient visits and procedures considers such factors as prior contract collection experience, current period changes in payor mix and patient acuity indicators, reimbursement rate trends in governmental and private sector insurance programs,
resolution of overprovision account balances, the estimated impact of billing system effectiveness improvement initiatives and trends in collections from self-pay patients and external credit agencies. The complexity of the estimation process associated with the Company’s fee for service volumes and diverse payor mix, along with the difficulty of assessing such factors as changes in the economy impacting the number of healthcare insured versus uninsured patients and other socio-economic trends that can have an impact on collection rates, could result in subsequent material adjustments to previously reported revenues.
The Company derives a significant portion of its net revenues from government sponsored healthcare programs. Estimated net revenues derived from the Medicare program were approximately 17% of total net revenues in both 2011 and 2012 and 16% in 2013. Estimated net revenues derived from the Medicaid program were approximately 11% of total net revenues in 2011, 10% in both 2012 and 2013. In addition, net revenues derived from within the Military Health System (MHS), which is the U.S. military’s dependent healthcare program, and other government agencies was approximately 5% in 2011, 2012 and 2013.
Segment Reporting
The Company provides its services through nine operating segments which are aggregated into two reportable segments, Healthcare Staffing and Other Services. The Healthcare Staffing segment, which is an aggregation of emergency medicine, anesthesia, specialty surgery and locums staffing, provides comprehensive healthcare service programs to users and providers of healthcare services on a fee for service as well as a cost plus or contract basis. The Other Services segment, is an aggregation of hospital medicine, military and government healthcare staffing, clinical services, nurse call center operations, as well as billing, collection and consulting services that provides a range of other comprehensive healthcare services. See Note 21 for financial information of the Company's reportable segments.
Noncontrolling Interests in Consolidated Entity
In November 2012, the Company entered into a joint venture to provide administrative management and billing services to certain existing urgent care clinics the Company operates. As of December 31, 2013, the joint venture partner has contributed a total of $1.1 million to the Company for its 25% interest. The consolidated financial statements include all assets, liabilities, revenues and expenses of the less than 100% owned entity that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of this entity.
Recently Issued Accounting Standards
Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU's) to the FASB's Accounting Standards Codification. The Company considers the applicability and impact of all ASU's. ASU's not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the consolidated financial position or results of operations of the Company.
On January 1, 2013, the Company adopted changes issued by the FASB related to the testing of indefinite-lived intangible assets for impairment, similar to the goodwill changes adopted in October 2011. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. Notwithstanding the adoption of these changes, management plans to proceed directly to the two-step quantitative test for the Company's indefinite-lived intangible assets. The adoption of these changes had no impact on the consolidated financial statements.
On January 1, 2013, the Company adopted changes issued by the FASB to the reporting of amounts reclassified out of accumulated other comprehensive earnings. These changes require an entity to report the effect of significant reclassifications out of accumulated other comprehensive earnings on the respective line items in net earnings if the amount being reclassified is required to be reclassified in its entirety to net earnings. For other amounts that are not required to be reclassified in their entirety to net earnings in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be applied to each component of accumulated other comprehensive earnings. Other than the additional disclosure requirements (see below), the adoption of these changes had no impact on the consolidated financial statements.
The changes in accumulated other comprehensive earnings related to available-for-sale securities and derivative instruments were as follows (in thousands):
(1) This amount was included in Other income on the accompanying Consolidated Statement of Comprehensive Earnings.
(2) These amounts were included in deferred taxes on the Company's Balance Sheet.
(3) A negative amount indicates a corresponding benefit to earnings.
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amends ASC 740, “Income Taxes.” The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and may be applied on either a prospective or retrospective basis. The provisions are effective for the Company’s first quarter of fiscal year ending December 31, 2014. The adoption of these provisions is not expected to have a significant impact on the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
3. Acquisitions and Contingent Purchase Obligations
Acquisitions
During the year ended December 31, 2013, the Company acquired the operations of nine businesses for total net cash proceeds of $159.1 million. On January 31, 2013, the Company completed the acquisition of an emergency medicine staffing business located in Arizona. Effective June 1, 2013, the Company acquired certain assets of a medical staffing group that provides anesthesia staffing services to two hospitals located in Florida. Effective July 1, 2013, the Company completed the acquisition of the operations of three emergency medicine staffing businesses located in New Jersey, Wisconsin and Ohio. On July 29, 2013, the Company completed the acquisition of certain operations of a medical staffing group that provides emergency medicine staffing services to a hospital located in Michigan. On October 11, 2013, the Company completed the acquisition of a physician management and staffing business that provides emergency medicine and hospital medicine services in Kentucky, Indiana, Ohio and West Virginia. On November 8, 2013, the Company
completed the acquisition of an anesthesia group in Florida. On December 20, 2013, the Company completed the acquisition of an anesthesia group in Nebraska. The purchase price for these acquisitions was allocated in accordance with ASC 805, "Business Combinations” (ASC 805), based on management’s estimates, to net assets acquired, including goodwill of approximately $90.7 million (of which $69.8 million is tax deductible goodwill), other intangibles consisting primarily of physician and hospital agreements of approximately $72.8 million and assumed net liabilities of approximately $4.8 million. In addition, certain agreements have a contingent consideration provision pursuant to which, if certain financial or other targets are achieved within a defined performance period, then future cash payments currently estimated to be approximately $16.5 million could be made at the conclusion of the respective performance periods, which will be accounted for as contingent purchase or other acquisition compensation expense over the related performance period.
