Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial position should be read in conjunction with the respective condensed consolidated financial statements and related footnotes of Adeptus Health Inc. included in Part I of this Quarterly Report on Form 10-Q, as well as our consolidated audited financial statements and related notes included in our 2015 Annual Report on Form 10-K. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those discussed in the section herein entitled “Forward Looking Statements” and in the section of the 2015 Annual Report on Form 10-K entitled Part I, "Item 1.A. Risk Factors.”
Overview
We are a patient-centered healthcare organization providing emergency medical care through the largest network of freestanding emergency rooms in the United States and partnerships with premier healthcare providers. We own and operate First Choice Emergency Room in Texas, and operate a hospital and freestanding facilities in partnership with Texas Health Resources in Texas and UCHealth Emergency Rooms in partnership with University of Colorado Health in Colorado. Together with Dignity Health, we also operate Dignity Health Arizona General Hospital and freestanding emergency departments in Arizona. Adeptus Health is the largest and oldest network of freestanding emergency rooms in the United States. We have experienced rapid growth in recent periods, growing from 14 freestanding facilities at the end of 2012 to 93 freestanding facilities and two fully licensed general hospitals at June 30, 2016. We own and/or operate facilities currently located in the Houston, Dallas/Fort Worth, San Antonio and Austin, Texas markets, as well as in the Colorado Springs and Denver, Colorado and Phoenix, Arizona markets. In the Arizona and Dallas/Fort Worth markets, each of the freestanding facilities are outpatient departments of the hospitals in those markets.
Since our founding in 2002, our mission has been to address the need within our local communities for immediate and convenient access to quality emergency care in a patient-friendly, cost-effective setting. We believe we are transforming the emergency care experience with a differentiated and convenient care delivery model which improves access, reduces wait times and provides high-quality clinical and diagnostic services on-site. Our facilities are fully licensed and provide comprehensive, emergency care with an acuity mix that we believe is comparable to hospital-based emergency rooms.
Initial
Public
Offering
On June 30, 2014, we completed our initial public offering of 5,321,414 shares of our Class A common stock at a price to the public of $22.00 per share and received net proceeds of approximately $96.2 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the initial public offering to purchase limited liability company units of Adeptus Health LLC, or LLC Units, from Adeptus Health LLC. Adeptus Health LLC used the proceeds it received as a result of our purchase of LLC Units to cause First Choice ER, LLC to reduce outstanding borrowings under its senior secured credit facility, to make a $2.0 million one-time payment to an affiliate of a significant stockholder in connection with the termination of an advisory services agreement and for general corporate purposes. An additional 313,586 shares were also sold by an affiliate of a significant stockholder.
Secondary Offerings
On May 11, 2015, we completed a public offering of 1,572,296 shares of our Class A common stock at a price to the public of $63.75 per share and received net proceeds of approximately $94.5 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,572,296 LLC Units. As such, the Company did not receive benefit from the net proceeds. An additional 842,704 shares were also sold by an affiliate of a significant stockholder.
On July 29, 2015, we completed a public offering of 2,645,277 shares of our Class A common stock at a price to the public of $105.00 per share and received net proceeds of approximately $265.9 million, after deducting
underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 2,645,277 LLC Units. As such, the Company did not receive benefit from the net proceeds. An additional 1,264,723 shares were also sold by an affiliate of a significant stockholder.
On June 8, 2016, we completed a public offering of 1,774,219 shares of our Class A common stock at a price to the public of $62.00 per share and received net proceeds of approximately $107.4 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering to purchase, for cash, 1,774,219 LLC Units. As such, the Company did not receive benefit from the net proceeds. An additional 1,043,281 shares were also sold by an affiliate of a significant stockholder.
