LifePoint Hospitals, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-51251
(Exact name of registrant as
specified in its charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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20-1538254
(I.R.S. Employer
Identification No.)
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103 Powell Court, Suite 200
Brentwood, Tennessee
(Address of Principal
Executive Offices)
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37027
(Zip
Code)
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(615) 372-8500
(Registrants Telephone
Number, Including Area Code)
Not Applicable
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in the
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of April 21, 2008, the number of outstanding shares of
Common Stock of LifePoint Hospitals, Inc. was 54,205,946.
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share amounts)
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Three Months Ended
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March 31,
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2007
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2008
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Revenues
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$
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661.2
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$
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699.9
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Salaries and benefits
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256.8
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275.4
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Supplies
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92.2
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95.5
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Other operating expenses
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114.6
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125.3
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Provision for doubtful accounts
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73.1
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82.7
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Depreciation and amortization
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32.5
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33.3
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Interest expense, net
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26.4
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22.5
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595.6
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634.7
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Income from continuing operations before minority interests and
income taxes
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65.6
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65.2
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Minority interests in earnings of consolidated entities
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0.3
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0.7
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Income from continuing operations before income taxes
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65.3
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64.5
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Provision for income taxes
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26.5
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24.8
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Income from continuing operations
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38.8
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39.7
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Discontinued operations, net of income taxes:
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Loss from discontinued operations
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(1.0
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)
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(0.2
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)
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Impairment (charge) adjustment
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(7.9
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)
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2.3
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Loss on sale of hospitals
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(0.1
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)
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(Loss) income from discontinued operations
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(9.0
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)
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2.1
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Net income
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$
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29.8
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$
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41.8
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Basic earnings (loss) per share:
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Continuing operations
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$
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0.69
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$
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0.73
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Discontinued operations
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(0.16
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)
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0.04
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Net income
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$
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0.53
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$
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0.77
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Diluted earnings (loss) per share:
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Continuing operations
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$
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0.68
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$
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0.72
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Discontinued operations
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(0.15
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)
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0.04
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Net income
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$
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0.53
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$
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0.76
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Weighted average shares and dilutive securities outstanding:
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Basic
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55.8
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54.1
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Diluted
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56.8
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55.2
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See accompanying notes.
3
LIFEPOINT
HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
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December 31,
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March 31,
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2007(1)
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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53.1
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$
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32.9
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Accounts receivable, less allowances for doubtful accounts of
$376.3 and $389.0 at December 31, 2007 and March 31,
2008, respectively
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304.5
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318.3
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Inventories
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69.3
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69.0
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Prepaid expenses
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12.4
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14.4
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Income taxes receivable
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27.9
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3.9
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Deferred tax assets
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113.6
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124.5
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Other current assets
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20.6
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21.0
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601.4
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584.0
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Property and equipment:
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Land
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72.8
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72.7
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Buildings and improvements
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1,219.6
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1,237.3
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Equipment
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674.1
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693.1
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Construction in progress (estimated cost to complete and equip
after March 31, 2008 is $89.7)
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34.1
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22.3
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2,000.6
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2,025.4
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Accumulated depreciation
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(582.9
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)
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(612.7
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)
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1,417.7
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1,412.7
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Deferred loan costs, net
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38.6
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36.8
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Intangible assets, net
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52.4
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57.3
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Other
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4.4
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4.3
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Goodwill
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1,512.0
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1,512.0
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$
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3,626.5
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$
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3,607.1
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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95.6
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$
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96.3
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Accrued salaries
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66.7
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66.5
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Other current liabilities
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98.7
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90.0
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Current maturities of long-term debt
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0.5
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0.5
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261.5
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253.3
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Long-term debt
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1,516.9
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1,516.6
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Deferred income taxes
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113.2
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103.3
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Professional and general liability claims and other liabilities
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120.0
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140.0
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Long-term income tax liability
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55.5
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70.9
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Minority interests in equity of consolidated entities
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15.2
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15.6
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Stockholders equity:
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Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued
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Common stock, $0.01 par value; 90,000,000 shares
authorized; 58,101,477 and 58,570,912 shares issued at
December 31, 2007 and March 31, 2008, respectively
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0.6
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0.6
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Capital in excess of par value
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1,084.9
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1,092.7
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Unearned ESOP compensation
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(3.1
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)
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(2.3
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)
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Accumulated other comprehensive loss
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(19.8
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)
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(31.6
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)
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Retained earnings
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522.8
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564.6
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Common stock in treasury, at cost, 1,356,487 and
4,354,267 shares at December 31, 2007 and
March 31, 2008, respectively
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(41.2
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)
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(116.6
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)
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1,544.2
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1,507.4
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$
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3,626.5
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$
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3,607.1
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(1) |
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Derived from audited financial statements. |
See accompanying notes.
4
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
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Three Months Ended
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March 31,
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2007
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2008
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Cash flows from operating activities:
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|
|
|
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Net income
|
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$
|
29.8
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|
|
$
|
41.8
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
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Loss (income) from discontinued operations
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9.0
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|
|
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(2.1
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)
|
Stock-based compensation
|
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|
3.6
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6.4
|
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ESOP expense (non-cash portion)
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2.2
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|
|
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1.8
|
|
Depreciation and amortization
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32.5
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|
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33.3
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Amortization of deferred loan costs
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1.3
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1.8
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Minority interests in earnings of consolidated entities
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0.3
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|
|
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0.7
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Deferred income taxes (benefit)
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|
(18.4
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)
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1.3
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Reserve for professional and general liability claims, net
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(0.5
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)
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1.1
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Increase (decrease) in cash from operating assets and
liabilities, net of effects from divestitures:
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Accounts receivable
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(7.5
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)
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(8.6
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)
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Inventories and other current assets
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(11.2
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)
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(3.2
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)
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Accounts payable and accrued expenses
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(33.2
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)
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3.8
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Income taxes payable/receivable
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42.3
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22.6
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Other
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1.2
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4.4
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Net cash provided by operating activities continuing
operations
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51.4
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105.1
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Net cash provided by (used in) operating activities
discontinued operations
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12.4
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(4.1
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)
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Net cash provided by operating activities
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63.8
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101.0
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Cash flows from investing activities:
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Purchase of property and equipment
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(31.7
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)
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(33.4
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)
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Other
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(0.2
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)
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(0.3
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)
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Net cash used in investing activities continuing
operations
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|
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(31.9
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)
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(33.7
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)
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Net cash used in investing activities discontinued
operations
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|
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(0.2
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)
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|
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
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|
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(32.1
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)
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|
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(33.7
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)
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Cash flows from financing activities:
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Proceeds from borrowings
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40.0
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|
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|
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Payments of borrowings
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|
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(52.4
|
)
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|
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Proceeds from exercise of stock options
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1.0
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|
|
|
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Proceeds from employee stock purchase plans
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|
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0.7
|
|
|
|
0.4
|
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Purchases of treasury stock
|
|
|
|
|
|
|
(87.6
|
)
|
Other
|
|
|
(0.3
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)
|
|
|
(0.3
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)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11.0
|
)
|
|
|
(87.5
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)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
20.7
|
|
|
|
(20.2
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)
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Cash and cash equivalents at beginning of period
|
|
|
12.2
|
|
|
|
53.1
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
32.9
|
|
|
$
|
32.9
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
28.8
|
|
|
$
|
17.1
|
|
|
|
|
|
|
|
|
|
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Capitalized interest
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
2.4
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2008
Unaudited
(In millions)
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Accumulated
|
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Capital in
|
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Unearned
|
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Other
|
|
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Common Stock
|
|
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Excess of
|
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|
ESOP
|
|
|
Comprehensive
|
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Retained
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
56.7
|
|
|
$
|
0.6
|
|
|
$
|
1,084.9
|
|
|
$
|
(3.1
|
)
|
|
$
|
(19.8
|
)
|
|
$
|
522.8
|
|
|
$
|
(41.2
|
)
|
|
$
|
1,544.2
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.8
|
|
|
|
|
|
|
|
41.8
|
|
|
|
|
|
Net change in fair value of interest rate swap, net of tax
benefit of $6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
Stock activity in connection with employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
Stock-based compensation nonvested stock
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
Stock-based compensation stock options
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
Nonvested stock issued to key employees, net of forfeitures
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock, at cost
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75.4
|
)
|
|
|
(75.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
54.2
|
|
|
$
|
0.6
|
|
|
$
|
1,092.7
|
|
|
$
|
(2.3
|
)
|
|
$
|
(31.6
|
)
|
|
$
|
564.6
|
|
|
$
|
(116.6
|
)
|
|
$
|
1,507.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
Unaudited
|
|
Note 1.
|
Basis of
Presentation
|
LifePoint Hospitals, Inc., a Delaware corporation, acting
through its subsidiaries, operates general acute care hospitals
in non-urban communities in the United States. Unless the
context otherwise requires, LifePoint and its subsidiaries are
referred to herein as LifePoint, the
Company, we, our or
us. At April 1, 2008, our subsidiaries owned or
leased 48 hospitals, having a total of 5,637 licensed beds, and
serving non-urban communities in 17 states.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP) for interim financial information and with
the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) and disclosures considered necessary for
a fair presentation have been included. Operating results for
the three months ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2008. For further information, refer to
the consolidated financial statements and notes thereto included
in the Companys 2007 Annual Report on
Form 10-K.
The majority of the Companys expenses are cost of
revenue items. Costs that could be classified as
general and administrative by the Company would
include LifePoint corporate overhead costs, which were
$20.8 million and $24.2 million for the three months
ended March 31, 2007 and 2008, respectively.
Certain prior year amounts have been reclassified to conform to
the current year presentation for discontinued operations. This
reclassification has no impact on the Companys total
assets, liabilities, stockholders equity, net income or
cash flows. Unless noted otherwise, discussions in these notes
pertain to the Companys continuing operations.
|
|
Note 2.
|
Share
Repurchase Program
|
In November 2007, the Companys Board of Directors
authorized the repurchase of up to $150.0 million of
outstanding shares of the Companys common stock either in
the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints and other
factors, to utilize excess cash flow after its capital
expenditure needs have been satisfied. The Company is not
obligated to repurchase any specific number of shares under the
program. The program expires on November 26, 2008, but may
be extended, suspended or discontinued at any time prior to the
expiration date. The Company repurchased approximately
3.0 million shares during the three months ended
March 31, 2008, for an aggregate purchase price, including
commissions, of approximately $75.4 million at an average
purchase price of $25.15 per share. As of March 31, 2008,
the Company had repurchased in the aggregate, approximately
4.4 million shares at an aggregate purchase price,
including commissions, of approximately $116.6 million.
These shares have been designated by the Company as treasury
stock.
|
|
Note 3.
|
Stock-Based
Compensation
|
The Company issues stock options and other stock-based awards to
key employees and directors under various stockholder-approved
stock-based compensation plans. The Company currently has the
following four types of stock-based awards outstanding under
these plans: stock options; nonvested stock; restricted stock
units; and deferred stock units. The Company accounts for its
stock-based awards in accordance with the provisions of
Statements of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment
(SFAS No. 123(R)). Under
SFAS No. 123(R), the Company recognizes compensation
expense based on the grant date fair value estimated in
accordance with the standard.
7
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The Company estimated the fair value of stock options granted
during the three months ended March 31, 2007 and 2008 using
the Hull-White II (HW-II) lattice option
valuation model and a single option award approach. The Company
is amortizing the fair value on a straight-line basis over the
requisite service periods of the awards, which are the vesting
periods of three years. The Company granted stock options to
purchase 492,375 and 1,076,750 shares of the Companys
common stock to certain key employees during the three months
ended March 31, 2007 and 2008, respectively. The stock
options that were granted during the three months ended
March 31, 2007 and 2008 vest 33.3% on each grant
anniversary date over three years of continued employment.
In addition, during March 2007, the Company granted
performance-based stock options to certain senior executives to
acquire up to an aggregate of 760,000 shares of the
Companys common stock. These stock options were subject to
forfeiture unless certain targeted levels of diluted earnings
per share were achieved for the year ended December 31,
2007. Depending on the level of diluted earnings per share
achieved for the current fiscal year, the senior executives
would forfeit zero to 100% of these stock options. The stock
options that would not have been forfeited at year end would
have vested ratably beginning one year from the date of the
grant to three years after the date of the grant. Through
March 31, 2007, for purposes of accounting for the expense
of these stock options, the Company assumed a target level of
diluted earnings per share that resulted in the recognition of
stock compensation expense assuming earned options to acquire an
aggregate of 380,000 shares and forfeited options for the
remaining 380,000 shares. At September 30, 2007, the
Company projected that the required targeted level of diluted
earnings per share was not going to be met and reversed the
previously recognized stock compensation expense associated with
these stock options.
The following table shows the weighted average assumptions the
Company used to develop the fair value estimates under its HW-II
option valuation model and the resulting estimates of
weighted-average fair value per share of stock options granted
during the periods presented:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2007
|
|
2008
|
|
Expected volatility
|
|
25.5%
|
|
32.0%
|
Risk free interest rate (range)
|
|
4.48% 5.21%
|
|
1.97% 3.74%
|
Expected dividends
|
|
|
|
|
Average expected term (years)
|
|
5.1
|
|
5.3
|
Fair value per share of stock options granted
|
|
$10.21
|
|
$8.06
|
The Company received $1.0 million in cash from stock option
exercises for the three months ended March 31, 2007. There
was a nominal amount of actual tax benefits realized for the tax
deductions from these stock option exercises. There was a
nominal amount of cash received and tax benefits realized from
stock option exercises for the three months ended March 31,
2008.