During the year ended December 31, 2012, the Company acquired the operations of eight businesses for total net cash proceeds of $167.6 million. In April 2012, the Company completed the acquisition of an anesthesia group in New Jersey. In May 2012, the Company completed the acquisition of a physician management and staffing business that provides emergency medicine, hospital medicine, and urgent care in New York, Pennsylvania, Ohio and Texas. On July 1, 2012, the Company completed the acquisition of certain assets of a medical staffing group that provides emergency department staffing services to a hospital located in Virginia. On August 10, 2012, the Company completed the acquisition of a contract physician staffing and management business that provides specialty hospitalist staffing and program management services, including OB-GYN, general surgery, orthopedic and anesthesia services, to hospitals and healthcare systems throughout the United States. On November 1, 2012, the Company completed the acquisition of certain assets of a medical staffing group that provides emergency department staffing services to hospitals located in Alabama. On December 15, 2012, the Company completed the acquisition of certain assets of a medical staffing group that provides emergency department staffing services to hospitals located in Alabama. On December 31, 2012, the Company completed the acquisitions of an anesthesia group in New Jersey and a physician management and staffing business that provides emergency department staffing services to a hospital located in California. The purchase price for these acquisitions was allocated in accordance with the provisions of ASC 805, based on management’s estimates, to net assets acquired, including goodwill of $105.4 million (of which $81.6 million is tax deductible goodwill), other intangibles consisting primarily of physician and hospital agreements of approximately $65.8 million and assumed net liabilities of approximately $7.0 million, including $2.0 million related to a contingent purchase liability recognized at the acquisition date. In addition, the agreements have a contingent consideration provision pursuant to which, if certain financial targets are achieved within a defined performance period, current estimated maximum future cash payments totaling $35.7 million could be made at the conclusion of the respective performance periods.
During the year ended December 31, 2011, the Company acquired the operations of four businesses for total net cash proceeds of $125.8 million. In April 2011, the Company completed the acquisition of certain assets of a medical staffing group that provides emergency department staffing services to a hospital located in Alabama. In September 2011, the Company completed the acquisitions of certain assets and related business operations of an anesthesia staffing business located in Colorado, an emergency medical staffing business located in Illinois and a medical staffing group located in Tennessee. These acquisitions have broadened the Company’s presence within these lines of business. The purchase price for these acquisitions was allocated in accordance with the provisions of ASC 805, based on management’s estimates, to net assets acquired, including goodwill of $57.8 million (all of which is tax deductible goodwill) and intangible assets of approximately $58.8 million and assumed working capital assets and liabilities consisting primarily of accounts receivable of $15.1 million. In addition, the agreements have contingent consideration provisions pursuant to which, if certain financial targets are achieved within a defined performance period, current estimated maximum future cash payments totaling $3.7 million could be made at the conclusion of the respective performance periods.
These acquisitions have expanded the Company’s presence in the markets of the respective acquisitions. The results of operations of the acquired businesses have been included in the Company’s consolidated financial statements beginning on the respective acquisition dates. Pro forma results of operations for acquisitions completed in 2011 have not been presented because the effect of these acquisitions was not material, individually or in the aggregate, to the Company’s consolidated results of operations.
The following unaudited pro forma information combines the consolidated results of operations of the Company and the acquisitions completed during 2012 and 2013 as if the transactions had occurred on January 1, 2011 and 2012 (in thousands, except for per share data):
The pro forma results are based on estimates and assumptions which the Company believes are reasonable and do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of the periods, nor are they indicative of the future results of these combined operations.
Contingent Purchase Obligations
In accordance with ASC 805, when contingent payments are tied to continuing employment, such amounts are recognized ratably over the defined measurement period of each agreement as a component of general and administrative expense in the results of the Company’s operations.
As of December 31, 2013, the Company estimates it may have to pay $34.4 million in future contingent payments for acquisitions made prior to December 31, 2013 based upon the current projected financial performance or anticipated achievement of other targets of the acquired operations. The current estimate of future contingent payments could increase or decrease depending upon the actual performance of the acquisition over the respective measurement period. These payments will be made should the acquired operations achieve the financial targets or certain contract terms as agreed to in the respective acquisition agreements. The contingent purchase and other acquisition compensation expense recognized for the years ended December 31, 2011, 2012 and 2013 was $13.6 million, $36.9 million and $24.0 million, respectively. Included in the expense recognized in 2013 is $0.5 million related to acquisition related payments made to non-owners of the acquired operations. Total estimated future unrecognized contingent purchase and other acquisition compensation expense is $18.7 million as of December 31, 2013.
The changes to the Company's accumulated contingent liability are as follows (in thousands):
The changes to the Company’s prepaid contingent purchase liability for the year ended December 31, 2013 are as follows (in thousands):
Estimated unrecognized contingent purchase and other acquisition compensation expense as of December 31, 2013 is as follows (in thousands):
During 2011, 2012 and 2013, total contingent purchase payments of $15.5 million, $31.4 million and $29.1 million, respectively, were made.