Joint Venture with Dignity Health
On October 22, 2014, we announced our expansion into Arizona through a joint venture with Dignity Health, one of the nation’s largest health systems. As of June 30, 2016, the partnership includes Dignity Health Arizona General Hospital, a full-service healthcare hospital facility in Phoenix Arizona and seven freestanding emergency departments. The hospital received its CMS certification from the Joint Commission on January 30, 2015. Department of Health and Human Services’ Centers for Medicare and Medicaid Services, or CMS, certification allows us to receive reimbursement for services provided to Medicare and Medicaid patients of the hospital. Dignity Health Arizona Health Hospital is a full-service hospital facility, licensed by the state as a general hospital. Spanning 39,000 square feet, the hospital has 16 inpatient rooms, two operating rooms for inpatient and outpatient surgical procedures, an emergency department, a high-complexity laboratory and a full radiology suite. Patients have full access to the Dignity Health area facilities and physicians, and the hospital provides Phoenix-area residents with 24/7 access to emergency medical care.
Joint Venture with University of Colorado Health
On April 21, 2015, we announced a new partnership with University of Colorado Health, or UCHealth, to improve access to high-quality and convenient emergency medical care in Colorado. Under the partnership, UCHealth holds a majority stake in the freestanding emergency rooms throughout Colorado Springs, northern Colorado and the Denver metro area. The Company contributed the 12 existing freestanding emergency rooms it held in Colorado, which have since been rebranded as UCHealth emergency rooms, and the related business associated with these facilities to the joint venture. The partnership will also include hospital locations planned for Colorado Springs and Denver.
Joint Venture with Ochsner Health System
In September 2015, the Company announced the formation of a new partnership with New Orleans-based Ochsner Health System to enhance access to emergency medical care in Louisiana. The joint venture will include freestanding emergency departments in locations still to be determined.
Joint Venture with Mount Carmel Health System
In February 2016, the Company announced expansion into Ohio and a new partnership with Mount Carmel Health System. The partnership will include freestanding emergency rooms in the Columbus, Ohio market.
Joint Venture with Texas Health Resources
On November 4, 2015, the Company opened a full-service hospital facility in Carrollton, Texas, a suburb of the Dallas/Fort Worth Metroplex. This facility received its CMS certification from the Joint Commission on November 4, 2015. CMS certification allows us to receive reimbursement for services provided to Medicare and Medicaid patients of the hospital and its freestanding emergency departments in the Dallas/Fort Worth market. First Texas Hospital is a full-service healthcare hospital facility, licensed by the state as a general hospital. Spanning 77,000 square feet, the hospital has 50 inpatient rooms, three operating rooms for inpatient and outpatient surgical procedures, an emergency department, a high-complexity laboratory and a full radiology suite.
On May 11, 2016, the Company announced the formation of a new partnership with Texas Health Resources (“THR”) to enhance access to emergency medical care in Dallas/Fort Worth. The Company contributed First Texas
Hospital and the 27 existing freestanding emergency rooms it held in Dallas/Fort Worth and the related business associated with these facilities to the joint venture. Under the joint venture, THR will hold a majority interest in these facilities. The contribution of these facilities and their operations was deemed a change of control for accounting purposes, and as such, the Company has recorded a gain of $185.4 million on the contribution of the previously fully owned facilities during the quarter ended June 30, 2016. This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.
We may not consolidate the financial results of the operations of any particular joint venture. While revenues from unconsolidated joint ventures are not recorded as revenues by us for GAAP reporting purposes, equity in earnings of joint ventures could be a significant portion of our overall earnings.
The Company has contracts to manage the facilities, which results in the Company having an active role in the operations of the facilities and devoting a significant portion of its corporate resources to the fulfillment of these management responsibilities for which the Company receives a management fee. Additionally, the Company receives a stipend for providing physicians to the facilities within each joint venture.
Industry Trends
The emergency room remains a critical access point for millions of Americans who experience sudden serious illness or injury in the United States each year. The availability of that care is under pressure and threatened by a wide range of factors, including shrinking capacity and an increasing demand for services. According to AHA, from 1992 to 2012, the number of emergency room visits increased by 46.7%, while the number of emergency departments decreased by 11.4%. The number of emergency room visits exceeded 130 million in 2012, or approximately 247 visits per minute.