As of March 31, 2008, there was $12.8 million of total
unrecognized compensation cost related to stock option
compensation arrangements. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
The Company expects to recognize that cost over a weighted
average period of 1.6 years.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of the Companys common stock on the day
prior to the grant date. The nonvested stock requires no payment
from employees and
8
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
directors, and stock-based compensation expense is recorded
equally over the vesting periods (three to five years).
The Company granted 364,960 and 457,491 shares of nonvested
stock awards to certain key employees during the three months
ended March 31, 2007 and 2008, respectively. These
nonvested stock awards cliff-vest three years from the grant
date. The fair market value at the date of grant of the 364,960
and 457,491 shares of nonvested stock awards was $36.60 and
$25.79 per share, respectively.
Of the nonvested stock awards granted during the three months
ended March 31, 2007 and 2008, 190,000 and
247,500 shares, respectively, are performance-based. In
addition to requiring continuing service of an employee, the
vesting of these nonvested stock awards is contingent upon the
satisfaction of certain financial goals specifically related to
the achievement of specified annual net revenues and other
earnings targets. If these goals are achieved, the nonvested
stock awards will cliff-vest three years after the grant date.
The fair value for each of these performance-based nonvested
stock awards was determined based on the closing price of the
Companys common stock on the day prior to the grant date
and assumes that the performance goals will be achieved. If
these performance goals are not met, no compensation expense
will be recognized and any recognized compensation expense will
be reversed.
As of March 31, 2008, there was $25.3 million of total
unrecognized compensation cost related to nonvested stock
compensation arrangements. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
The Company expects to recognize that cost over a weighted
average period of 2.1 years.
On February 18, 2008, pursuant to the Outside Directors
Stock and Incentive Compensation Plan (ODSICP), the
Companys Board of Directors, upon recommendation of the
Compensation Committee of the Board of Directors, approved the
grant of 3,500 restricted stock unit awards to Gregory T. Bier,
who was appointed to the Companys Board of Directors on
this same date. This award will be fully vested and no longer
subject to forfeiture upon the earliest of any of the following
conditions to occur: (i) the date that is immediately prior
to the date of the 2008 Annual Meeting of Stockholders of the
Company; (ii) the death or disability of the non-employee
director; or (iii) events described in Section 7.1 of
the ODSICP. Generally, such shares will be forfeited in their
entirety unless the individual continues to serve as a director
of the Company on the day prior to the 2008 Annual Meeting of
Stockholders. The non-employee directors receipt of shares
of common stock pursuant to the restricted stock unit award is
deferred until the first business day following the earliest to
occur of (i) the third anniversary of the date of grant, or
(ii) the date the non-employee director ceases to be a
member of the Companys Board of Directors.
The following table summarizes the Companys total
stock-based compensation expense as well as the total recognized
tax benefits related thereto (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Nonvested stock
|
|
$
|
2.2
|
|
|
$
|
4.3
|
|
Stock options
|
|
|
1.4
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3.6
|
|
|
$
|
6.4
|
|
|
|
|
|
|
|
|
|
|
Tax benefits on stock-based compensation expense
|
|
$
|
1.4
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
The Company did not capitalize any stock based
compensation cost for the three months ended March 31, 2007
and 2008. As of March 31, 2008, there was
$38.1 million of total unrecognized compensation cost
related to all of the Companys stock compensation
arrangements. Total unrecognized compensation cost may be
adjusted for future changes in estimated forfeitures. The
Company expects to recognize that cost over a weighted-average
period of 1.9 years.
9
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Earnings
(Loss) Per Share
|
The following table sets forth the computation of basic and
diluted earnings (loss) per share (in millions, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings (loss) per
share income from continuing operations
|
|
$
|
38.8
|
|
|
$
|
39.7
|
|
(Loss) income from discontinued operations, net of income taxes
|
|
|
(9.0
|
)
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29.8
|
|
|
$
|
41.8
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share
weighted average shares outstanding
|
|
|
55.8
|
|
|
|
54.1
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock benefit plans
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share
weighted average shares
|
|
|
56.8
|
|
|
|
55.2
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.69
|
|
|
$
|
0.73
|
|
Discontinued operations
|
|
|
(0.16
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.68
|
|
|
$
|
0.72
|
|
Discontinued operations
|
|
|
(0.15
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
The Companys
31/2% Convertible
Senior Subordinated Notes due May 15, 2014 (the
31/2% Notes)
and
31/4% Convertible
Senior Subordinated Debentures due August 15, 2025 (the
31/4% Debentures)
are included in the calculation of diluted earnings per share
whether or not the contingent requirements have been met for
conversion using the treasury stock method if the conversion
price of $51.79 and $61.22, respectively, is less than the
average market price of the Companys common stock for the
period. Upon conversion, the par value is settled in cash, and
only the conversion premium is settled in shares of the
Companys common stock. The impact of the
31/4% Debentures
has been excluded because the effect would have been
anti-dilutive for the three months ended March 31, 2007 and
2008. The impact of the
31/2% Notes
has been excluded because the effect would have been
anti-dilutive for the three months ended March 31, 2008.
|
|
Note 5.
|
Goodwill
and Intangible Assets
|
The Company evaluates its goodwill for impairment annually, or
more frequently if circumstances indicate potential impairment,
in accordance with SFAS No. 142 Goodwill and
Other Intangible Assets. The Company performed its most
recent annual goodwill impairment test as of October 1,
2007 and did not incur an impairment charge.
10
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides information regarding the
Companys intangible assets, which are included in the
accompanying condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
Class of Intangible Asset
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-based physician minimum revenue guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
44.0
|
|
|
$
|
(8.8
|
)
|
|
$
|
35.2
|
|
Additions
|
|
|
7.3
|
|
|
|
|
|
|
|
7.3
|
|
Amortization expense
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
51.3
|
|
|
$
|
(10.9
|
)
|
|
$
|
40.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
17.3
|
|
|
$
|
(7.0
|
)
|
|
$
|
10.3
|
|
Amortization expense
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
17.3
|
|
|
$
|
(7.3
|
)
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of need:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 and March 31, 2008
|
|
$
|
6.9
|
|
|
$
|
|
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
68.2
|
|
|
$
|
(15.8
|
)
|
|
$
|
52.4
|
|
Additions
|
|
|
7.3
|
|
|
|
|
|
|
|
7.3
|
|
Amortization expense
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
75.5
|
|
|
$
|
(18.2
|
)
|
|
$
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-Based
Physician Minimum Revenue Guarantees
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements, or physician
minimum revenue guarantees, with various physicians
practicing in the communities it serves. In consideration for a
physician relocating to one of its communities and agreeing to
engage in private practice for the benefit of the respective
community, the Company may advance certain amounts of money to a
physician to assist in establishing his or her practice.
The Company accounts for contract-based physician minimum
revenue guarantees in accordance with Financial Accounting
Standards Board (the FASB) Staff Position
(FSP)
No. 45-3
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners
(FSP
FIN 45-3).
Under FSP
FIN 45-3,
the Company records a contract-based intangible asset and a
related guarantee liability for new physician minimum revenue
guarantees and amortizes the contract-based intangible asset to
other operating expenses, in the accompanying condensed
consolidated statements of operations, over the period of the
physician contract, which is typically five years. As of
December 31, 2007 and March 31, 2008, the
Companys liability balance for contract-based physician
minimum revenue guarantees was $15.3 million and
$17.7 million, respectively, which is included in other
current liabilities in the accompanying condensed consolidated
balance sheets.
11
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-Competition
Agreements
The Company has entered into non-competition agreements and
these non-competition agreements are amortized on a
straight-line basis over the term of the agreements.
Certificates
of Need
The construction of new facilities, the acquisition or expansion
of existing facilities and the addition of new services and
certain equipment at the Companys facilities may be
subject to state laws that require prior approval by state
regulatory agencies. These certificates of need laws generally
require that a state agency determine the public need and give
approval prior to the construction or acquisition of facilities
or the addition of new services. The Company operates hospitals
in certain states that have adopted certificate of need laws. If
the Company fails to obtain necessary state approval, the
Company will not be able to expand its facilities, complete
acquisitions or add new services at its facilities in these
states. These intangible assets have been determined to have
indefinite lives and, accordingly, are not amortized.
|
|
Note 6.
|
Discontinued
Operations
|
Impact
of Discontinued Operations
Effective April 1, 2008, the existing lease agreement of
Colorado River Medical Center (Colorado River), a 25
bed facility located in Needles, California was terminated, as
discussed in detail within this note.
Effective July 1, 2007, the Company sold Coastal Carolina
Medical Center, a 41 bed facility located in Hardeeville, South
Carolina, to Tenet Healthcare Corporation for approximately
$35.0 million, plus working capital.
Effective May 1, 2007, the Company sold St. Josephs
Hospital, a 325 bed facility located in Parkersburg, West
Virginia, to Signature Hospital, LLC for approximately
$68.5 million, plus working capital.
Effective January 1, 2007, the Company sold Saint
Francis Hospital, a 155 bed facility located in
Charleston, West Virginia, to the Herbert J. Thomas Memorial
Hospital Association for approximately $37.5 million, plus
working capital.
The results of operations, net of income taxes, of the
Companys sold hospitals are reflected in the accompanying
condensed consolidated financial statements as discontinued
operations in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
The Company allocated to discontinued operations interest
expense of $1.7 million and $0.1 million for the three
months ended March 31, 2007 and 2008, respectively. For
those disposed assets that were part of an acquisition group for
which specifically identifiable debt was incurred, the
allocation of interest expense to discontinued operations was
based on the ratio of the disposed net assets to the sum of
total net assets of the acquisition group plus the debt that was
incurred. For those asset acquisitions for which specifically
identifiable debt was not incurred, the allocation of interest
expense to discontinued operations was based on the ratio of
disposed net assets to the sum of total net assets of the
Company plus the Companys total outstanding debt.
The revenues and loss before income taxes, excluding impairment
(charge) adjustment and loss on sale of hospitals, of
discontinued operations were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2007
|
|
2008
|
|
Revenues
|
|
$
|
37.6
|
|
|
$
|
1.3
|
|
Loss before income taxes
|
|
|
(1.2
|
)
|
|
|
(0.3
|
)
|
12
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
In March 2007, the Company, through its indirect subsidiary,
Principal-Needles, Inc. (PNI), signed a letter of
intent with the Board of Trustees of Needles Desert Communities
Hospital (the Board of Trustees) to transfer to the
Board of Trustees substantially all of the operating assets and
net working capital of Colorado River plus $1.5 million in
cash, which approximated the net present value of future lease
payments due under the lease agreement between PNI and the Board
of Trustees in consideration for the termination of the existing
operating lease agreement. Subsequently, in December 2007, the
Company entered into a definitive agreement with the Board of
Trustees that terminated the existing lease agreement effective
April 1, 2008, on which date the Company transferred
Colorado River to the Board of Trustees. In connection with the
signing of the letter of intent in March 2007 and the
termination of the lease agreement effective April 1, 2008,
the Company recognized an impairment (charge) adjustment of
($7.9) million and $2.3 million, net of income taxes,
or ($0.14) and $0.04 per diluted share, in discontinued
operations for the three months ended March 31, 2007 and
2008, respectively. The impairment charge relates to goodwill
impairment, the property and equipment and net working capital
that was originally to be transferred to the Board of Trustees,
for which the Company anticipated receiving no consideration.
The impairment adjustment relates to the reversal of a portion
of the previously recognized impairment charge for certain net
working capital components that were ultimately excluded from
the assets transferred effective April 1, 2008.
The following table sets forth the components of Colorado
Rivers impairment (charge) adjustment (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Property and equipment
|
|
$
|
(3.4
|
)
|
|
$
|
|
|
Net working capital
|
|
|
(4.9
|
)
|
|
|
3.6
|
|
Goodwill
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.4
|
)
|
|
|
3.6
|
|
Income tax benefit (provision)
|
|
|
3.5
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7.9
|
)
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Interest
Rate Swap
|
On June 1, 2006, the Company entered into an interest rate
swap agreement with Citibank as counterparty. The interest rate
swap agreement, as amended, was effective as of
November 30, 2006 and has a maturity date of May 30,
2011. The Company entered into the interest rate swap agreement
to mitigate the floating interest rate risk on a portion of its
outstanding variable rate borrowings. The interest rate swap
agreement requires the Company to make quarterly fixed rate
payments to Citibank calculated on a notional amount as set
forth in the table below at an annual fixed rate of 5.585% while
Citibank is obligated to make quarterly floating payments to the
Company based on the three-month LIBOR on the same referenced
notional amount. Notwithstanding the terms of the interest rate
swap transaction, the Company is ultimately obligated for all
amounts due and payable under the Credit Agreement, as amended
and restated, supplemented or otherwise modified from time to
time (the Credit Agreement), entered into on
April 15, 2005, with Citicorp North America, Inc.
(CITI), as administrative agent and the lenders
party thereto, Bank of America, N.A., CIBC World Markets Corp.,
SunTrust Bank and UBS Securities LLC, as co-syndication agents
and Citigroup Global Markets Inc., as sole lead arranger and
sole book runner.