In 2011, 2012 and 2013, the Company recognized transaction costs of $4.1 million, $4.4 million and $3.8 million, respectively which related to costs associated with acquisition activity.
4. Fair Value Measurements
The Company applies the provisions of FASB ASC 820, “Fair Value Measurements and Disclosures,” in determining the fair value of its financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements but rather applies to all other accounting pronouncements that require or permit fair value measurements.
FASB ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3
Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
The following table provides information on those assets and liabilities the Company currently measures at fair value on a recurring basis as of December 31, 2012 and 2013 (in thousands):
The Company’s insurance subsidiary investments are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from readily available pricing sources for comparable investment or identical investments in less active markets. The fair values of the Company’s supplemental employee retirement investments are based on quoted prices. See Note 9 for more information regarding the Company’s investments.
The Company classified its municipal and corporate bonds, agency securities, and U.S. Treasury securities within Level 2 because these securities were valued based on quoted prices in markets that are less active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. As of December 31, 2012 and 2013, the fair value of these investments reflected net unrealized gains of $2.6 million and $0.7 million, respectively.
In addition to the preceding disclosures prescribed by the provisions of ASC 820, ASC 825 “Financial Instruments” (formerly SFAS No. 107 “Disclosures About Fair Value of Financial Instruments”) requires the disclosure of the estimated fair value of financial instruments. The Company’s short term financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
The fair value of the Company’s debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities (Level 2). The estimated fair value of the Company’s outstanding debt as of December 31, 2012 approximated the carrying value of $517.8 million. At December 31, 2013, the estimated fair value of the Company’s outstanding debt was $501.1 million compared to a carrying value of $501.6 million.
5. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during the years ended December 31, 2012 and 2013 were as follows (in thousands):
The following is a summary of other intangible assets and related amortization as of December 31, 2012 and 2013 for intangibles that are subject to amortization (in thousands):
Total amortization expense for other intangibles was $17.8 million, $29.8 million and $37.6 million for the years 2011, 2012 and 2013, respectively.
The estimated annual amortization expense for intangibles for the next five years is as follows (in thousands):
Other intangible assets are amortized straight-line over their estimated life which is approximately three to six years. As of December 31, 2013, the weighted average remaining amortization period for intangible assets was 3.6 years.
6. Property and Equipment
Property and equipment consists of the following at December 31 (in thousands):
Depreciation expense was $12.2 million in 2011, $14.5 million in 2012 and $17.1 million in 2013.
7. Receivables Under Insured Programs
Receivables under insured programs represent the portion of the Company’s reserves for professional liability losses estimated to be reimbursable under commercial insurance company policies. The entities providing professional liability coverage to the Company are creditworthy commercial insurance companies, and the Company believes such receivables are probable of being collected and these companies will be able to fully satisfy their obligations under the insurance contracts.
8. Other Assets
Other assets consist of the following as of December 31 (in thousands):
9. Investments
Investments are comprised of securities held by the Company’s captive insurance subsidiary and by the Company in connection with its participant directed supplemental employee retirement plan. Investments held by the Company’s captive insurance subsidiary are classified as available-for-sale securities. The unrealized gains or losses of investments held by the Company’s captive insurance subsidiary are included in accumulated other comprehensive income as a separate component of shareholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such securities until their full cost can be recovered, in which case such securities are written down to fair value and the loss is charged to current period earnings.
The investments held by the Company in connection with its participant directed supplemental employee retirement plan are classified as trading securities; therefore, changes in fair value associated with these investments are recognized as a component of earnings.
Long term investments represent securities held by the Company’s captive insurance subsidiary. At December 31, 2012 and 2013, amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by investment type were as follows (in thousands):
At December 31, 2012 and 2013, the amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by contractual maturities were as follows (in thousands):
A summary of the Company’s temporarily impaired investment securities available-for-sale as of December 31, 2012 and 2013 follows (in thousands):
(a) Unrealized loss is less than $1,000.
As of December 31, 2012, there were $2.7 million of unrealized gains and $0.1 million of unrealized losses on investments. Through specific identification, there were $2.7 million of realized gains and no realized losses on investments during 2012. As of December 31, 2013, there were $1.6 million of unrealized gains and $0.9 million of unrealized losses on investments. Through specific identification, there were $0.1 million of realized gains and no realized losses on investments sold during 2013.
As of December 31, 2012 and 2013, the investments related to the participant directed supplemental employee retirement plan totaled $20.1 million and $28.5 million , respectively, and are included in other assets in the accompanying consolidated balance sheet. The trading gains and losses on those investments for the year ended on December 31, 2012 and 2013 that are still held by the Company as of December 31, 2012 and 2013 were as follows (in thousands):
In March 2012, the Company made an investment in a variable interest entity that is a provider of hospital-based telemedicine consultations. The Company determined that it is not the primary beneficiary of the entity, as it does not have the power to direct the activities that most significantly impact economic performance of the entity nor the responsibility to absorb a majority of the expected losses and therefore, the entity is not consolidated. The determination of whether the Company is the primary beneficiary was performed at the time of the initial investment and is performed at the date of each subsequent reporting period. This investment is accounted for as a cost method investment, which is classified in other assets in the accompanying consolidated balance sheets and measured at fair value on a nonrecurring basis. The fair value of the Company's cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. As of December 31, 2012 and December 31, 2013, the carrying amount and maximum exposure to loss of this investment was $2.0 million. When measured on a recurring basis, this investment is considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.