Factors affecting access to emergency care include availability of emergency departments, capacity of emergency departments, and availability of staffing in emergency departments. ACEP's National Report Card on U.S. emergency care rates the access to emergency care category with a near-failing grade of "D-" and a grade of "D+" for the overall emergency room system. As the largest operator of freestanding emergency rooms, we believe we are an essential part of the solution, providing access to high-quality emergency care and offering a significantly improved patient experience.
Key Revenue Drivers
Our revenue growth is primarily driven by facility expansion, increasing patient volumes and reimbursement rates.
Facility Expansion
We add new facilities based on capacity, location, demographics and competitive considerations. We expect the new facilities we open to be the primary driver of our revenue growth. Our results of operations have been and will continue to be materially affected by the timing and number of new facility openings and the amount of new facility opening costs incurred. A new facility builds its patient volumes over time and, as a result, generally has lower revenue than our more mature facilities. A new facility generally takes up to 12 months to achieve a level of operating performance comparable to our similar existing facilities.
Patient Volume
We generate revenue by providing emergency care to patients based upon the estimated amounts due from commercial insurance providers, patients and other third-party payors. Revenue per treatment is sensitive to the mix of services used in treating a patient. Our patient volumes are directly correlated to our new facility openings, our targeted marketing efforts and external factors such as severity of annually recurring viruses that lead to increases in patient visits. Revenue is recognized when services are rendered to patients.
Patient volume is supported through marketing programs focused on educating communities about the convenient and high-quality emergency care we provide. Through our targeted marketing campaigns, which include
direct mail, radio, television, outdoor advertising, digital and social media, we aim to increase our patient volumes by reaching a broad base of potential patients in order to increase brand awareness. We also have a dedicated field marketing team that works to educate local communities in which we operate about the access and care available at our facilities. Our dedicated field marketing team targets specific audiences by attending local chamber of commerce meetings, meeting with primary care physicians and visiting with school nurses and athletic directors, in order to increase patient volumes within a facility's local community.
Our patient volume is also influenced by local market conditions, such as weather, economy, etc., that may be beyond our direct control, as well as, seasonal conditions. These seasonal conditions include the timing, location and severity of influenza, allergens and other annually recurring viruses, which at times leads to severe upper respiratory concerns.
Reimbursement Rates and Acuity Mix
The majority of our net patient revenue is derived from patients with commercial health insurance coverage. The reimbursement rates set by third-party payors tend to be higher for higher acuity visits, reflecting their higher complexity. Consistent with billing practices at all emergency rooms and in light of the fact our facilities are open 24 hours a day, seven days a week and staffed with Board-certified physicians, we bill payors a facility fee, a professional services fee and other related fees. The reimbursement rates we have been able to negotiate have held relatively stable; however, the mix of both acuity and payors can vary period to period, changing the overall blended reimbursement rate. With select payors, we have the ability to make annual increases in our billed amounts.
Seasonality
Our patient volumes are sensitive to seasonal fluctuations in emergency activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks can vary dramatically. Additionally, as consumers shift towards high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Sources of Revenue by Payor
We receive payments for services rendered to patients from third-party payors or from our patients directly, as described in more detail below. Generally, our revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures.