13
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
Notional Amount
|
|
Date Range
|
|
(In millions)
|
|
|
November 30, 2006 to November 30, 2007
|
|
$
|
900.0
|
|
November 30, 2007 to November 28, 2008
|
|
$
|
750.0
|
|
November 28, 2008 to November 30, 2009
|
|
$
|
600.0
|
|
November 30, 2009 to November 30, 2010
|
|
$
|
450.0
|
|
November 30, 2010 to May 30, 2011
|
|
$
|
300.0
|
|
On January 1, 2008, the Company adopted the provisions of
FASB Statement No. 157, Fair Value Measurements
(SFAS No. 157), with respect to the
valuation of its interest rate swap agreement. The Company did
not adopt the provisions of SFAS No. 157 as it relates
to nonfinancial assets pursuant to FSP
FAS 157-2,
Effective Date of FASB Statement No. 157.
SFAS No. 157 clarifies how companies are required to
use a fair value measure for recognition and disclosure by
establishing a common definition of fair value, a framework for
measuring fair value, and expanding disclosures about fair value
measurements. The adoption of SFAS No. 157 did not
have a material impact on the Companys results of
operations or financial position.
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
The Company determines the fair value of its interest rate swap
based on the amount at which it could be settled, which is
referred to in SFAS No. 157 as the exit price. This price
is based upon observable market assumptions and appropriate
valuation adjustments for credit risk. The Company has
categorized its interest rate swap as Level 2 under SFAS
No. 157.
The interest rate swap agreement exposes the Company to credit
risk in the event of non-performance by Citibank. However, the
Company does not anticipate non-performance by Citibank. The
Company does not hold or issue derivative financial instruments
for trading purposes. The fair value of the Companys
interest rate swap at December 31, 2007 and March 31,
2008 reflected a liability of approximately $31.0 million
and $50.2 million, respectively, and is included in
professional and general liability claims and other liabilities
in the accompanying condensed consolidated balance sheets. The
interest rate swap reflects a liability balance as of
December 31, 2007 and March 31, 2008 because of
decreases in market interest rates since inception.
The Company has designated the interest rate swap as a cash flow
hedge instrument. The Company assesses the effectiveness of this
cash flow hedge instrument on a quarterly basis. The Company
completed its quarterly assessment of the cash flow hedge
instrument at March 31, 2008, and determined the hedge to
be partially ineffective in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133). Because the notional
amount of the interest rate swap in effect at March 31,
2008 exceeded the Companys outstanding borrowings under
its variable rate debt Credit Agreement, a portion of the cash
flow hedge instrument was determined to be ineffective. The
Company recognized an increase in interest expense of
approximately $0.6 million related to the ineffective
portion of the Companys cash flow hedge during the three
months ended March 31, 2008.
|
|
Note 8.
|
Recently
Issued Accounting Pronouncements
|
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) retains the purchase method of
accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are
recognized in the purchase accounting as well as requiring the
expensing of acquisition-related costs as incurred. Furthermore,
SFAS No. 141(R) provides guidance for recognizing and
measuring the goodwill acquired in the business combination and
determines
14
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for
fiscal years beginning on or after December 15, 2008.
Earlier adoption is prohibited. While the Company has not yet
fully evaluated the impact that SFAS No. 141(R) will
have on its results of operations or financial position, the
Company will be required to expense costs related to any future
acquisitions beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
amends Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements
(ARB No. 51) to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.
SFAS No. 160 clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated
financial statements. Additionally, SFAS No. 160
changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the
noncontrolling interest.
SFAS No. 160 requires expanded disclosures in the
consolidated financial statements that clearly identify and
distinguish between the interests of the parents owners
and the interests of the noncontrolling owners of a subsidiary,
including a reconciliation of the beginning and ending balances
of the equity attributable to the parent and the noncontrolling
owners and a schedule showing the effects of changes in a
parents ownership interest in a subsidiary on the equity
attributable to the parent. SFAS No. 160 does not
change ARB No. 51s provisions related to
consolidation purposes or consolidation policy, or the
requirement that a parent consolidate all entities in which it
has a controlling financial interest. SFAS No. 160
does, however, amend certain of ARB No. 51s
consolidation procedures to make them consistent with the
requirements of SFAS No. 141(R) as well as to provide
definitions for certain terms and to clarify some terminology.
In addition to the amendments to ARB No. 51,
SFAS No. 160 amends SFAS No. 128,
Earnings per Share, so that the calculation of
earnings per share amounts in consolidated financial statements
will continue to be based on amounts attributable to the parent.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. Earlier adoption is
prohibited. SFAS No. 160 must be applied prospectively
as of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. The Company has not yet evaluated the impact
that SFAS No. 160 will have on its results of
operations or financial position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
applies to all derivative instruments and related hedged items
accounted for under SFAS No. 133.
SFAS No. 161 requires entities to provide greater
transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items
affect an entitys financial position, results of
operations, and cash flows. To meet these objectives,
SFAS No. 161 requires (1) qualitative disclosures
about objectives for using derivatives by primary underlying
risk exposure and by purpose or strategy, (2) information
about the volume of derivative activity in a flexible format
that the preparer believes is the most relevant and practicable,
(3) tabular disclosures about balance sheet location and
gross fair value amounts of derivative instruments, income
statement and other comprehensive income location and amounts of
gains and losses on derivative instruments by type of contract,
and (4) disclosures about credit-risk related contingent
features in derivative agreements. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early
application is encouraged, as are comparative disclosures for
earlier periods, but neither are required. The Company has not
yet fully evaluated the impact that SFAS No. 161 will
have on its results of operations or financial position, but
anticipates that additional disclosure surrounding its interest
rate swap instrument will be required.
15
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Americans
with Disabilities Act Claim
On January 12, 2001, a class action lawsuit was filed by
Access Now in the United States District Court of the Eastern
District of Tennessee (the District Court) against
each of the Companys existing hospitals alleging
non-compliance with the Americans with Disabilities Act (the
ADA). This lawsuit has been amended to add hospitals
the Company subsequently acquired and to dismiss divested
facilities. The lawsuit does not seek any monetary damages, but
seeks injunctive relief requiring facility modification, where
necessary, to meet ADA guidelines, in addition to
attorneys fees and costs. The Company may be required to
make significant capital expenditures at one or more of its
facilities in order to comply with the ADA.
Through March 31, 2008, the plaintiffs had conducted
inspections at 32 of the Companys hospitals (including two
subsequently divested hospitals), and have entered into
settlement agreements with the plaintiffs regarding 13 of the
Companys hospitals. Under settlement agreements reached
with the plaintiffs, the Company has completed corrective work
on three facilities for a cost of $1.0 million. The Company
currently anticipates that the costs associated with the ten
other facilities which have settlement agreements will range
from $5.1 million to $7.0 million. On
February 12, 2008, the District Court entered an order
dismissing the case due to the lack of individual plaintiffs.
The Company anticipates that the plaintiffs will re-file the
case in another jurisdiction.
Legal
Proceedings and General Liability Claims
The Company is, from time to time, subject to claims and suits
arising in the ordinary course of business, including claims for
damages for personal injuries, medical malpractice, breach of
contracts, wrongful restriction of or interference with
physicians staff privileges and employment related claims.
In certain of these actions, plaintiffs request payment for
damages, including punitive damages that may not be covered by
insurance. The Company is currently not a party to any pending
or threatened proceeding, which, in managements opinion,
would have a material adverse effect on the Companys
business, financial condition or results of operations.
Physician
Commitments
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements with various
physicians practicing in the communities it serves. In
consideration for a physician relocating to one of its
communities and agreeing to engage in private practice for the
benefit of the respective community, the Company may advance
certain amounts of money to a physician, normally over a period
of one year, to assist in establishing the physicians
practice. The amount of commitments the Company estimates it
will advance to physicians as of March 31, 2008 is
$17.7 million and often depends upon the financial results
of a physicians private practice during the guarantee
period. Generally, amounts advanced under the recruiting
agreements may be forgiven pro rata over a period of
48 months contingent upon the physician continuing to
practice in the respective community. Pursuant to the
Companys standard physician recruiting agreement, any
breach or non-fulfillment by a physician under the physician
recruiting agreement gives the Company the right to recover any
payments made to the physician under the agreement.
Capital
Expenditure Commitments
The Company is reconfiguring some of its facilities to
accommodate patient services more effectively and restructuring
existing surgical capacity in some of its hospitals to permit
additional patient volume and a greater variety of services. The
Company has incurred approximately $22.3 million in
uncompleted projects as
16
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of March 31, 2008, which is included as construction in
progress in the Companys accompanying condensed
consolidated balance sheet. At March 31, 2008, the Company
had projects under construction with an estimated cost to
complete and equip of approximately $89.7 million.
The Company agreed in connection with the lease of Wythe County
Community Hospital to make capital expenditures or improvements
to the hospital of a value not less than $10.3 million
prior to June 1, 2008, and an additional $4.2 million,
for an aggregate total of $14.5 million, before
June 1, 2013. The Company has incurred approximately
$8.3 million of the required capital expenditures and
improvements as of March 31, 2008.
The Company is subject to additional annual capital expenditure
commitments in connection with several of its other facilities.
Acquisitions
The Company has historically acquired businesses with prior
operating histories. Acquired companies may have unknown or
contingent liabilities, including liabilities for failure to
comply with healthcare laws and regulations, medical and general
professional liabilities, workers compensation liabilities,
previous tax liabilities and unacceptable business practices.
Although the Company institutes policies designed to conform
practices to its standards following completion of acquisitions,
there can be no assurance that the Company will not become
liable for past activities that may later be asserted to be
improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from
prospective sellers covering such matters, there can be no
assurance that any such matter will be covered by
indemnification, or if covered, that such indemnification will
be adequate to cover potential losses and fines.
17
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
We recommend that you read this discussion together with our
unaudited condensed consolidated financial statements and
related notes included elsewhere in this report, as well as our
2007 Annual Report on
Form 10-K.
Unless otherwise indicated, all relevant financial and
statistical information included herein relates to our
continuing operations.
Overview
We operate general acute care hospitals in non-urban communities
in the United States. We seek to fulfill our mission of making
communities healthier by striving to (1) improve the
quality and types of healthcare services available in our
communities; (2) provide physicians with a positive
environment in which to practice medicine, with access to
necessary equipment, office space and resources;
(3) develop and provide a positive work environment for
employees; (4) expand each hospitals role as a
community asset; and (5) improve each hospitals
financial performance.
The following table reflects our summarized operating results
for the periods presented (in millions, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
661.2
|
|
|
$
|
699.9
|
|
Income from continuing operations
|
|
$
|
38.8
|
|
|
$
|
39.7
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.68
|
|
|
$
|
0.72
|
|
Key
Challenges
We anticipate increasing our revenues and profitability on both
a long-term and short-term basis. However, we have the following
internal and external key challenges to overcome:
|
|
|
|
|
Inpatient Volumes. We have experienced
diminutive growth in our inpatient volumes at most of our
facilities during the past twelve months. This was the result of
physician attrition in several of our markets, lack of disease
across our markets, the closure of certain unprofitable service
lines at a few of our hospitals and the long-term industry trend
of inpatient services shifting to outpatient services. We will
focus on adding or further emphasizing service lines that are
needed in our communities.
|
The following table reflects our quarterly admissions for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
|
52,207
|
|
|
|
52,358
|
|
Second Quarter
|
|
|
48,191
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
48,367
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
47,990
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,755
|
|
|
|
52,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases in Provision for Doubtful
Accounts. We have experienced an increase in our
provision for doubtful accounts during recent years. These
increases were the result of an increased number of uninsured
patients and an increase in co-payments and deductibles from
healthcare plan design changes. These changes increase
collection costs and reduce overall cash collections.
|
18
Our quarterly provision for doubtful accounts on a consolidated
basis, which comprises our continuing and discontinued
operations was as follows for the periods presented (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
Doubtful Accounts
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
77.7
|
|
|
$
|
82.2
|
|
Second Quarter
|
|
|
84.6
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
82.2
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
79.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
324.1
|
|
|
$
|
82.2
|
|
|
|
|
|
|
|
|
|
|
Our revenues decrease when we write-off patient accounts
identified as charity and indigent care. Our hospitals write-off
a portion of a patients account upon the determination
that the patient qualifies under the hospitals
charity/indigent care policy.
In the event that a patient account was previously classified as
self-pay when the determination of
charity/indigent
status is made, a corresponding reduction in the provision for
doubtful accounts may occur.
The following table reflects our quarterly consolidated charity
and indigent care write-offs for the periods presented (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Charity and
|
|
|
|
Indigent Care
|
|
|
|
Write-Offs
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
16.2
|
|
|
$
|
13.7
|
|
Second Quarter
|
|
|
14.1
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
12.0
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
11.4
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53.7
|
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
|
|
The provision for doubtful accounts, as well as charity and
indigent care write-offs, relate primarily to self-pay revenues.