10. Other Accrued Liabilities
The Company’s other accrued liabilities consist of the following as of December 31 (in thousands):
11. Long-Term Debt
Long-term debt consists of the following as of December 31 (in thousands):
On June 29, 2011, the Company entered into a new senior secured credit facility, consisting of a $175 million Five-Year Revolving Credit Facility (Revolving Credit Facility), a $150 million Five-Year Term Loan A Facility (Term Loan A Facility) and a $250 million Seven-Year Term Loan B Facility (Term Loan B Facility), with a syndicate of financial institutions. The Company used borrowings under the new credit facility and existing cash to repay $402.7 million of its outstanding term loan as well as fees and expenses associated with the refinancing of $7.8 million of which $4.3 million was recognized as a loss on refinancing of debt in the statement of comprehensive earnings. In addition, the Company also recognized $1.7 million as a loss on refinancing of debt resulting from the write-off of previously recognized deferred financing costs. In December 2011, under the provisions of the accordion feature of the senior credit agreement, the amount of the revolving credit facility was increased to $225.0 million.
On November 1, 2012, the Company entered into an amendment to its senior secured credit facilities which, among other things, (1) increased the existing Term Loan A Facility from $150.0 million ($140.6 million outstanding at November 1, 2012) to $275.0 million, (2) increased the Company's existing Revolving Credit Facility to $250.0 million, (3) increased the Company's option to exercise its Incremental Facility for an amount up to the greater of (x) $250.0 million (increased from $150.0 million) and (y) an amount such that, after giving pro forma effect to the increase, the first lien leverage ratio does not exceed 3.75:1.00, subject to the consent of lenders and the satisfaction of certain conditions, and (4) extended the maturities of the Term Loan A Facility and the Revolving Credit Facility from June 29, 2016 to November 1, 2017. The existing $250.0 million Term Loan B Facility was not subject to the amendment and remains in place with current terms and conditions. The proceeds from the increased Term Loan A Facility were used to pay $85.0 million that was outstanding under the Revolving Credit Facility, fees associated with the refinancing of $2.8 million and accrued interest of $0.6 million. Remaining proceeds of $46.3 million was retained for other general corporate purposes. The Company recognized $0.2 million as a loss on refinancing of debt in connection with the transaction.
The interest rate on any outstanding revolving credit borrowings and Term Loan A Facility, and the commitment fee applicable to undrawn revolving commitments, is priced off a grid based upon the Company’s first lien net leverage ratio and is currently LIBOR + 1.75% in the case of revolving credit borrowings and Term Loan A Facility and 0.35% in the case of unused revolving commitments. The interest rate on the Term Loan B Facility is LIBOR + 2.75%, subject to a 1% LIBOR floor. The interest rate at December 31, 2013 was 1.8% for amounts outstanding under the Term Loan A Facility and 3.8% for the Term Loan B Facility.
There were no borrowings under the Revolving Credit Facility as of December 31, 2013, and the Company had $6.1 million of standby letters of credit outstanding against the Revolving Credit Facility commitment.
The senior credit facility agreement, as amended, contains both affirmative and negative covenants, including limitations on the Company’s ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire the Company's capital stock, acquire the capital stock or assets of another business and pay dividends, and requires the Company to
comply with a maximum first lien net leverage ratio, tested quarterly. At December 31, 2013, the Company was in compliance with all covenants under the senior credit facility agreement. The credit facility is secured by substantially all of the Company’s U. S. subsidiaries’ assets.
Aggregate annual maturities of long-term debt as of December 31, 2013 are as follows (in thousands):
12. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following as of December 31 (in thousands):
The Company’s professional liability loss reserves consist of the following as of December 31 (in thousands):
The changes to the Company’s estimated losses under self-insured programs for 2012 and 2013 are as follows (in thousands):
The Company provides for its estimated professional liability losses through a combination of self-insurance and commercial insurance programs. Losses in excess of the limit of coverage remain as a self-insured obligation of the Company. A portion of the professional liability loss risks being provided for through self-insurance (“claims-made” basis) are transferred to and funded into a captive insurance company. The accounts of the captive insurance company are fully consolidated with those of the other operations of the Company in the accompanying consolidated financial statements.
The self-insurance components of our risk management program include reserves for future claims incurred but not reported (“IBNR”). As of December 31, 2012, of the $145.0 million of estimated losses under self-insured programs, approximately $94.2 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $50.8 million representing specific case reserves. Of the existing case reserves as of December 31, 2012, $2.8 million represented case reserves that had settled but not yet funded, and $48.0 million reflected unsettled case reserves.