Patient service revenue before the provision for bad debt by major payor source for the periods indicated is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commercial
|
|
$
|
92,068
|
|
$
|
100,545
|
|
$
|
215,114
|
|
$
|
193,812
|
Self-pay
|
|
|
5,407
|
|
|
2,360
|
|
|
10,879
|
|
|
3,990
|
Medicaid
|
|
|
1,972
|
|
|
343
|
|
|
4,406
|
|
|
398
|
Medicare
|
|
|
1,269
|
|
|
111
|
|
|
3,175
|
|
|
145
|
Other
|
|
|
879
|
|
|
1,004
|
|
|
1,309
|
|
|
1,920
|
Patient Service Revenue
|
|
|
101,595
|
|
|
104,363
|
|
|
234,883
|
|
|
200,265
|
Provision for bad debt
|
|
|
(16,673)
|
|
|
(17,514)
|
|
|
(43,726)
|
|
|
(32,459)
|
Net Revenue
|
|
$
|
84,922
|
|
$
|
86,849
|
|
$
|
191,157
|
|
$
|
167,806
|
Four major third-party payors accounted for 79.5%, 85.1%, 80.8% and 85.6%, of our patient service revenue for the three and six months ended June 30, 2016 and 2015, respectively. These same payors also accounted for 76.2% and 65.9% of our accounts receivable as of June 30, 2016 and December 31, 2015, respectively. The following table presents a breakdown by major payor source of the percentage of patient service revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Payor:
|
|
|
|
|
|
|
|
|
|
|
|
|
United HealthCare
|
|
30.3
|
%
|
|
30.9
|
%
|
|
29.4
|
%
|
|
28.9
|
%
|
Blue Cross Blue Shield
|
|
20.0
|
|
|
21.1
|
|
|
22.2
|
|
|
23.2
|
|
Aetna
|
|
15.8
|
|
|
19.5
|
|
|
15.9
|
|
|
19.7
|
|
Cigna
|
|
13.4
|
|
|
13.6
|
|
|
13.3
|
|
|
13.8
|
|
Other
|
|
17.3
|
|
|
14.5
|
|
|
16.0
|
|
|
14.1
|
|
Medicaid/Medicare
|
|
3.2
|
|
|
0.4
|
|
|
3.2
|
|
|
0.3
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Third-Party Payors
Third-party payors include health insurance companies as well as related payments from patients for deductibles and co-payments and have historically comprised the vast majority of our patient service revenue. We enter into contracts with health insurance companies and other health benefit groups by granting discounts to such organizations in return for the patient volume they provide.
Most of our commercial revenue is attributable to contracts where a fee is negotiated relative to the service provided at our facilities. Our contracts are structured as either case-rate contracts or as discounts to billed charges. In a case rate contract, a set fee is assigned to visits based on acuity level. We also enter into contracts with payors based on a discount of our billed charges. There are contracted rates for both the professional component and the technical component. Each portion of the claim is billed separately and paid based on the patient's emergency room benefits received.
Freestanding emergency room facilities, like hospital emergency rooms, are full-service emergency rooms licensed by the states of Texas, Colorado and Arizona. As such, we collect the emergency room benefits based on a patient's specific insurance plan. Additionally, Texas insurance law provides that all fully funded insurance plans should pay all emergency claims at the in-network benefit rate, regardless of the provider's contract status.
Self-Pay
Self-pay consists of out-of-pocket payments for treatments by patients not otherwise covered by third-party payors. For the three and six months ended June 30, 2016 and 2015, self-pay payments accounted for 5.3%, 2.3%, 4.6% and 1.9% of our patient service revenue, respectively.
Charity Care
Charity care consists of the write-off of all charges associated with patients who are treated but do not have commercial insurance or the ability to self-pay. For the three and six months ended June 30, 2016 and 2015, charity care write-offs represented 3.3%, 9.0%, 3.4% and 8.9%, of our patient service revenue, respectively.
Key Performance Measures
The key performance measures we use to evaluate our business focus on the number of patient visits, or patient volume, same-store revenue and Adjusted EBITDA. As a result of our strategy of partnering with Dignity Health in
Arizona, University of Colorado Health in Colorado and THR in Dallas/Fort Worth,
we review unconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics, including systemwide same-store revenue, systemwide net patient services revenue and systemwide patient volume.
Patient Volume
We utilize patient volume to forecast our expected net revenue and as a basis by which to measure certain costs of the business. We track patient volume at the facility level. The number of patients we treat is influenced by factors we control and also by conditions that may be beyond our direct control. See "—Key Revenue Drivers."