The following table reflects our quarterly consolidated self-pay
revenues, net of charity and indigent care write-offs, for the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Self-Pay Revenues
|
|
|
|
2007
|
|
|
2008
|
|
|
First Quarter
|
|
$
|
80.3
|
|
|
$
|
91.3
|
|
Second Quarter
|
|
|
87.1
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
86.6
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
82.7
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336.7
|
|
|
$
|
91.3
|
|
|
|
|
|
|
|
|
|
|
19
The following table shows our consolidated revenue days
outstanding reflected in our consolidated net accounts
receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Revenue Days
|
|
|
|
Outstanding
|
|
|
|
In Accounts
|
|
|
|
Receivable
|
|
|
|
2007
|
|
|
2008
|
|
|
March 31
|
|
|
40.8
|
|
|
|
41.3
|
|
June 30
|
|
|
41.4
|
|
|
|
N/A
|
|
September 30
|
|
|
43.7
|
|
|
|
N/A
|
|
December 31
|
|
|
43.1
|
|
|
|
N/A
|
|
The approximate percentages of billed hospital receivables,
which is a component of total accounts receivable, are
summarized as follows as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Insured receivables
|
|
|
33.2
|
%
|
|
|
34.9
|
%
|
Uninsured receivables (including co-payments and deductibles)
|
|
|
66.8
|
|
|
|
65.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The approximate percentages of billed hospital receivables in
summarized aging categories are as follows as of the dates
presented:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
0 to 60 days
|
|
|
45.1
|
%
|
|
|
48.2
|
%
|
61 to 150 days
|
|
|
19.9
|
|
|
|
17.6
|
|
Over 150 days
|
|
|
35.0
|
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We continue to implement a number of operating strategies
related to cash collections. However, if the trend of increasing
self-pay revenues continues, our future results of operations
and future financial position could be materially adversely
affected.
|
|
|
|
|
Physician Recruitment and
Retention. Recruiting, attracting and retaining
both primary care physicians and specialists for our non-urban
communities is a key to increasing revenues, patient volumes and
the value that the communities place on our hospitals. The
medical staffs at our hospitals are typically small and our
revenues are negatively affected by the loss of physicians. We
believe that continuing to add primary care physicians and
specialists should help our hospitals increase volumes by
offering new services. Physician attrition is also a challenge
for us.
|
|
|
|
Challenges in Professional and General Liability Costs.
Professional and general liability costs remain a
challenge to us and we expect this pressure to continue in the
future. Additionally, we experienced unfavorable claims
development results recently, which are reflected in our
professional and general liability costs.
|
|
|
|
Shortage of Clinical Personnel and Increased Contract Labor
Usage. In recent years, many hospitals, including
some of the hospitals we own, have encountered difficulty in
recruiting and retaining nurses and other clinical personnel.
When we are unable to staff our nursing and other clinical
positions, we are required to use contract labor to ensure
adequate patient care. Contract labor generally costs more per
hour than employed labor. We have adopted a number of human
resources strategies in an attempt to improve our ability to
recruit and retain nurses and other clinical personnel. However,
we expect that staffing issues related to nurses and other
clinical personnel will continue in the future. Additionally, we
have incurred an increase in professional fees primarily for
anesthesiology, hospitalists, fees for on-call coverage for
physicians, and emergency room services. Our expense for
professional fees paid to hospital-based physicians has
increased as the shortage of these physicians becomes more acute.
|
20
|
|
|
|
|
Indebtedness. Our consolidated debt was
$1,517.1 million as of March 31, 2008, and we incurred
$22.5 million of net interest expense during the three
months ended March 31, 2008. Our indebtedness decreases our
net income and reduces the amount of funds available for
operations, capital expenditures and future acquisitions. We are
in compliance with our financial debt covenants as of
March 31, 2008 and believe we will be in compliance with
them throughout 2008.
|
|
|
|
Medicare Changes Hospital Inpatient Prospective
Payment System. Changes with respect to
governmental reimbursement affect our revenues and earnings. On
August 1, 2007, the Centers for Medicare and Medicaid
Services (CMS) issued its hospital inpatient
prospective payment system (IPPS) final rule for
Federal Fiscal year (FFY 2008), which began on
October 1, 2007. Among other items, the final rule created
745 new severity-adjusted diagnosis-related groups
(Medicare Severity DRGs or MS-DRGs) to
replace Medicares previous 538 DRGs. The new MS-DRGs are
being phased-in over a two-year period. In addition, the final
rule also provided for a market basket increase of 3.3% in FFY
2008 for hospitals that report certain patient care quality
measures and an increase of 1.3% for hospitals that do not
submit this information. However, to offset the effect of the
coding and discharge classification changes that CMS believes
will occur as hospitals implement the MS-DRG system, the final
rule also reduced Medicare payments to hospitals by 1.2% in FFY
2008 and 1.8% in both FFY 2009 and 2010. Subsequently, on
September 29, 2007, President Bush signed Public Law
No. 110-90,
effectively decreasing these reductions for FFY 2008 and 2009 to
0.6% and 0.9%. CMS has announced that it plans to conduct a
look-back beginning in FFY 2010 and to make
appropriate changes to the reduction percentages based on actual
claims data. The implementation of the MS-DRG system and the
other provisions of the final rule may result in our Medicare
acute inpatient hospital reimbursement remaining flat to
increasing slightly in FFY 2008.
|
On April 14, 2008, CMS issued its IPPS proposed rule for
FFY 2009. Among other items, the proposed rule would provide for
a market basket increase of 3.0% in FFY 2009 for hospitals that
report certain patient care quality measures and an increase of
1.0% for hospitals that do not. As required by Public Law
No. 110-90,
the proposed rule also reduces payment rates by 0.9% for FFY
2009 to account for the coding and discharge classification
changes that CMS believes will occur as a result of the
implementation of the MS-DRG system. In addition to the payment
rate changes, the proposed rule reduces the outlier threshold
from $22,185 to $21,025 in FFY 2009, adds 43 new patient care
quality measures that hospitals would be required to report in
order to receive the full market basket increase in FFY 2010,
and adds nine additional categories of conditions that CMS will
no longer reimburse at a higher weighted MS-DRG when those
conditions are acquired in a hospital. The proposed rule also
contains a number of amendments to the CMS regulations that
implement the Stark Law and seeks additional comments on the
Disclosure of Financial Relationships Report, which, if
implemented, would require selected hospitals to disclose
certain information regarding each hospitals ownership,
investment, and compensation relationships with physicians. CMS
anticipates that the payment changes in the proposed rule would
increase Medicare payments to acute care hospitals by nearly
$4.0 billion in FFY 2009. Although difficult to predict,
the provisions of the proposed rule may result in our Medicare
acute inpatient hospital reimbursement increasing 3.0% to 3.5%
in FFY 2009.
|
|
|
|
|
Medicare Changes Medicare Hospital Outpatient
Prospective Payment System. On November 1,
2007, CMS issued its final hospital outpatient prospective
payment system rule for calendar year 2008. Among other
provisions, this includes a 3.3% market basket update and
requires hospitals to begin reporting seven hospital outpatient
quality measures. Beginning in calendar year 2009, the annual
payment update factor will be reduced by 2.0 percentage
points for hospitals that do not report those measures.
|
21
|
|
|
|
|
Medicare Changes Inpatient Rehabilitation
Facility Prospective Payment System. On
July 31, 2007, CMS published its Medicare inpatient
rehabilitation facility prospective payment system final rule
for FFY 2008. The final rule increased the inpatient
rehabilitation facility (IRF) payment rate by 3.2%
and the high-cost outlier threshold from $5,534 to $7,362 for
FFY 2008. The final rule also continued the phase-in of the
requirement that at least 75% of an IRFs patients have one
of 13 designated medical conditions, which has resulted in
decreased volume in our rehabilitation units. However, the
Medicare, Medicaid and SCHIP Extension Act of 2007
(MMSEA), enacted on December 29, 2007,
permanently froze the compliance threshold at 60% effective for
cost reporting periods beginning on or after July 1, 2006,
and allows co-morbid conditions to count toward this threshold.
MMSEA also set the IRF prospective payment system rate increase
factor for FFYs 2008 and 2009 at 0%, effective for discharges
beginning on or after April 1, 2008. On April 21,
2008, CMS issued its IRF prospective payment system proposed
rule for FFY 2009. In addition to implementing the changes
required by MMSEA, the proposed rule would also set the outlier
threshold for FFY 2009 at $9,191 and would update the IRF
prospective payment systems case mix group relative
weights and average length of stay values using FFY 2006
information. CMS anticipates that the proposed rule would
decrease aggregate IRF payments by $20.0 million in FFY
2009.
|
|
|
|
Medicaid Changes. States have adopted, or may
be considering, legislation designed to reduce coverage and
program eligibility, enroll Medicaid recipients in managed care
programs
and/or
impose additional taxes on hospitals to help finance or expand
the states Medicaid systems. Future legislation or other
changes in the administration or interpretation of government
health programs could have a material adverse effect on our
financial position and results of operations. On May 25,
2007, CMS issued a final rule entitled Medicaid Program:
Cost Limit for Providers Operated by Units of Government and
Provisions to Ensure the Integrity of Federal-State Financial
Partnership, which was expected to reduce federal Medicaid
funding by $4.0 billion over five years. On the same date,
President Bush signed into law HR 2206, which placed a
moratorium on the implementation of this rule for one year.
However, when the moratorium expires this year, this final rule
could significantly impact state Medicaid programs and our
revenue from these programs.
|
|
|
|
NPI Implementation. To improve the efficiency
of the national healthcare system, the Health Insurance
Portability and Accountability Act of 1996 (HIPAA)
required the Department of Health and Human Services
(HHS) to adopt regulations that, among other things,
established a uniform set of national standards for electronic
healthcare transactions. As part of those regulations, HHS
adopted a requirement that all covered healthcare providers
obtain and use a National Provider Indentifier (NPI)
in all covered electronic healthcare transactions, which
includes the electronic submission of healthcare claims. The NPI
is intended to replace the multiple legacy or
existing Medicare, Medicaid, and private third party payor
provider numbers healthcare providers are currently required to
use. CMS has been phasing in the use of the NPI in the Medicare
program over the past several months. However, beginning
May 23, 2008, CMS will require all Medicare claims to be
submitted under the providers NPI and will no longer
accept claims that contain the providers existing Medicare
provider number. Some providers have encountered difficulties
and have had their claims rejected by the Medicare payment
system for issues relating to the implementation of the NPI. We
cannot predict if any of our facilities will experience any
payment delays or issues when the Medicare program fully
implements the use of the NPI on May 23, 2008. If our
facilities experience payment delays as a result of the
implementation of the NPI, our cash flows could be materially
adversely affected.
|
|
|
|
Increases in Supply Costs. During the past few
years, we have experienced an increase in supply costs
per-equivalent admission, especially in the areas of
pharmaceutical, orthopedic, oncology and cardiac supplies. We
participate in a group purchasing organization in an attempt to
achieve lower supply costs from our vendors. Because of the
fixed reimbursement nature of most governmental and commercial
payor arrangements, we may not be able to recover supply cost
increases through increased revenues.
|
22
|
|
|
|
|
Increases in Information Technology Costs and Costs of
Integration. Our business depends significantly
on effective information systems to process clinical and
financial information. Our acquisition activity requires
transitions from, and the integration of, various information
systems that are used by hospitals we acquire. We rely heavily
on HCA-IT for information systems integration pursuant to our
contractual arrangement for information technology services.
Under a contract with a term that will expire on
December 31, 2009, HCA-IT provides us with financial,
clinical, patient accounting and network information systems. We
are currently negotiating with HCA-IT to extend the HCA-IT
agreement beyond 2009.
|
|
|
|
Summary. Each of our challenges are
intensified by our inability to control related trends and the
associated risks. Therefore, our actual results may differ from
our expectations. To maintain or improve operating margins in
the future, we must, among other things, increase patient
volumes by developing service lines in response to needs in our
respective communities.
|
Hospital
Acquisitions
We seek to identify and acquire selected hospitals in non-urban
communities. In evaluating a hospital for acquisition, we focus
on a variety of factors. One factor we consider is the number of
patients that are traveling outside of the community for
healthcare services. Another factor we consider is the
hospitals prior operating history and our ability to
implement new healthcare services. In addition, we review the
local demographics and expected future trends. Upon acquiring a
facility, we work to integrate the hospital quickly into our
operating practices. Part I, Item 2. Properties
in our 2007 Annual Report on
Form 10-K
contains a table of our hospitals, including acquisition dates.
Our results of operations include the operations of our
acquisitions since the effective date of each acquisition.
Discontinued
Operations
From time to time, we evaluate our facilities and may sell
assets which we believe may no longer fit with our long-term
strategy for various reasons.
Effective April 1, 2008, the existing lease agreement of
Colorado River Medical Center (Colorado River), a 25
bed facility located in Needles, California was terminated, as
discussed in detail below.
Effective July 1, 2007, we sold Coastal Carolina Medical
Center, a 41 bed facility located in Hardeeville, South
Carolina, to Tenet Healthcare Corporation for approximately
$35.0 million, plus working capital.
Effective May 1, 2007, we sold St. Josephs
Hospital, a 325 bed facility located in Parkersburg,
West Virginia, to Signature Hospital, LLC for approximately
$68.5 million, plus working capital.
Effective January 1, 2007, we sold Saint Francis
Hospital, a 155 bed facility located in Charleston,
West Virginia, to the Herbert J. Thomas Memorial Hospital
Association for approximately $37.5 million, plus working
capital.