As of December 31, 2013, of the $166.2 million of estimated losses under self-insurance programs, approximately $100.2 million represents an estimate of IBNR claims and expenses and additional loss development, with the remaining $66.0 million representing specific case reserves. Of the existing case reserves as of December 31, 2013, $2.4 million represents case reserves that have been settled but not yet funded, and $63.6 million reflects unsettled case reserves.
The Company’s provisions for losses under its self-insurance components are estimated using the results of periodic actuarial studies. Such actuarial studies include numerous underlying estimates and assumptions, including assumptions as to future claim losses, the severity and frequency of such projected losses, loss development factors and others. Based on the results of the 2013 semi-annual actuarial studies completed in April 2013 and October 2013, management determined no change was necessary in the consolidated reserves for professional liability losses related to prior year loss estimates. During the first quarter of 2012, the Company recorded an unfavorable adjustment to prior year professional liability reserves of $5.2 million of which $4.4 million was related to a change in the discount rate used by the Company for calculating its professional liability reserves. During the first quarter of 2012, the Company adopted a discount factor based upon the weighted average US Treasury rates over a 10 year period. Prior to this change, the Company used the 10 year Treasury rate as a discount factor. The remaining $0.7 million of the prior year liability loss reserve change related to unfavorable development on prior year loss estimates. The Company’s provisions for losses under its self-insured components are subject to subsequent adjustment should future actuarial projected results for such periods indicate projected losses greater or less than previously projected. The Company’s estimated loss reserves under such programs are discounted at approximately 0.7% and 1.4% at December 31, 2012 and 2013, respectively, which was the current ten year U.S. Treasury rate at December 31, 2012 and the current weighted average Treasury rate, over a 10 year period at December 31, 2013, which reflects the risk free interest rate over the expected period of claims payments.
Loss Portfolio Transfer
Effective July 31, 2012, the Company entered into a contract with a commercial reinsurance carrier to provide coverage for professional liability claims for the first $0.5 million of indemnity and allocated expense exposure for such claims. The program provides coverage of net obligations on a reported basis for claims reported between March 12, 2003 and June 1, 2011 but unpaid as of July 31, 2012. It will remain effective until all obligations have been satisfied. Under the terms of the policy, the commercial reinsurance carrier will insure any incurred indemnity up to certain limits per claim based on a 70%/30% quota share. The total commercial reinsurance carrier exposure is subject to a total aggregate limit of 130% of premium paid. The total net premium paid for this program was $37.3 million.
13. Shareholders’ Equity
Authorized capitalization of Team Health Holdings, Inc.
Authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share and 10,000,000 shares of preferred stock, par value $0.01 per share. Total number of outstanding common shares was 67,763,000 and 70,016,000 as of December 31, 2012 and December 31, 2013, respectively. There were no shares of preferred stock outstanding as of December 31, 2012 or 2013.
Common stock
Voting rights. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. The holders of common stock do not have cumulative voting rights in the election of directors.
Dividend rights. Holders of common stock are entitled to receive dividends ratably if, as and when dividends are declared from time to time by our Board out of funds legally available for that purpose, after payment of dividends required to be paid on outstanding preferred stock, as described below, if any. The amounts available to pay cash dividends are restricted by the Company’s debt agreements. The credit facilities and the indenture impose restrictions on the Company’s ability to declare dividends with respect to its common stock. Any decision to declare and pay dividends in the future will be made at the discretion of the Board and will depend on, among other things, the Company’s results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Board may deem relevant.
Liquidation rights. Upon liquidation, dissolution or winding up, the holders of common stock are entitled to receive ratably the assets available for distribution to the shareholders after payment of liabilities and liquidation preferences on any outstanding preferred stock.
Other matters. The common stock has no preemptive or conversion rights and is not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the common stock.
Preferred stock
The Company’s certificate of incorporation authorizes its Board to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms and rights of that series, including:
•
the designation of the series;
•
the number of shares of the series, which the board may, except where otherwise provided in the preferred stock designation, increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares then outstanding);
•
whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;
•
the dates at which dividends, if any, will be payable;
•
the redemption rights and price or prices, if any, for shares of the series;
•
the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;
•
the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of our company;
•
whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation, and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made;
•
restrictions on the issuance of shares of the same series or of any other class or series; and
•
the voting rights, if any, of the holders of the series.
Compensation of directors
No officers of the Company or any of its subsidiaries receive any compensation for serving as a director or as a member or chair of a committee of the board of directors.
14. Equity-based Compensation
2009 Stock Incentive Plan
In May 2013, the Company's shareholders approved the Team Health Holdings, Inc. Amended and Restated 2009 Stock Incentive Plan (Stock Plan) that amended the 2009 Stock Incentive Plan.
Purpose. The purpose of the Team Health Holdings, Inc. Amended Stock Plan is to aid in recruiting and retaining key employees, directors, consultants, and other service providers of outstanding ability and to motivate those employees, directors, consultants, and other service providers to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of options, stock appreciation rights and other stock-based awards.
Shares Subject to the Plan. The Stock Plan provides that the total number of shares of common stock that may be issued under the 2009 Stock Plan is 15,100,000. Shares of the Company’s common stock covered by awards that terminate or lapse without the payment of consideration may be granted again under the Stock Plan.