Systemwide Same-Store Revenue
We begin comparing systemwide same-store revenue for a new facility on the first day of the 16th full fiscal month following the facility's opening, which is when we believe systemwide same-store comparison becomes meaningful. When a facility is relocated, we continue to include revenue from that facility in systemwide same-store revenue. Systemwide same-store revenue allows us to evaluate how our facility base is performing by measuring the change in period-over-period net revenue in facilities that have been open for 15 months or more. Various factors affect systemwide same-store revenue, including outbreaks of illnesses, changes in marketing and competition. For the three months ended June 30, 2016, our systemwide same-store revenue decreased by 2.8% to $91.6 million from $94.3 million for the three months ended June 30, 2015. For the six months ended June 30, 2016, our systemwide same-store revenue grew by 3.5% to $171.4 million from $165.6 million for the six months ended June 30, 2015. Opening new facilities is an important part of our growth strategy. These new facilities, within 15 months after opening, generally have historically generated approximately $5.0 million to $6.0 million in annual net revenue and on average have historically incurred approximately $3.6 million to $4.0 million in annual operating expenses. On that basis, our average annual estimated operating income, excluding depreciation and amortization, for such facilities has historically been between $1.0 million and $2.0 million, which would represent a facility operating margin, excluding depreciation and amortization, of between approximately 28% and 33%. As we continue to pursue our growth strategy, we anticipate that a significant percentage of our revenue will come from stores not yet included in our systemwide same-store revenue calculation.
Systemwide Net Patient Services Revenue
The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results. Only the (i) Company’s share of the income generated from its non-controlling equity investment in one full-service healthcare hospital facility and seven freestanding emergency rooms in Arizona, (ii) the Company’s preferred return and its share of the income generated from its non-controlling equity investments in 16 freestanding emergency rooms in Colorado and one hospital and 30 freestanding facilities in Dallas/Fort Worth, and (iii)
its share of the income generated from its non-controlling equity investment in the development activity associated with our joint ventures with Ochsner Health System in Louisiana and Mount Carmel Health System in Ohio
is reported on a net basis in the line item equity in earnings of unconsolidated joint ventures. Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). Systemwide net patient services revenue is a non-GAAP measure of our financial performance, as it includes revenue from our unconsolidated facilities as if they were consolidated, and should not be considered as an alternative to net patient service revenue as a measure of financial performance, or any other performance measure derived in accordance with GAAP. We believe the presentation of systemwide net patient service revenue provides supplemental information regarding our financial performance as it includes revenue earned by all of our affiliated facilities, regardless of consolidation.
For the three months ended June 30, 2016, systemwide net patient services revenue grew by 36.2% to $142.4 million for the three months ended June 30, 2016, from $104.5 million for the three months ended June 30, 2015. The growth in systemwide net patient services revenue was primarily attributable to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 68 to 93, annual gross charge increases and continued growth of our hospitals and their hospital outpatient departments in Arizona and Texas. For the three months ended June
30, 2016, systemwide patient volume grew by 58.6% to 89,001 compared to 56,119 for the three months ended June 30, 2015.
For the six months ended June 30, 2016, systemwide net patient services revenue grew by 50.0% to $282.7 million for the six months ended June 30, 2016, from $188.5 million for the six months ended June 30, 2015. The growth in systemwide net patient services revenue was primarily attributable to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 68 to 93, annual gross charge increases and continued growth of our hospitals and their hospital outpatient departments in Arizona and Texas. For the six months ended June 30, 2016, systemwide patient volume grew by 67.3% to 180,076 compared to 107,667 for the six months ended June 30, 2015.