The following table reflects our summarized operating results of
discontinued operations for the periods presented (in millions,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
37.6
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1.0
|
)
|
|
$
|
(0.2
|
)
|
Impairment (charge) adjustment
|
|
|
(7.9
|
)
|
|
|
2.3
|
|
Loss on sale of hospitals
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(9.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from discontinued operations
|
|
$
|
(0.15
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
23
Impairment
In March 2007, we signed a letter of intent with the Board of
Trustees of Needles Desert Communities Hospital (the Board
of Trustees) to transfer to the Board of Trustees
substantially all of the operating assets and net working
capital of Colorado River plus $1.5 million in cash, which
approximated the net present value of future lease payments due
under the lease agreement between Colorado River and the Board
of Trustees in consideration for the termination of the existing
operating lease agreement. Subsequently, in December 2007, we
entered into a definitive agreement with the Board of Trustees
that terminated the existing lease agreement effective
April 1, 2008, on which date we transferred Colorado River
to the Board of Trustees. In connection with the signing of the
letter of intent in March 2007 and the termination of the lease
agreement effective April 1, 2008, we recognized an
impairment (charge) adjustment of ($7.9) million and
$2.3 million, net of income taxes, or ($0.14) and $0.04 per
diluted share, in discontinued operations for the three months
ended March 31, 2007 and 2008, respectively. The impairment
charge relates to goodwill impairment, the property and
equipment and net working capital that was originally to be
transferred to the Board of Trustees, for which we anticipated
receiving no consideration. The impairment adjustment relates to
the reversal of a portion of the previously recognized
impairment charge for certain net working capital components
which were ultimately excluded from the assets transferred
effective April 1, 2008.
The following table sets forth the components of Colorado
Rivers impairment (charge) adjustment (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Property and equipment
|
|
$
|
(3.4
|
)
|
|
$
|
|
|
Net working capital
|
|
|
(4.9
|
)
|
|
|
3.6
|
|
Goodwill
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.4
|
)
|
|
|
3.6
|
|
Income tax benefit (provision)
|
|
|
3.5
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7.9
|
)
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Revenue
Sources
Our hospitals generate revenues by providing healthcare services
to our patients. The majority of these healthcare services are
directed by physicians. We are paid for these healthcare
services from a number of different sources, depending upon the
patients medical insurance coverage. Primarily, we are
paid by governmental Medicare and Medicaid programs, commercial
insurance, including managed care organizations, and directly by
the patient. The amounts we are paid for providing healthcare
services to our patients vary depending upon the payor.
Governmental payors generally pay significantly less than the
hospitals customary charges for the services provided.
Please refer to Part I, Item 1. Business,
Sources of Revenue in our 2007 Annual
Report on
Form 10-K
for a detailed discussion of our revenue sources.
Revenues from governmental payors, such as Medicare and
Medicaid, are controlled by complex rules and regulations that
stipulate the amount a hospital is paid for providing healthcare
services. Our compliance with these rules and regulations
requires an extensive effort to ensure we remain eligible to
participate in these governmental programs. In addition, these
rules and regulations are subject to frequent changes as a
result of legislative and administrative action on both the
federal and the state levels. For these reasons, revenues from
governmental programs change frequently and require us to
monitor regularly the environment in which these governmental
programs operate.
Revenues from HMOs, PPOs and other private insurers are subject
to contracts and other arrangements that require us to discount
the amounts we customarily charge for healthcare services. These
discounted arrangements often limit our ability to increase
charges in response to increasing costs. We actively negotiate
with these payors to seek to maintain or increase the pricing of
our healthcare services. Insured patients are generally not
responsible for any difference between customary hospital
charges and the amounts received
24
from commercial insurance payors. However, insured patients are
responsible for payments not covered by insurance, such as
exclusions, deductibles and co-payments.
Self-pay revenues are primarily generated through the treatment
of uninsured patients. Our hospitals experienced an increase in
self-pay revenues during recent years.
Critical
Accounting Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to
be critical if:
|
|
|
|
|
it requires assumptions to be made that were uncertain at the
time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have
been made could have a material impact on our consolidated
results of operations or financial condition.
|
Our critical accounting estimates are more fully described in
our Annual 2007 Report on
Form 10-K
and continue to include the following areas:
|
|
|
|
|
Allowance for doubtful accounts and provision for doubtful
accounts;
|
|
|
|
Revenue recognition/Allowance for contractual discounts;
|
|
|
|
Accounting for stock-based compensation;
|
|
|
|
Goodwill and accounting for business combinations;
|
|
|
|
Professional and general liability claims; and
|
|
|
|
Accounting for income taxes.
|
Critical
Accounting Estimate Update
During 2008, we modified our quarterly process for estimating
our reserve for our critical accounting estimate for
professional and general liability claims by reducing the number
of actuarial calculations upon which the reserve is determined
from the average of two calculations to one.
Results
of Operations
The following definitions apply throughout the remaining portion
of Managements Discussion and Analysis of Financial
Condition and Results of Operations:
Admissions. Represents the total number of
patients admitted (in the facility for a period in excess of
23 hours) to our hospitals and used by management and
investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations
information excludes the operations of hospitals that are
classified as discontinued operations.
Emergency room visits. Represents the total
number of hospital-based emergency room visits.
Equivalent admissions. Management and
investors use equivalent admissions as a general measure of
combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the
outpatient factor (the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by
gross inpatient revenue). The equivalent admissions computation
equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a
general measure of combined inpatient and outpatient volume.
25
ESOP. Employee stock ownership plan. The ESOP
is a defined contribution retirement plan that covers
substantially all of our employees.
Medicare case mix index. Refers to the acuity
or severity of illness of an average Medicare patient at our
hospitals.
N/A. Not applicable.
N/M. Not meaningful.
Outpatient surgeries. Outpatient surgeries are
those surgeries that do not require admission to our hospitals.
26
Operating
Results Summary
The following tables present summaries of results of operations
for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
661.2
|
|
|
|
100.0
|
%
|
|
$
|
699.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
256.8
|
|
|
|
38.8
|
|
|
|
275.4
|
|
|
|
39.4
|
|
Supplies
|
|
|
92.2
|
|
|
|
13.9
|
|
|
|
95.5
|
|
|
|
13.6
|
|
Other operating expenses
|
|
|
114.6
|
|
|
|
17.4
|
|
|
|
125.3
|
|
|
|
17.9
|
|
Provision for doubtful accounts
|
|
|
73.1
|
|
|
|
11.1
|
|
|
|
82.7
|
|
|
|
11.8
|
|
Depreciation and amortization
|
|
|
32.5
|
|
|
|
4.9
|
|
|
|
33.3
|
|
|
|
4.8
|
|
Interest expense, net
|
|
|
26.4
|
|
|
|
4.0
|
|
|
|
22.5
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595.6
|
|
|
|
90.1
|
|
|
|
634.7
|
|
|
|
90.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interests and
income taxes
|
|
|
65.6
|
|
|
|
9.9
|
|
|
|
65.2
|
|
|
|
9.3
|
|
Minority interests in earnings of consolidated entities
|
|
|
0.3
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
65.3
|
|
|
|
9.9
|
|
|
|
64.5
|
|
|
|
9.2
|
|
Provision for income taxes
|
|
|
26.5
|
|
|
|
4.0
|
|
|
|
24.8
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
38.8
|
|
|
|
5.9
|
%
|
|
$
|
39.7
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended March 31, 2007 and
2008
Revenues
The increase in our revenues for the three months ended
March 31, 2008 as compared to the three months ended
March 31, 2007, was primarily the result of increases in
outpatient diagnostic services, such as CT imaging, laboratory
and cardiovascular services, as well as emergency room visits
and revenues per equivalent admission. The increase in our
emergency room visits was the result of a widespread outbreak of
the flu during February and March of 2008. Our respiratory
admissions increased by approximately 14% during the three
months ended March 31, 2008 as compared to the same period
last year. This was partially offset by a decrease in our
surgical volumes during the three months ended March 31,
2008 as compared to the same period last year. Adjustments to
estimated reimbursement amounts increased our revenues by
$1.3 million and $1.6 million for the three months
ended March 31, 2007 and 2008, respectively.
The following table shows the key drivers of our revenues for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
Three Months Ended March 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions
|
|
|
52,207
|
|
|
|
52,358
|
|
|
|
151
|
|
|
|
0.3
|
%
|
Equivalent admissions
|
|
|
99,454
|
|
|
|
99,533
|
|
|
|
79
|
|
|
|
0.1
|
|
Revenues per equivalent admission
|
|
$
|
6,649
|
|
|
$
|
7,031
|
|
|
$
|
382
|
|
|
|
5.7
|
|
Medicare case mix index
|
|
|
1.25
|
|
|
|
1.27
|
|
|
|
0.02
|
|
|
|
1.6
|
|
Average length of stay (days)
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
0.1
|
|
|
|
2.3
|
|
Inpatient surgeries
|
|
|
14,971
|
|
|
|
14,264
|
|
|
|
(707
|
)
|
|
|
(4.7
|
)
|
Outpatient surgeries
|
|
|
36,923
|
|
|
|
35,950
|
|
|
|
(973
|
)
|
|
|
(2.6
|
)
|
Emergency room visits
|
|
|
222,275
|
|
|
|
234,066
|
|
|
|
11,791
|
|
|
|
5.3
|
|
Outpatient factor
|
|
|
1.91
|
|
|
|
1.90
|
|
|
|
(0.01
|
)
|
|
|
(0.5
|
)
|
27
The following table shows the sources of our revenues by payor
for the periods presented , expressed as percentages of total
revenues, including adjustments to estimated reimbursement
amounts:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Medicare
|
|
|
34.6
|
%
|
|
|
32.9
|
%
|
Medicaid
|
|
|
9.9
|
|
|
|
9.8
|
|
HMOs, PPOs and other private insurers
|
|
|
40.4
|
|
|
|
41.3
|
|
Self-Pay
|
|
|
11.9
|
|
|
|
13.0
|
|
Other
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the periods presented (dollars in millions, except
for salaries and benefits per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
196.2
|
|
|
|
29.7
|
%
|
|
$
|
212.0
|
|
|
|
30.3
|
%
|
|
$
|
15.8
|
|
|
|
8.1
|
%
|
Stock-based compensation
|
|
|
3.6
|
|
|
|
0.5
|
|
|
|
6.4
|
|
|
|
0.9
|
|
|
|
2.8
|
|
|
|
79.4
|
|
Employee benefits
|
|
|
39.9
|
|
|
|
6.0
|
|
|
|
43.3
|
|
|
|
6.2
|
|
|
|
3.4
|
|
|
|
8.3
|
|
Contract labor
|
|
|
13.3
|
|
|
|
2.0
|
|
|
|
11.9
|
|
|
|
1.7
|
|
|
|
(1.4
|
)
|
|
|
(10.3
|
)
|
ESOP expense
|
|
|
3.8
|
|
|
|
0.6
|
|
|
|
1.8
|
|
|
|
0.3
|
|
|
|
(2.0
|
)
|
|
|
(51.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256.8
|
|
|
|
38.8
|
%
|
|
$
|
275.4
|
|
|
|
39.4
|
%
|
|
$
|
18.6
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
87.4
|
|
|
|
N/A
|
|
|
|
88.6
|
|
|
|
N/A
|
|
|
|
1.2
|
|
|
|
1.4
|
%
|
Salaries and benefits per equivalent admission
|
|
$
|
2,456
|
|
|
|
N/A
|
|
|
$
|
2,600
|
|
|
|
N/A
|
|
|
$
|
144
|
|
|
|
5.9
|
%
|
Salaries and wages as a percentage of revenues increased during
the three months ended March 31, 2008 as compared to the
three months ended March 31, 2007, primarily as a result of
increases in our average hourly rate. We experienced an increase
in our average hourly rate as a result of market rate increases
for skilled personnel and an increase in our employed
physicians. Additionally, during the three months ended
March 31, 2008, we continued to implement strategies to
reduce our contract labor by employing nurses, physicians and
other clinical personnel.
The increase in our stock-based compensation is generally a
result of an increase in the number of outstanding unvested
stock options and nonvested stock and a change in our forfeiture
rate methodology. We changed from a static forfeiture rate
methodology to a dynamic forfeiture rate methodology during the
later half of 2007. The dynamic forfeiture rate methodology
incorporates the lapse of time into the resulting expense
calculation and results in a forfeiture rate that diminishes as
the granted awards approach its vest date. Accordingly, the
dynamic forfeiture rate methodology results in a more consistent
stock compensation expense calculation over the vesting period
of the award. This change in methodology resulted in a higher
stock compensation expense during the three months ended
March 31, 2008 as compared to three months ended
March 31, 2007.
Our ESOP expense has two components: (1) common stock and
(2) cash. Shares of our common stock are allocated ratably
to employee accounts at approximately 70,000 shares each
quarter. The cash component is discretionary and is impacted by
the amount of forfeitures in the ESOP. We made $1.6 million
of
28
discretionary cash contributions to the ESOP during the three
months ended March 31, 2007. There were no cash
contributions made during the three months ended March 31,
2008, which was the primary reason why our ESOP expense
decreased by 51.4% during the three months ended March 31,
2008 as compared to three months ended March 31, 2007.