The following table summarizes the status of options under the Stock Plan as of December 31, 2011, 2012 and 2013:
(1)Intrinsic value is the amount by which the stock price exceeds the exercise price of the options on the option exercise date or the balance sheet date.
For the year ended December 31, 2011, the Company recognized equity-based compensation of $3.9 million. As of December 31, 2011, the Company had $15.5 million of unrecognized compensation expense related to unvested options which will be recognized over the remaining requisite service period. Fair value of the options granted was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 2.1%, implied volatility of 36.3% and an expected life of the options of 6.25 years. Forfeitures of equity-based awards have been historically immaterial to the Company. The weighted-average estimated fair value of options granted during 2011 was $8.45 and the fair value of options vested during the year was $3.2 million.
For the year ended December 31, 2012, the Company recognized equity-based compensation of $6.4 million. As of December 31, 2012, the Company had $20.3 million of unrecognized compensation expense related to unvested options which will be recognized over the remaining requisite service period. Fair value of the options granted was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 1.0%, implied volatility of 38.9% and an expected life of the options of 6.25 years. Forfeitures of equity-based awards have been historically immaterial to the Company. The weighted-average estimated fair value of options granted during 2012 was $8.68 and the fair value of options vested during the year was $6.4 million.
For the year ended December 31, 2013, the Company recognized equity-based compensation of $8.3 million. As of December 31, 2013, the Company had $18.4 million of unrecognized compensation expense related to unvested options which will be recognized over the remaining requisite service period. Fair value of the options granted was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 1.0%, implied volatility of 41.0% and an expected life of the options of 5.25 years. Forfeitures of equity-based awards have been historically immaterial to the Company. The weighted-average estimated fair value of options granted during 2013 was $20.82 and the fair value of options vested during the year was $9.0 million.
The Company has also granted a total of 312,000 shares of restricted stock, including 256,000 shares during the year ended December 31, 2013, to its non-employee directors and management. The issued shares vest annually over a three-year period for the grants made to the independent directors and a four-year period for the grants made to management from the initial grant date. The Company recorded restricted stock expense of $0.2 million, $0.3 million and $1.5 million during 2011, 2012 and 2013, respectively, and has $6.9 million of expense remaining to be recognized over the requisite service period for these awards as of December 31, 2013.
A summary of changes in unvested shares of restricted stock is as follows (in thousands):
Stock Purchase Plans
In May 2010, the Company’s board of directors adopted the 2010 Employee Stock Purchase Plan (ESPP) and the 2010 Nonqualified Stock Purchase Plan (NQSPP).
The ESPP provides for the issuance of up to 600,000 shares to our employees. All eligible employees are granted identical rights to purchase common stock in each Board authorized offering under the ESPP. Rights granted pursuant to any offering under the ESPP terminate immediately upon cessation of an employee’s employment for any reason. In general, an employee may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 5% discount on shares purchased under the ESPP. Rights granted under the plan are not transferable and may be exercised only by the person to whom such rights are granted. Offerings will occur every six months in October and April. As of December 31, 2013, contributions under the ESPP totaled $0.7 million. During 2013, approximately 53,000 shares of the Company’s common stock were issued to plan participants.
The NQSPP provides for the issuance of up to 800,000 shares to our independent contractors. All eligible contractors are granted identical rights to purchase common stock in each Board authorized offering under the NQSPP. Rights granted pursuant to any offering under the NQSPP terminate immediately upon cessation of a contractor’s relationship with the Company for any reason. In general, a contractor may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Contractors receive a 5% discount on shares purchased under the NQSPP. Rights granted under the NQSPP are not transferable and may be exercised only by the person to whom such rights are granted. Offerings will occur every six months in October and April. As of December 31, 2013, contributions under the NQSPP totaled $0.4 million. During 2013, approximately 32,000 shares of the Company’s common stock were issued to plan participants.
15. Net Revenues
Net revenues consists of fee for service revenue, contract revenue and other revenue. The Company’s net revenues are principally derived from the provision of healthcare staffing services to patients within healthcare facilities and is recorded in the period the services are rendered. Under the fee for service arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. Fee for service revenue reflects gross fee for service charges less contractual allowances and policy discounts, where applicable. Contractual adjustments represent the Company’s estimate of discounts and other adjustments to be recognized from gross fee for service charges under contractual payment arrangements, primarily with commercial, managed care and governmental payment plans such as Medicare and Medicaid when the Company’s providers participate in such plans. Contractual adjustments are not reflected in self-pay fee for service revenue. Contract revenue represents revenue generated under contracts in which the Company provides physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-to hourly rates. Revenue in such cases is recognized as the hours are worked by the Company’s affiliated staff and contractors. Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. The Company also records a provision for uncollectible accounts based primarily on historical collection experience to record accounts receivables at the estimated amounts expected to be collected.