The following table sets forth a reconciliation of our systemwide net patient services revenue for the periods indicated (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net Patient Services Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated facilities
(1)
|
|
$
|
84,922
|
|
$
|
86,849
|
|
$
|
191,157
|
|
$
|
167,806
|
Unconsolidated joint ventures
|
|
|
57,455
|
|
|
17,659
|
|
|
91,580
|
|
|
20,662
|
Systemwide net patient services revenue
|
|
$
|
142,377
|
|
$
|
104,508
|
|
$
|
282,737
|
|
$
|
188,468
|
|
(1)
|
|
Net patient services revenue from our Colorado and Dallas/Fort Worth facilities is included as consolidated facilities revenue until consummation of the UCHealth joint venture on April 20, 2015 and the THR joint venture on May 11, 2016, respectively.
|
Adjusted EBITDA
We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, further adjusted to eliminate the impact of certain additional items, including facility pre-opening expenses, stock compensation expense, costs associated with our public offerings, and other non-recurring costs, losses or gains that we do not consider in our evaluation of ongoing operating performance from period to period. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metric used by management to assess our financial performance. We use Adjusted EBITDA to supplement GAAP measures of performance in order to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Adjusted EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
Adjusted EBITDA is a non-GAAP measure of our financial performance and should not be considered as an alternative to net income as a measure of financial performance, or any other performance measure derived in accordance with GAAP, nor should it be construed as an inference that our future results will be unaffected by unusual or other items. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as preopening expenses, stock compensation expense, and other adjustments. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, facility openings and certain other cash costs that may recur in the future. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by supplementally relying on our GAAP results in addition to using Adjusted EBITDA. Our presentation of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
The following table sets forth a reconciliation of our Adjusted EBITDA to net income using data derived from our condensed consolidated financial statements for the periods indicated
(in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
|
$
148,196
|
|
$
27,674
|
|
$
156,059
|
|
$
29,276
|
Depreciation and amortization(a)
|
|
5,206
|
|
4,929
|
|
10,015
|
|
9,685
|
Interest expense
|
|
1,822
|
|
3,898
|
|
3,648
|
|
7,172
|
Provision for income taxes
|
|
47,270
|
|
6,328
|
|
50,388
|
|
6,806
|
Gain on contribution to joint venture(b)
|
|
(185,336)
|
|
(24,250)
|
|
(185,336)
|
|
(24,250)
|
Preopening expenses(c)
|
|
3,294
|
|
1,991
|
|
5,234
|
|
4,089
|
Stock compensation expense(d)
|
|
1,221
|
|
608
|
|
2,309
|
|
1,157
|
Public offering costs€
|
|
530
|
|
993
|
|
530
|
|
993
|
Duplicative billing effort (f)
|
|
—
|
|
—
|
|
208
|
|
—
|
Other(g)
|
|
292
|
|
769
|
|
1,179
|
|
1,275
|
Total adjustments
|
|
(125,701)
|
|
(4,734)
|
|
(111,825)
|
|
6,927
|
Adjusted EBITDA
|
|
$
22,495
|
|
$
22,940
|
|
$
44,234
|
|
$
36,203
|
|
(a)
|
|
Includes the Company’s proportionate share of depreciation and amortization related to its joint ventures.
|
|
(b)
|
|
Consists of a gain recognized on the contribution and change of control of previously owned freestanding facilities to the joint venture with THR in May 2016 and UCHealth in April 2015.
|
|
(c)
|
|
Includes labor, marketing costs and occupancy costs prior to opening facilities and hospital losses prior to obtaining Medicare certification.
|
|
(d)
|
|
Stock compensation expense associated with grants of management incentive units.
|
|
(e)
|
|
For the three and six months ended June 30, 2016 and 2015, we incurred cost of $0.5 million and $1.0 million, respectively, in conjunction with secondary public offerings.
|
|
(f)
|
|
Consists of duplicative costs, including salaries, stay bonuses, and contract labor, incurred during the transition to outsource billing services for the ICD-10 conversion.
|
|
(g)
|
|
For the three months ended June 30, 2016, we incurred costs to develop long-term strategic goals and objectives totaling $0.3 million. For the three months ended June 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling approximately $0.6 million and third-party costs and fees involved in recruiting our management team of $0.2 million.
|
For the six months ended June 30, 2016, we incurred costs to develop long-term strategic goals and objectives totaling $1.2 million. For the six months ended June 30, 2015, we incurred costs to develop long-term strategic goals and objectives totaling approximately $1.1 million, third-party costs and fees involved in recruiting our management team of $0.2 million and terminated real-estate development costs totaling $32,000.