Supplies
The following table summarizes our supplies expense for the
periods presented (dollars in millions, except for supplies per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
92.2
|
|
|
$
|
95.5
|
|
|
$
|
3.3
|
|
|
|
3.6
|
%
|
Supplies as a percentage of revenues
|
|
|
13.9
|
%
|
|
|
13.6
|
%
|
|
|
(30
|
)bps
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
930
|
|
|
$
|
967
|
|
|
$
|
37
|
|
|
|
4.0
|
%
|
Our supplies expense increased for the three months ended
March 31, 2008 compared to the three months ended
March 31, 2007, primarily as a result of increases in
supplies per equivalent admission. Supplies as a percentage of
revenues decreased slightly as a result of effective management
of our supply costs and increased synergies as a result of our
participation in a group purchasing organization. Supplies per
equivalent admission increased as a result of rising supply
costs, particularly those related to pharmaceutical products,
orthopedic implants and other surgical-related supplies.
Other
Operating Expenses
The following table summarizes our other operating expenses for
the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Professional fees
|
|
$
|
14.8
|
|
|
|
2.2
|
%
|
|
$
|
16.6
|
|
|
|
2.4
|
%
|
|
$
|
1.8
|
|
|
|
11.9
|
%
|
Utilities
|
|
|
11.9
|
|
|
|
1.8
|
|
|
|
12.4
|
|
|
|
1.8
|
|
|
|
0.5
|
|
|
|
4.2
|
|
Repairs and maintenance
|
|
|
13.3
|
|
|
|
2.0
|
|
|
|
14.1
|
|
|
|
2.0
|
|
|
|
0.8
|
|
|
|
6.1
|
|
Rents and leases
|
|
|
6.7
|
|
|
|
1.0
|
|
|
|
6.5
|
|
|
|
0.9
|
|
|
|
(0.2
|
)
|
|
|
(3.7
|
)
|
Insurance
|
|
|
5.9
|
|
|
|
0.9
|
|
|
|
9.9
|
|
|
|
1.4
|
|
|
|
4.0
|
|
|
|
69.5
|
|
Physician recruiting
|
|
|
3.7
|
|
|
|
0.6
|
|
|
|
4.7
|
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
23.5
|
|
Contract services
|
|
|
35.7
|
|
|
|
5.4
|
|
|
|
34.9
|
|
|
|
5.0
|
|
|
|
(0.8
|
)
|
|
|
(2.2
|
)
|
Non-income taxes
|
|
|
9.5
|
|
|
|
1.4
|
|
|
|
10.0
|
|
|
|
1.4
|
|
|
|
0.5
|
|
|
|
4.9
|
|
Other
|
|
|
13.1
|
|
|
|
2.1
|
|
|
|
16.2
|
|
|
|
2.3
|
|
|
|
3.1
|
|
|
|
24.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114.6
|
|
|
|
17.4
|
%
|
|
$
|
125.3
|
|
|
|
17.9
|
%
|
|
$
|
10.7
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the three months
ended March 31, 2008 as compared to the three months ended
March 31, 2007 was primarily a result of increases in
professional fees, insurance and other expenses.
The increase in professional fees was primarily the result of
increases in fees paid for hospitalists and anesthesiology and
emergency room physician coverage. To attract and retain
qualified anesthesiologists, emergency department specialists
and other critical hospital-based physicians, hospitals in small
communities are increasingly required to guarantee that these
physicians will meet or exceed negotiated minimum income levels.
Our expense for professional fees paid to hospital-based
physicians has increased as the shortage of these physicians
becomes more acute. In addition, an increasing number of
physicians are demanding that our
29
hospitals retain hospitalists and also be paid for call coverage.
Our professional and general liability insurance expense
increased during the three months ended March 31, 2008
compared the three months ended March 31, 2007, primarily
as a result of an increase in our reserves for self-insured
malpractice claims as a result of the settlement of several
claims at amounts higher than those anticipated and the
actuarial implications of such settlements.
Other expenses increased as a result of increased legal and
accounting fees and $1.6 million in costs that were related
to certain discontinued information system conversion projects
at a few of our hospitals.
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
% Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
73.1
|
|
|
$
|
82.7
|
|
|
$ 9.6
|
|
|
13.1
|
%
|
Percentage of revenues
|
|
|
11.1
|
%
|
|
|
11.8
|
%
|
|
70bps
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
14.8
|
|
|
$
|
13.6
|
|
|
$(1.2)
|
|
|
(8.5
|
)
|
Percentage of revenues
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
(10)bps
|
|
|
N/M
|
|
The increase in the provision for doubtful accounts for the
three months ended March 31, 2008 as compared to the three
months ended March 31, 2007 was primarily the result of an
increase in self-pay revenues over the same period in the prior
year. The provision for doubtful accounts relates principally to
self-pay amounts due from patients. The provision and allowance
for doubtful accounts are critical accounting estimates and are
further discussed in Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Critical
Accounting Estimates, in our 2007 Annual Report on
Form 10-K.
Depreciation
and Amortization
Depreciation and amortization expense increased slightly for the
three months ended March 31, 2008 compared to the three
months ended March 31, 2007, primarily as a result of an
increase in depreciable fixed assets from capital projects that
we completed during 2007.
30
Interest
Expense
The following table summarizes our interest expense for the
periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities, including commitment fees
|
|
$
|
25.3
|
|
|
$
|
11.2
|
|
|
$
|
(14.1
|
)
|
Province
71/2% Senior
Subordinated Notes
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
31/4% Debentures
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
31/2% Notes
|
|
|
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Interest rate swap (including ineffective portion)
|
|
|
0.5
|
|
|
|
2.8
|
|
|
|
2.3
|
|
Other
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.8
|
|
|
|
21.2
|
|
|
|
(6.6
|
)
|
Amortization of deferred loan costs
|
|
|
1.3
|
|
|
|
1.8
|
|
|
|
0.5
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest expense allocation
|
|
|
(1.7
|
)
|
|
|
(0.1
|
)
|
|
|
1.6
|
|
Interest income
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
Capitalized interest
|
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26.4
|
|
|
$
|
22.5
|
|
|
$
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in interest expense during the three months ended
March 31, 2008 compared to the three months ended
March 31, 2007 was primarily a result of decreases in our
outstanding debt balances and lower interest rates under the
31/2% Notes
as compared to our senior secured credit facilities
(Senior Secured Credit Facilities), discussed in
more detail below under the heading Liquidity and Capital
Resources Senior Secured Credit Facilities. In
May 2007, we issued a total of $575.0 million of our
31/2% Notes.
The net proceeds of approximately $561.7 million were used
to repay a portion of the outstanding borrowings under our
Senior Secured Credit Facilities. Our weighted-average monthly
interest-bearing debt balance, excluding capital leases,
decreased from $1,661.7 million during the three months
ended March 31, 2007 to $1,512.2 million during the
three months ended March 31, 2008. For a further
discussion, see Liquidity and Capital
Resources Debt.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
Increase
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Provision for income taxes
|
|
$
|
26.5
|
|
|
$
|
24.8
|
|
|
$
|
(1.7
|
)
|
Effective income tax rate
|
|
|
40.6
|
%
|
|
|
38.4
|
%
|
|
|
(220
|
)bps
|
The decrease in our provision for income taxes was a result of a
lower effective tax rate during the three months ended
March 31, 2008 compared to the three months ended
March 31, 2007 due to a reduction in the valuation
allowance against deferred tax assets and deferred tax
liabilities resulting from a change in state taxation
apportionment percentages. During the three months ended
March 31, 2008, we benefited from some tax restructuring
that will generate taxable income and allow the utilization of
state net operating loss carry forwards that we were previously
unable to conclude that would more likely than not be utilized.
Based upon actual and budgeted financial results, we concluded
during the three months ended March 31, 2008 that the state
net operating loss carry forwards would likely be utilized and
accordingly, released the valuation
31
allowance during the three months ended March 31, 2008. In
addition, the tax restructuring reduced our overall state
allocation and apportionment percentages, which reduced the
required deferred tax liabilities during the three months ended
March 31, 2008. Both of the favorable adjustments to the
provision for income taxes were isolated to the three months
ended March 31, 2008.
Liquidity
and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our
operations and our debt borrowings. We believe that our
internally generated cash flows and amounts available under our
debt agreements will be adequate to service existing debt,
finance internal growth, expend funds on capital expenditures,
fund certain small to mid-size hospital acquisitions and fund
our stock repurchase program. It is not our intent to maintain
large cash balances.
The following table reconciles the non-GAAP metric of free
operating cash flow to the cash provided by operating
activities continuing operations, as stated in our
accompanying condensed consolidated statements of cash flows and
presents our summarized cash flow information for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net cash flows provided by continuing operating activities
|
|
$
|
51.4
|
|
|
$
|
105.1
|
|
Less: Purchase of property and equipment
|
|
|
(31.7
|
)
|
|
|
(33.4
|
)
|
|
|
|
|
|
|
|
|
|
Free operating cash flow
|
|
|
19.7
|
|
|
|
71.7
|
|
Proceeds from borrowings
|
|
|
40.0
|
|
|
|
|
|
Payments on borrowings
|
|
|
(52.4
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(87.6
|
)
|
Other
|
|
|
1.0
|
|
|
|
(0.2
|
)
|
Cash flows from operations provided by (used in) discontinued
operations
|
|
|
12.4
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
20.7
|
|
|
$
|
(20.2
|
)
|
|
|
|
|
|
|
|
|
|
The non-GAAP metric of free operating cash flow is an important
liquidity measure for us. Our computation of free operating cash
flow consists of net cash flow provided by continuing operations
less cash flows used for purchases of property and equipment.
Our cash flows provided by continuing operating activities for
the three months ended March 31, 2008 were positively
impacted by an increase in net income over the three months
ended March 31, 2007, a decrease in interest payments by
$11.7 million during the three months ended March 31,
2008 as compared to the three months ended March 31, 2007
and the timing of certain payments during the three months ended
March 31, 2008 compared to the three months ended
March 31, 2007. In addition, our net cash flows provided by
continuing operating activities for the three months ended
March 31, 2007 was negatively impacted by an
$8.5 million over-funding of our employee 401(k) plan.
Excluding this payment, which was refunded during April 2007,
our net cash provided by continuing operating activities would
have been $59.6 million for the three months ended
March 31, 2007.
We believe that free operating cash flow is useful to investors
and management as a measure of the ability of our business to
generate cash and is also utilized for debt repayments.
Computations of free operating cash flow may differ from company
to company. Therefore, free operating cash flow should be used
as a complement to, and in conjunction with, our condensed
consolidated statements of cash flows presented in our condensed
consolidated financial statements included elsewhere in this
report.
32
Working
Capital
Our net working capital and current ratio are summarized as
follows for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Total current assets
|
|
$
|
601.4
|
|
|
$
|
584.0
|
|
Total current liabilities
|
|
|
261.5
|
|
|
|
253.3
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
339.9
|
|
|
$
|
330.7
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
Our management believes that capital expenditures in key areas
at our hospitals should increase our local market share and help
persuade patients to obtain healthcare services within their
communities.
The following table reflects our capital expenditures for the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Capital projects
|
|
$
|
21.9
|
|
|
$
|
21.8
|
|
Routine
|
|
|
8.4
|
|
|
|
11.3
|
|
Information systems
|
|
|
1.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31.7
|
|
|
$
|
33.4
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
31.8
|
|
|
$
|
33.0
|
|
|
|
|
|
|
|
|
|
|
Ratio of capital expenditures to depreciation expense
|
|
|
99.7
|
%
|
|
|
101.2
|
%
|
|
|
|
|
|
|
|
|
|
We have a formal and intensive review procedure for the
authorization of capital expenditures. The most important
financial measure of acceptability for a discretionary capital
project is whether its projected discounted cash flow return on
investment exceeds our cost of capital. We will continue to
invest in modern technologies, emergency rooms and operating
room expansions, the construction of medical office buildings
for physician expansion and reconfiguring the flow of patient
care.
Debt
An analysis and roll-forward of our long-term debt is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Proceeds from
|
|
|
Payments of
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Borrowings
|
|
|
Borrowings
|
|
|
2008
|
|
|
Senior Secured Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
706.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
706.0
|
|
Revolving Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
31/2% Notes
|
|
|
575.0
|
|
|
|
|
|
|
|
|
|
|
|
575.0
|
|
31/4% Debentures
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
225.0
|
|
Other, including capital leases
|
|
|
5.2
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517.4
|
|
|
$
|
|
|
|
$
|
(0.3
|
)
|
|
$
|
1,517.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
We use leverage, or our debt to total capitalization ratio, to
make financing decisions. The following table illustrates our
financial statement leverage and the classification of our debt
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Increase
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Current portion of long-term debt
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
|
|
Long-term debt
|
|
|
1,516.9
|
|
|
|
1,516.6
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,517.4
|
|
|
|
1,517.1
|
|
|
|
(0.3
|
)
|
Total stockholders equity
|
|
|
1,544.2
|
|
|
|
1,507.4
|
|
|
|
(36.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,061.6
|
|
|
$
|
3,024.5
|
|
|
$
|
(37.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
49.6
|
%
|
|
|
50.2
|
%
|
|
|
60
|
bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
|
53.5
|
%
|
|
|
53.5
|
%
|
|
|
|
|
Variable rate debt(*)
|
|
|
46.5
|
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
46.9
|
%
|
|
|
46.9
|
%
|
|
|
|
|
Subordinated debt
|
|
|
53.1
|
|
|
|
53.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Our interest rate swap mitigates our floating rate risk on our
outstanding variable rate borrowings which converts our variable
rate debt to an annual fixed rate of 5.585%. The above
calculation does not consider the effect of our interest rate
swap. Our interest rate swap decreases our variable rate debt as
a percentage of our outstanding debt from 46.5% to zero as of
December 31, 2007 and March 31, 2008. Please refer to
the Capital Resources Interest Rate
Swap section below for a discussion of our interest rate
swap agreement. |
Capital
Resources
31/2% Convertible
Senior Subordinated Notes due May 15, 2014
On May 29, 2007, we issued $500.0 million of our
31/2% Notes,
and on May 31, 2007, we issued another $75.0 million
pursuant to the underwriters exercise of their
over-allotment option. The net proceeds of approximately
$561.7 million were used to repay a portion of our
outstanding borrowings under the Credit Agreement. The
31/2% Notes
bear interest at the rate of
31/2%
per year, payable semi-annually on May 15 and November 15.