Net revenues for the years ended December 31, 2011, 2012 and 2013 consisted of the following (in thousands):
The Company employs several methodologies for determining its allowance for doubtful accounts depending on the nature of the net revenues before provision for uncollectibles recognized. The Company initially determines gross revenue for our fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in net revenues before provision for uncollectibles. Net revenues before provision for uncollectibles is then reduced for management’s estimate of uncollectible amounts. Fee for service net revenues represent estimated cash to be collected from such patient visits and are net of management’s estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately eleven million million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each fee for service contract by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by the Company’s billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenues are billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon specific accounts and invoice periodic reviews once it is concluded that such amounts are not likely to be collected. Approximately 98% of the Company’s allowance for doubtful accounts is related to receivables for fee for service patient visits. The principal exposure for uncollectible fee for service visits is centered in self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance. While the Company does not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of December 31, 2013 was equal to approximately 92% of outstanding self-pay fee for service patient accounts. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2012 and 2013.
16. Income Taxes
The provision (benefits) for income taxes from continuing operations consists of the following (in thousands):
The reconciliation of the provision for income taxes computed at the federal statutory tax rate to the provision for income taxes is as follows:
During 2013, the Company determined that the income tax accounting for equity based compensation was applied incorrectly to options granted prior to December 31, 2009. These options were issued at the time of the Company's 2009 initial public offering in conjunction with the conversion of equity units. In accordance with ASC 718, "Compensation - Stock Compensation," the Company has adjusted additional paid-in-capital for the additional tax benefit associated with the excess tax deduction over the book expense. The Company considers the adjustments an immaterial correction of an error.
The effect of these immaterial adjustments on the consolidated balance sheet as of December 31, 2012, as previously reported, is as follows (in thousands):
The effect of these immaterial adjustments on the consolidated statements of shareholders' equity (deficit) for the years ended December 31, 2010, 2011, and 2012, as previously reported, is as follows (in thousands):
The effect of these immaterial adjustments on the tax benefit related to exercise of stock options on the statements of shareholders' equity (deficit) for the years ended December 31, 2011 and 2012, as previously reported, is as follows (in thousands):
The effect of these immaterial adjustments on the consolidated statements of cash flows for the years ended December 31, 2011 and 2012, as previously reported, is as follows (in thousands):
The effect of these immaterial adjustments on the general corporate total assets balance and total assets balance noted in footnote 21, Segment Reporting, for the years ended December 31, 2011 and 2012, as previously reported, is as follows (in thousands):
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows at December 31 (in thousands):
The Company recognizes valuation allowances on deferred tax assets reported, if based on the weight of evidence, it believes that it is more likely than not that all or a portion of the deferred tax assets will not be realized. As of December 31, 2012 and 2013, the Company had a valuation allowance of $10.0 million and $8.7 million, respectively. The net decrease in the valuation allowance was the result of the implementation of planning opportunities for utilization of state net operating losses.
The Company, as of December 31, 2013, had net operating loss carryforwards in various states that expire at various times depending on the year generated and jurisdiction, the earliest expiration year being 2014.
The Company files a consolidated income tax return in the U.S. federal jurisdiction and in various states for its subsidiaries and remains subject to examination of its income tax returns for 2010 through 2013.
In addition, the Company generally remains subject to examination of its various state returns for a period of three or four years from the date the returns were filed. A number of years may pass before an uncertain tax position, for which we have unrecognized benefits, is audited and resolved. It is difficult to predict the outcome for resolution; however, management believes that the unrecognized tax benefits recorded reflect the most likely outcome.
A reconciliation of the beginning and ending amount of unrecognized tax benefit (excluding interest and penalties) is as follows (in thousands):
The total unrecognized tax benefits that, if recognized, would affect the effective rate is $3.0 million as it relates to uncertainties that are permanent deductions. The Company expects a majority of the unrecognized tax benefits to be settled in 2014.
The Company recognizes accrued interest and penalties, if applicable, associated with uncertain tax positions in the respective accounts in operating expenses. During the year ended December 31, 2013, the Company reported $44,000 in additional interest expense related to the uncertain tax positions and no penalties.
17. Employee Savings Plans
The Company sponsors various employee savings plans that are primarily defined contribution plans. The Company recognized expense of approximately $4.1 million in 2011, $6.3 million in 2012 and $5.8 million in 2013 related to these plans.
The Company maintains a retirement savings plan for its employees. The plan is a defined contribution plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan provides for a discretionary match by the Company up to a maximum of 50% of the first 6% of compensation contributed by employees. The Company’s provisions in the periods comprising 2011, 2012 and 2013 reflect the maximum discretionary provisions provided for under the plan.
The Company also maintains non-qualified deferred compensation plans for certain of its employees. Total deferred compensation payable as of December 31, 2012 and 2013 was approximately $23.5 million and $31.7 million, respectively.
18. Commitments and Contingencies
Leases
The Company leases office space for terms of primarily one to fourteen years with options to renew for additional periods. Future minimum payments due on these non-cancellable operating leases at December 31, 2013 are as follows (in thousands):
Operating lease costs were approximately $10.8 million, $13.8 million and $15.4 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Litigation
We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material
adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.
On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Company’s services at hospitals that are affiliated with Health Management Associates, Inc. (HMA) and any of HMA’s affiliates. The Company intends to cooperate with the government in its investigation and is in the process of responding to the government’s request.
Healthcare Regulatory Matters
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action. From time to time, governmental regulatory agencies will conduct inquiries and audits of the Company’s practices. It is the Company’s current practice and future intent to cooperate fully with such inquiries.