Results of Operations
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
The following table summarizes our results of operations for the three months ended June 30, 2016 and 2015 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
Change from prior
|
|
net patient
|
|
|
|
|
|
|
|
|
period
|
|
service revenue
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient service revenue
|
|
$
|
101,595
|
|
$
|
104,363
|
|
$
|
(2,768)
|
|
(2.7)
|
%
|
|
|
|
|
|
|
Provision for bad debt
|
|
|
(16,673)
|
|
|
(17,514)
|
|
|
841
|
|
(4.8)
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
|
84,922
|
|
|
86,849
|
|
|
(1,927)
|
|
(2.2)
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Management and contract services revenue
|
|
|
15,245
|
|
|
2,738
|
|
|
12,507
|
|
456.8
|
|
|
18.0
|
|
|
3.2
|
|
Total net operating revenue
|
|
|
100,167
|
|
|
89,587
|
|
|
10,580
|
|
11.8
|
|
|
118.0
|
|
|
103.2
|
|
Equity in earnings of unconsolidated joint ventures
|
|
|
2,435
|
|
|
3,621
|
|
|
(1,186)
|
|
(32.8)
|
|
|
2.9
|
|
|
4.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
62,130
|
|
|
51,124
|
|
|
11,006
|
|
21.5
|
|
|
73.2
|
|
|
58.9
|
|
General and administrative
|
|
|
13,015
|
|
|
11,370
|
|
|
1,645
|
|
14.5
|
|
|
15.3
|
|
|
13.1
|
|
Other operating expenses
|
|
|
12,093
|
|
|
12,541
|
|
|
(448)
|
|
(3.6)
|
|
|
14.2
|
|
|
14.4
|
|
Depreciation and amortization
|
|
|
3,412
|
|
|
4,523
|
|
|
(1,111)
|
|
(24.6)
|
|
|
4.0
|
|
|
5.2
|
|
Total operating expenses
|
|
|
90,650
|
|
|
79,558
|
|
|
11,092
|
|
13.9
|
|
|
106.7
|
|
|
91.6
|
|
Income from operations
|
|
|
11,952
|
|
|
13,650
|
|
|
(1,698)
|
|
(12.4)
|
|
|
14.1
|
|
|
15.7
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on contribution to joint venture
|
|
|
185,336
|
|
|
24,250
|
|
|
161,086
|
|
664.3
|
|
|
218.2
|
|
|
27.9
|
|
Interest expense
|
|
|
(1,822)
|
|
|
(3,898)
|
|
|
2,076
|
|
(53.3)
|
|
|
(2.1)
|
|
|
(4.5)
|
|
Total other income
|
|
|
183,514
|
|
|
20,352
|
|
|
163,162
|
|
801.7
|
|
|
216.1
|
|
|
23.4
|
|
Income before provision for income taxes
|
|
|
195,466
|
|
|
34,002
|
|
|
161,464
|
|
474.9
|
|
|
230.2
|
|
|
39.2
|
|
Provision for income taxes
|
|
|
47,270
|
|
|
6,328
|
|
|
40,942
|
|
647.0
|
|
|
55.7
|
|
|
7.3
|
|
Net income
|
|
$
|
148,196
|
|
$
|
27,674
|
|
$
|
120,522
|
|
435.5
|
%
|
|
174.5
|
%
|
|
31.9
|
%
|
Overall
Our results for the three months ended June 30, 2016 reflect a 11.8% increase in net operating revenue to $100.2 million and net income of $148.2 million compared to net income of $27.7 million for the three months ended June 30, 2015. The increase in net income is primarily attributable to a $10.6 million increase in net operating revenue, a $2.1 million decrease in interest expense, and a $185.3 million gain recognized on the contribution and change of control of previously owned facilities to the joint venture with THR. This increase was partially offset by a $1.2 million decrease in equity in earnings of unconsolidated joint ventures, an increase of salaries, wages, and benefits and other costs related to our growth initiatives and the impact of deferred taxes associated with the gain recognized on the contribution and change of control of previously owned facilities to the joint venture with THR.