Please refer to Part I. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Capital Resources
31/2%
Convertible Senior Subordinated Notes due May 15,
2014 in our 2007 Annual Report on
Form 10-K
for a detailed discussion of the
31/2%
Notes.
Senior
Secured Credit Facilities
Terms
On April 15, 2005, in connection with the Province business
combination, we entered into the Credit Agreement with CITI, as
administrative agent and the lenders party thereto, Bank of
America, N.A., CIBC World Markets Corp., SunTrust Bank and UBS
Securities LLC, as co-syndication agents and Citigroup Global
Markets Inc., as sole lead arranger and sole book runner.
Effective May 11, 2007, we amended our Credit Agreement and
increased our additional tranches available under our term B
loans (the Term B Loans) and revolving loans (the
Revolving Loans) by $200.0 million and
$50.0 million, respectively. Additionally, the amendment
allows for the issuance of up to $250.0 million in term A
loans (the Term A Loans), which was
34
previously unavailable. Finally, the amendment modified certain
existing non-monetary terms of the Credit Agreement to allow for
the flexibility in the issuance of the
31/2% Notes.
The Credit Agreement, as amended, provides for secured Term A
Loans up to $250.0 million, Term B Loans up to
$1,450.0 million and Revolving Loans of up to
$350.0 million, all maturing on April 15, 2012. In
addition, the Credit Agreement provides that we may request
additional tranches of Term B Loans up to $400.0 million
and additional tranches of Revolving Loans up to
$100.0 million. The Credit Agreement is guaranteed on a
senior secured basis by our subsidiaries with certain limited
exceptions. The Term B Loans are subject to additional mandatory
prepayments with a certain percentage of excess cash flow as
specifically defined in the Credit Agreement. As amended, the
Credit Agreement provides for letters of credit up to
$75.0 million.
Borrowings
and Payments
During January 2007, we borrowed $40.0 million under our
Credit Agreement in the form of Revolving Loans and repaid
$32.5 million of our outstanding borrowings under the
Credit Agreement for Term B Loans. Additionally, during the
first quarter of 2007 we repaid $20.0 million on our
Revolving Loans. All outstanding amounts of our Revolving Loans
were repaid by December 31, 2007. The remaining balances of
the Term B Loans are scheduled to be repaid in 2011 and 2012 in
four equal installments totaling in the aggregate of
$706.0 million.
Letters
of Credit and Availability
As of March 31, 2008, we had $36.4 million in letters
of credit outstanding under the Revolving Loans that were
related to the self-insured retention level of our general and
professional liability insurance and workers compensation
programs as security for payment of claims. Under the terms of
the Credit Agreement, Revolving Loans available for borrowing
were $413.6 million as of March 31, 2008, including
the $100.0 million available under the additional tranche.
Under the terms of the Credit Agreement, Term A Loans and Term B
Loans available for borrowing were $250.0 million and
$400.0 million, respectively, as of March 31, 2008,
all of which is available under the additional tranches.
Interest
Rates
Interest on the outstanding balances of the Term B Loans is
payable, at our option, at CITIs base rate (the alternate
base rate or ABR) plus a margin of 0.625%
and/or at an
adjusted London Interbank Offered Rate (Adjusted
LIBOR) plus a margin of 1.625%. Interest on the Revolving
Loans is payable at ABR plus a margin for ABR Revolving Loans or
Adjusted LIBOR plus a margin for eurodollar Revolving Loans. The
margin on ABR Revolving Loans ranges from 0.25% to 1.25% based
on the total leverage ratio being less than 2.00:1.00 to greater
than 4.50:1.00. The margin on the eurodollar Revolving Loans
ranges from 1.25% to 2.25% based on the total leverage ratio
being less than 2.00:1.00 to greater than 4.50:1.00.
As of March 31, 2008, the applicable annual interest rate
under the Term B Loans was 4.71%, which was based on the
90-day
Adjusted LIBOR plus the applicable margin. The
90-day
Adjusted LIBOR was 3.09% at March 31, 2008. The
weighted-average applicable annual interest rate for the three
months ended March 31, 2008 under the Term B Loans was
6.09%.
Covenants
The Credit Agreement requires us to satisfy certain financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreement. The minimum interest coverage ratio can be no less
than 3.50:1.00 for all periods ending after December 31,
2005. These calculations are based on the trailing four
quarters. The maximum total leverage ratios cannot exceed
4.25:1.00 for the periods ending on March 31, 2008 through
December 31, 2008; 4.00:1.00 for the periods ending on
March 31, 2009 through December 31, 2009; and
3.75:1.00 for the periods ending thereafter. In addition, on an
annualized basis, we are also limited with respect to amounts we
may spend on capital expenditures. Such amounts cannot exceed
10.0% of revenues for all years ending after December 31,
2006.
35
The financial covenant requirements and ratios are as follows:
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Level at
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|
|
|
|
|
March 31,
|
|
|
|
Requirement
|
|
|
2008
|
|
|
Minimum Interest Coverage Ratio
|
|
|
³3.50:1.00
|
|
|
|
5.32
|
|
Maximum Total Leverage Ratio
|
|
|
£4.25:1.00
|
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|
|
3.30
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|
In addition, the Credit Agreement contains customary affirmative
and negative covenants, which among other things, limit our
ability to incur additional debt, create liens, pay dividends,
effect transactions with our affiliates, sell assets, pay
subordinated debt, merge, consolidate, enter into acquisitions
and effect sale leaseback transactions.
Our Credit Agreement does not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our cost of borrowings.
31/4% Convertible
Senior Subordinated Debentures due August 15,
2025
On August 10, 2005, we sold $225.0 million of our
31/4% Debentures.
The net proceeds were approximately $218.4 million and were
used to repay indebtedness and for working capital and general
corporate purposes. The
31/4% Debentures
bear interest at the rate of
31/4%
per year, payable semi-annually on February 15 and
August 15. Please refer to Part I. Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Capital
Resources
31/4%
Convertible Senior Subordinated Debentures due August 15,
2025 in our 2007 Annual Report on
Form 10-K
for a detailed discussion of the
31/4% Debentures.
Province
7
1/2% Senior
Subordinated Notes
The $6.1 million outstanding principal amount of
Provinces
71/2% Senior
Subordinated Notes due 2013 (the
71/2% Notes)
bears interest at the rate of
71/2%
payable semi-annually on June 1 and December 1. We may
redeem all or a portion of the
71/2% Notes
on or after June 1, 2008, at the then current redemption
prices, plus accrued and unpaid interest. The
71/2% Notes
are unsecured and subordinated to our existing and future senior
indebtedness. The supplemental indenture contains no material
covenants or restrictions.
Province
41/4% Convertible
Subordinated Notes
In connection with the Province business combination,
approximately $172.4 million of the $172.5 million
outstanding principal amount of Provinces
41/4% Convertible
Subordinated Notes due 2008 was purchased and subsequently
retired. The supplemental indenture contains no material
covenants or restrictions.
Interest
Rate Swap
On June 1, 2006, we entered into an interest rate swap
agreement with Citibank as counterparty. The interest rate swap
agreement, as amended, was effective as of November 30,
2006 and has a maturity date of May 30, 2011. We entered
into the interest rate swap agreement to mitigate the floating
interest rate risk on a portion of our outstanding variable rate
borrowings. The interest rate swap agreement requires us to make
quarterly fixed rate payments to Citibank calculated on a
notional amount as set forth in the table below at an annual
fixed rate of 5.585% while Citibank will be obligated to make
quarterly floating payments to us based on the three-month LIBOR
on the same referenced notional amount. Notwithstanding the
terms of the interest rate swap transaction, we are ultimately
obligated for all amounts due and payable under the Credit
Agreement.
36
|
|
|
|
|
|
|
Notional Amount
|
|
Date Range
|
|
(In millions)
|
|
|
November 30, 2006 to November 30, 2007
|
|
$
|
900.0
|
|
November 30, 2007 to November 28, 2008
|
|
$
|
750.0
|
|
November 28, 2008 to November 30, 2009
|
|
$
|
600.0
|
|
November 30, 2009 to November 30, 2010
|
|
$
|
450.0
|
|
November 30, 2010 to May 30, 2011
|
|
$
|
300.0
|
|
On January 1, 2008, we adopted the provisions of FASB
Statement No. 157, Fair Value Measurements,
(SFAS No. 157) with respect to the
valuation of our interest rate swap agreement. We did not adopt
the provisions of SFAS No. 157 as it relates to
nonfinancial assets pursuant to FSP
FAS 157-2,
Effective Date of FASB Statement No. 157.
SFAS No. 157 clarifies how companies are required to
use a fair value measure for recognition and disclosure by
establishing a common definition of fair value, a framework for
measuring fair value, and expanding disclosures about fair value
measurements. The adoption of SFAS No. 157 did not
have a material impact on our results of operations or financial
position.
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
We determine the fair value of our interest rate swap based on
the amount at which it could be settled, which is referred to in
SFAS No. 157 as the exit price. This price is based upon
observable market assumptions and appropriate valuation
adjustments for credit risk. We have categorized our interest
rate swap as Level 2 under SFAS No. 157.
The interest rate swap agreement exposes us to credit risk in
the event of non-performance by Citibank. However, we do not
anticipate non-performance by Citibank. We do not hold or issue
derivative financial instruments for trading purposes. The fair
value of our interest rate swap at December 31, 2007 and
March 31, 2008 reflected a liability of approximately
$31.0 million and $50.2 million, respectively, and is
included in professional and general liability claims and other
liabilities in the accompanying condensed consolidated balance
sheets. The interest rate swap reflects a liability balance as
of December 31, 2007 and March 31, 2008 because of
decreases in market interest rates since inception.
We have designated the interest rate swap as a cash flow hedge
instrument. We assess the effectiveness of this cash flow hedge
instrument on a quarterly basis. We completed our quarterly
assessment of the cash flow hedge instrument at March 31,
2008, and determined the hedge to be partially ineffective in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133). Because the notional
amount of the interest rate swap in effect at March 31,
2008 exceeded our outstanding borrowings under our variable rate
debt Credit Agreement, a portion of the cash flow hedge
instrument was determined to be ineffective. We recognized an
increase in interest expense of approximately $0.6 million
related to the ineffective portion of our cash flow hedge during
the three months ended March 31, 2008.
Debt
Ratings
Please refer to Part I. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Capital Resources Debt
Ratings in our 2007 Annual Report on Form 10-K for a
detailed discussion of the way our debt is rated. During the
three months ended March 31, 2008, there were no material
changes in our debt ratings presented in our 2007 Annual Report
on Form 10-K.
Liquidity
and Capital Resources Outlook
We expect the level of capital expenditures during the period
April 1, 2008 to December 31, 2008 to be in a range of
$125.0 million to $140.0 million. We have large
projects in process at a number of our facilities. We are
reconfiguring some of our hospitals to more effectively
accommodate patient services and restructuring
37
existing surgical capacity in some of our hospitals to permit
additional patient volume and a greater variety of services. At
March 31, 2008, we had projects under construction with an
estimated additional cost to complete and equip of approximately
$89.7 million. See Note 9 to our consolidated
financial statements included elsewhere in this report for a
discussion of required capital expenditures for certain
facilities. We anticipate funding these expenditures through
cash provided by operating activities, available cash and
borrowings available under our credit arrangements.
Our business strategy contemplates the selective acquisition of
additional hospitals and other healthcare service providers, and
we regularly review these potential acquisitions. These
acquisitions may, however, require additional financing. We
regularly evaluate opportunities to sell additional equity or
debt securities, obtain credit facilities from lenders or
restructure our long-term debt or equity for strategic reasons
or to further strengthen our financial position. The sale of
additional equity or convertible debt securities could result in
additional dilution to our stockholders.
We have never declared or paid cash dividends on our common
stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not
currently intend to declare or pay any cash dividends on our
common stock. Our Board of Directors will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends. Delaware law prohibits us from paying any dividends
unless we have capital surplus or net profits available for this
purpose. In addition, our credit facilities impose restrictions
on our ability to pay dividends.