In addition to laws and regulations governing the Medicare and Medicaid programs, there are a number of federal and state laws and regulations governing such matters as the corporate practice of medicine and fee splitting arrangements, anti-kickback statutes, physician self-referral laws, false or fraudulent claims filing and patient privacy requirements. The failure to comply with any of such laws or regulations could have an adverse impact on our operations and financial results. It is management’s belief that the Company is in substantial compliance in all material respects with such laws and regulations.
19. Related Party Transactions
The Company leases office space from several partnerships that are partially or entirely owned by certain employees of the Company. The leases were assumed by the Company as part of a merger or purchase transaction. Total related party lease costs were approximately $0.4 million in 2011, $2.4 million in 2012 and $3.6 million in 2013. In addition, the Company purchased approximately $0.1 million and $0.1 million of medical supplies in 2012 and 2013, respectively, from a company that is partially owned by a member of management.
20. Quarterly Financial Information (unaudited)
Selected unaudited quarterly financial information for the years ended December 31, 2012 and 2013 is as follows (in thousands, except per share amounts):
21. Segment Reporting
During the fourth quarter of 2012 the Company completed certain changes to its management reporting structure to better align its businesses with Company objectives and operating strategies. These changes resulted in changes in the Company's operating and reportable segments. In connection with the changes, the Company determined, in accordance with segment reporting guidance, that it provides services through nine operating segments which are aggregated into two reportable segments, Healthcare Staffing and Other Services. The Healthcare Staffing segment, which is an aggregation of emergency medicine, anesthesia, specialty surgery and locums staffing, provides comprehensive healthcare service programs to users and providers of healthcare services on a fee for service as well as a cost plus or contract basis. The Other Services segment, is an aggregation of hospital medicine, military and government healthcare staffing, clinical services, nurse call center operations, as well as billing, collection and consulting services that provides a range of other comprehensive healthcare services. The operating segments included in the Other Services reportable segment, while similar in the types of services provided by those operating segments included in the Healthcare Staffing segment, do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation. The changes in the reportable segments and underlying operating segments did not result in any goodwill impairment charges in the fourth quarter of 2012. The 2011 segment results have been restated to conform to the current year reporting of these businesses.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenues, where intercompany charges have been eliminated. Certain expenses are not allocated to the segments. These unallocated expenses are corporate expenses, net interest expense, depreciation and amortization, transaction costs and income taxes. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.
The following table presents financial information for each reportable segment. Depreciation, amortization, management fee and other expenses separately identified in the consolidated statements of operations are included as a reduction to the respective segments’ operating earnings for each year below (in thousands):
Note 22. Earnings Per Share
The Company computes basic earnings per share of Team Health Holdings, Inc. using the weighted average number of shares outstanding. The Company computes diluted earnings per share of Team Health Holdings, Inc. using the weighted average number of shares outstanding plus the dilutive effect of restricted common shares and outstanding stock options. The following table sets forth the computation of basic and diluted earnings per share of Team Health Holdings, Inc. for each year below (in thousands, except per share amounts):
Item 15(a)
Team Health Holdings, Inc.
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 31,
(In thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TEAM HEALTH HOLDINGS, INC.
By:
/S/ GREG ROTH
Greg Roth
Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2014
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Greg Roth, Michael Snow, David P. Jones and Heidi S. Allen, and each of them, as his or her true and lawful attorneys-in-fact and agents, with power to act with or without the others and with full power of substitution and resubstitution, to do any and all acts and things and to execute any and all instruments which said attorneys and agents and each of them may deem necessary or desirable to enable the registrant to comply with the U.S. Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the U.S. Securities and Exchange Commission thereunder in connection with the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the Annual Report), including specifically, but without limiting the generality of the foregoing, power and authority to sign the name of the registrant and the name of the undersigned, individually and in his or her capacity as a director or officer of the registrant, to the Annual Report as filed with the U.S. Securities and Exchange Commission, to any and all amendments thereto, and to any and all instruments or documents filed as part thereof or in connection therewith; and each of the undersigned hereby ratifies and confirms all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 13, 2014, by the following persons on behalf of the registrant and in the capacities indicated.
TEAM HEALTH HOLDINGS, INC.
By:
/s/ GREG ROTH
Greg Roth
Chief Executive Officer and Director
(Principal Executive Officer)
By:
/s/ DAVID P. JONES
David P. Jones
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
By:
/s/ H. LYNN MASSINGALE, M. D.
H. Lynn Massingale, M.D.
Executive Chairman and Director
By:
/s/ JAMES L. BIERMAN
James L. Bierman
Director
By:
/s/ GLENN A. DAVENPORT
Glenn A. Davenport
Director
By:
/s/ MARY R. GREALY
Mary R. Grealy
Director
By:
/s/ VICKY B. GREGG
Vicky B. Gregg
Director
By:
/s/ JOSEPH L. HERRING
Joseph L. Herring
Director
By:
/s/ NEIL M. KURTZ, M.D.
Neil M. Kurtz, M.D.
Director
By:
/s/ NEIL P. SIMPKINS
Neil P. Simpkins
Director
EXHIBIT INDEX
*
Management contracts or compensatory plans or arrangements