In November 2007, our Board of Directors authorized the
repurchase of up to $150.0 million of outstanding shares of
our common stock either in the open market or through privately
negotiated transactions, subject to market conditions,
regulatory constraints and other factors, to utilize excess cash
flow after its capital expenditure needs have been satisfied. We
are not obligated to repurchase any specific number of shares
under the program. The program expires on November 26,
2008, but may be extended, suspended or discontinued at any time
prior to the expiration date. We repurchased approximately
3.0 million shares during the three months ended
March 31, 2008 for an aggregate purchase price, including
commissions, of approximately $75.4 million with an average
purchase price of $25.15 per share. As of March 31, 2008,
the Company had repurchased in the aggregate, approximately
4.4 million shares at an aggregate purchase price,
including commissions, of approximately $116.6 million. We
have designated these shares as treasury stock.
We believe that cash flows from operations, amounts available
under our credit facility and our access to capital markets are
sufficient to fund the purchase prices for any potential
acquisitions, meet expected liquidity needs, including repayment
of our debt obligations, planned capital expenditures and other
expected operating needs over the next three years.
Contractual
Obligations
We have various contractual obligations, which are recorded as
liabilities in our condensed consolidated financial statements.
Other items, such as certain purchase commitments and other
executory contracts, are not recognized as liabilities in our
condensed consolidated financial statements but are required to
be disclosed. For example, we are required to make certain
minimum lease payments for the use of property under certain of
our operating lease agreements. During the three months ended
March 31, 2008, there were no material changes in our
contractual obligations presented in our 2007 Annual Report on
Form 10-K.
Off-Balance
Sheet Arrangements
We had standby letters of credit outstanding of approximately
$36.4 million as of March 31, 2008, all of which
relates to the self-insured retention levels of our professional
and general liability insurance and workers compensation
programs as security for the payment of claims.
38
Recently
Issued Accounting Pronouncements
Please refer to Note 8 of our accompanying condensed
consolidated financial statements included elsewhere in this
report for a discussion of the impact of recently issued
accounting pronouncements.
Contingencies
Please refer to Note 9 of our condensed consolidated
financial statements included elsewhere in this report for a
discussion of our material financial contingencies, including:
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|
|
Americans with Disabilities Act claim;
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|
|
Legal proceedings and general liability claims;
|
|
|
|
Physician commitments;
|
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|
|
Capital expenditure commitments; and
|
|
|
|
Acquisitions.
|
Forward-Looking
Statements
We make forward-looking statements in this report and in other
reports and proxy statements we file with the SEC
and/or
release to the public. In addition, our senior management makes
forward-looking statements orally to analysts, investors, the
media and others. Broadly speaking, forward-looking statements
include:
|
|
|
|
|
projections of our revenues, net income, earnings per share,
capital expenditures, cash flows, debt repayments, interest
rates, certain operating statistics and data or other financial
items;
|
|
|
|
descriptions of plans or objectives of our management for future
operations or services, including acquisitions, divestitures,
business strategies and initiatives;
|
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|
|
interpretations of Medicare and Medicaid law and their effects
on our business; and
|
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|
|
descriptions of assumptions underlying or relating to any of the
foregoing.
|
In this report, for example, we make forward-looking statements
discussing our expectations about:
|
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|
|
|
future financial performance and condition;
|
|
|
|
future liquidity and capital resources;
|
|
|
|
repurchases of our common stock;
|
|
|
|
future cash flows;
|
|
|
|
existing and future debt and equity structure;
|
|
|
|
compliance with debt covenants;
|
|
|
|
our strategic goals;
|
|
|
|
our business strategy and operating philosophy;
|
|
|
|
supply and information technology costs;
|
|
|
|
changes in interest rates;
|
|
|
|
our plans as to the payment of dividends;
|
|
|
|
future acquisitions, dispositions and joint ventures;
|
|
|
|
industry and general economic trends;
|
|
|
|
the efforts of insurers and other payors, healthcare providers
and others to contain healthcare costs;
|
|
|
|
reimbursement changes;
|
39
|
|
|
|
|
governmental budgetary challenges at the federal level and in
the states where we operate;
|
|
|
|
patient volumes and related revenues;
|
|
|
|
recruiting and retention of clinical personnel;
|
|
|
|
future capital expenditures;
|
|
|
|
expected changes in certain expenses;
|
|
|
|
the impact of changes in our critical accounting estimates;
|
|
|
|
claims and legal actions relating to professional liabilities
and other matters;
|
|
|
|
non-GAAP measures;
|
|
|
|
the impact and applicability of new accounting standards;
|
|
|
|
staffing issues relating to nurses and other clinical
personnel; and
|
|
|
|
physician recruiting and retention.
|
There are a number of factors, many beyond our control, that
could cause results to differ significantly from our
expectations. Part I, Item 1A. Risk Factors of
our 2007 Annual Report on
Form 10-K
contains a summary of these factors. Any factor described in our
2007 Annual Report on
Form 10-K
could by itself, or together with one or more factors, adversely
affect our business, results of operations
and/or
financial condition. There may be factors not described in our
2007 Annual Report on
Form 10-K
that could also cause results to differ from our expectations.
Forward-looking statements discuss matters that are not
historical facts. Because they discuss future events or
conditions, forward-looking statements often include words such
as can, could, may,
should, believe, will,
would, expect, project,
estimate, anticipate, plan,
intend, target, continue or
similar expressions. Do not unduly rely on forward-looking
statements, which give our expectations about the future and are
not guarantees. Forward-looking statements speak only as of the
date they are made. We do not undertake any obligation to update
our forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events. The following are some of
the factors that could cause our actual results to differ
materially from the expected results described in or underlying
our forward-looking statements:
|
|
|
|
|
reduction in payments to healthcare providers by government and
commercial third-party payors, as well as changes in the manner
in which employers provide healthcare coverage to their
employees including high deductible plans;
|
|
|
|
the possibility of adverse changes in, and requirements of,
applicable laws, regulations, policies and procedures;
|
|
|
|
our ability to manage healthcare risks, including malpractice
litigation, and the lack of state and federal tort reform;
|
|
|
|
the availability, cost and terms of insurance coverage;
|
|
|
|
the highly competitive nature of the healthcare business,
including the competition to recruit and retain physicians and
other healthcare professionals;
|
|
|
|
the ability to attract and retain qualified management and
personnel;
|
|
|
|
our reliance on contract labor;
|
|
|
|
the geographic concentration of our operations;
|
|
|
|
changes in our operating or expansion strategy;
|
|
|
|
the ability to operate and integrate newly acquired facilities
successfully;
|
40
|
|
|
|
|
the availability and terms of capital to fund our business
strategy;
|
|
|
|
changes in our liquidity or the amount or terms of our
indebtedness and in our debt credit ratings;
|
|
|
|
the potential adverse impact of government investigations and
litigation involving the business practices of healthcare
providers, including whistleblowers investigations;
|
|
|
|
changes in generally accepted accounting principles or practices;
|
|
|
|
volatility in the market value of our common stock;
|
|
|
|
changes in general economic conditions in the markets we serve;
|
|
|
|
ability to add or further emphasize service lines that are
needed in our communities;
|
|
|
|
our reliance on information technology systems maintained by
HCA-IT;
|
|
|
|
the costs of complying with the Americans with Disabilities Act;
|
|
|
|
possible adverse rulings, judgments, settlements and other
outcomes of pending litigation; and
|
|
|
|
those risks and uncertainties described from time to time in our
filings with the SEC.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Interest
Rates
The following discussion relates to our exposure to market risk
based on changes in interest rates:
Outstanding
Debt
We are exposed to market risk related to changes in interest
rates. We have an interest rate swap to manage our exposure to
these fluctuations. The interest rate swap converts a portion of
our indebtedness to a fixed rate with a notional amount of
$750.0 million at March 31, 2008 and at an annual
fixed rate of 5.585%. The notional amount of the swap agreement
represents a balance used to calculate the exchange of cash
flows and is not an asset or liability. Any market risk or
opportunity associated with this swap agreement is offset by the
opposite market impact on the related debt. Our credit risk
related to this agreement is low because the swap agreement is
with a creditworthy financial institution.
As of March 31, 2008, we had outstanding debt of
$1,517.1 million, 46.5% or $706.0 million, of which
was subject to variable rates of interest. As of March 31,
2008, the fair value of our outstanding variable rate debt
approximates its carrying value. The fair value of our
$225.0 million
31/4% Debentures
and $575.0 million
31/2% Notes
was approximately $182.3 million and $483.0 million,
respectively, based on the quoted market prices at
March 31, 2008.
Based on a hypothetical 100 basis point increase in
interest rates, the potential annualized decrease in our future
pre-tax earnings would be approximately $7.1 million as of
March 31, 2008. The estimated change to our interest
expense is determined considering the impact of hypothetical
interest rates on our borrowing cost and debt balances. These
analyses do not consider the effects, if any, of the potential
changes in our credit ratings or the overall level of economic
activity. Further, in the event of a change of significant
magnitude, our management would expect to take actions intended
to further mitigate our exposure to such change.
Cash
Balances
Certain of our outstanding cash balances are invested overnight
with high credit quality financial institutions. We do not hold
direct investments in auction rate securities, collateralized
debt obligations, structured investment vehicles or
mortgage-backed securities. We do not have significant exposure
to changing interest rates on invested cash at March 31,
2008. As a result, the interest rate market risk implicit in
these investments at March 31, 2008, if any, is low.
41
Item 4. Controls
and Procedures.
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report pursuant to
Rule 13a-15
of the Securities and Exchange Act of 1934, as amended (the
Exchange Act). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in ensuring
that information required to be disclosed by us (including our
consolidated subsidiaries) in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported on a timely basis.
There has been no change in our internal control over financial
reporting during the three months ended March 31, 2008 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
42
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
General. We are, from time to time, subject to
claims and suits arising in the ordinary course of business,
including claims for damages for personal injuries, medical
malpractice, breach of contracts, wrongful restriction of or
interference with physicians staff privileges and
employment related claims. In certain of these actions,
plaintiffs request payment for damages, including punitive
damages that may not be covered by insurance. We are currently
not a party to any pending or threatened proceeding, which, in
managements opinion, would have a material adverse effect
on our business, financial condition or results of operations.
Americans with Disabilities Act Claim. On
January 12, 2001, a class action lawsuit was filed by
Access Now in the United States District Court of the Eastern
District of Tennessee (the District Court) against
each of our existing hospitals alleging non-compliance with the
Americans with Disabilities Act (the ADA). This
lawsuit has been amended to add hospitals we subsequently
acquired and to dismiss divested facilities. The lawsuit does
not seek any monetary damages, but seeks injunctive relief
requiring facility modification, where necessary, to meet ADA
guidelines, in addition to attorneys fees and costs. We
may be required to make significant capital expenditures at one
or more of our facilities in order to comply with the ADA.
Through March 31, 2008, the plaintiffs had conducted
inspections at 32 of our hospitals (including two subsequently
divested hospitals), and have entered into settlement agreements
with the plaintiffs regarding 13 of the hospitals. Under
settlement agreements reached with the plaintiffs, we have
completed corrective work on three facilities for a cost of
$1.0 million. We currently anticipate that the costs
associated with the ten other facilities which have settlement
agreements will range from $5.1 million to
$7.0 million. On February 12, 2008, the District Court
entered an order dismissing the case due to the lack of
individual plaintiffs. We anticipate that the plaintiffs will
re-file the case in another jurisdiction.
There have been no material changes in our risk factors from
those disclosed in our 2007 Annual Report on
Form 10-K.
43
|
|
Item 2.
|
Unregistered
Sales of Securities and Use of Proceeds.
|
The following table summarizes our share repurchase activity by
month for the three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
May Yet be
|
|
|
|
|
|
|
Weighted
|
|
|
Part of a
|
|
|
Purchased
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Publicly
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Program(1)
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Program(1)
|
|
|
(In millions)
|
|
|
January 1, 2008 to January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2008 to February 29, 2008
|
|
|
1,865,280
|
|
|
$
|
25.12
|
|
|
|
1,865,280
|
|
|
$
|
62.0
|
|
March 1, 2008 to March 31, 2008
|
|
|
1,132,500
|
|
|
$
|
25.20
|
|
|
|
1,132,500
|
|
|
$
|
33.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,997,780
|
|
|
$
|
25.15
|
|
|
|
2,997,780
|
|
|
$
|
33.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In November 2007, the Companys Board of Directors
authorized the repurchase of up to $150.0 million of
outstanding shares of the Companys common stock either in
the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints and other
factors, to utilize excess cash flow after its capital
expenditure needs have been satisfied. The Company is not
obligated to repurchase any specific number of shares under the
program. The program expires on November 26, 2008, but may
be extended, suspended or discontinued at any time prior to the
expiration date. As of March 31, 2008, the Company had
repurchased in the aggregate, approximately 4.4 million
shares at an aggregate purchase price, including commissions, of
approximately $116.6 million. These shares have been
designated by the Company as treasury stock |
44
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate (incorporated by reference from
exhibits to the Registration Statement on
Form S-8
filed on April 19, 2005, File
No. 333-124093).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws (incorporated by reference
from exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251).
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Accounting Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief Accounting Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
45
SIGNATURES
Pursuant to the requirements 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.
LifePoint Hospitals, Inc.
Gary D. Willis
Chief Accounting Officer
(Principal Accounting Officer)
Date: May 1, 2008
46
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference from exhibits to the Registration Statement on
Form S-8
filed on April 19, 2005, File
No. 333-124093).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws (incorporated by reference
from exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251).
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Accounting Officer of LifePoint
Hospitals, Inc. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief Accounting Officer of LifePoint
Hospitals, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|