Revenue
Patient Service Revenue
Patient service revenue decreased by $2.8 million, or 2.7%, to $101.6 million for the three months ended June 30, 2016 from $104.4 million for the three months ended June 30, 2015. The decrease was primarily attributable to the deconsolidation of our DFW locations due to the THR joint venture offset by the impact of volumes generated from the expansion of the number of consolidated freestanding facilities and annual gross charge increases.
Provision for Bad Debt
Our provision for bad debt decreased by $0.8 million to $16.7 million for the three months ended June 30, 2016, from $17.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture offset by bad debts associated with revenue generated from the expansion of the number of consolidated freestanding facilities.
Net Patient Service Revenue
As a result of the factors described above, our net patient service revenue decreased by $1.9 million, or 2.2%, to $84.9 million for the three months ended June 30, 2016, from $86.8 million for the three months ended June 30, 2015.
Management and Contract Services Revenue
Management and contract services revenue was $15.2 million for the three months ended June 30, 2016 compared to $2.7 million for the three months ended June 30, 2015. The increase is a result of our management and contract services agreement associated with our joint venture agreements, which increased due to the addition of the joint venture with THR in May 2016.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of joint ventures consists of our ownership interest, which ranges from 49.0% to 50.1%, of earnings generated from our non-controlling equity investments. Our equity in earnings of unconsolidated joint ventures decreased by $1.2 million to $2.4 million for the three months ended June 30, 2016 from earnings of approximately $3.6 million for the three months ended June 30, 2015. The decrease is primarily attributable to a decrease in volumes in our UCHealth joint venture and increased contract services expense partially offset by earnings from the Arizona and Dallas/Fort Worth joint ventures.
Operating Expenses
Salaries, Wages and Benefits
Salaries, wages and benefits increased by $11.0 million to $62.1 million for the three months ended June 30, 2016, from $51.1 million for the three months ended June 30, 2015. This increase was primarily attributable to our continued efforts to support new facility growth, including $3.7 million in facility compensation, coupled with an increase of $12.9 million for physician labor, as we provide physician services to each facility, whether owned or managed, offset by billing and collection salaries, wages and benefits outsourced to a third party revenue cycle company and the deconsolidation of salaries attributable to joint ventures.
General and Administrative
General and administrative expenses increased by $1.6 million to $13.0 million for the three months ended June 30, 2016, from $11.4 million for the three months ended June 30, 2015. This increase was primarily attributable to $1.7 million in costs related to outsourcing billing and collections to a third party revenue cycle company, $0.5 million in legal and accounting expenses, and $0.4 million in other corporate expenses, offset by reductions of $0.4 million in
marketing costs associated with opening new facilities and our consumer awareness program, $0.5 million in costs associated with the secondary offerings in the current period compared to the prior year and the deconsolidation of costs attributable to joint ventures.
Other Operating Expenses
Other operating expenses decreased by $0.4 million to $12.1 million for the three months ended June 30, 2016, from $12.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of costs attributable to joint ventures, offset by increases in costs due to the expansion of the number of consolidated freestanding facilities, including $1.6 million in lease costs for buildings and medical equipment, $0.1 million in building and medical equipment maintenance and $0.6 million in patient care and supply costs.
Depreciation and Amortization
Depreciation and amortization expenses decreased by $1.1 million to $3.4 million for the three months ended June 30, 2016, from $4.5 million for the three months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of assets attributable to joint ventures.
Other Income (Expense)
Gain on Contribution to Joint Venture
The Company recorded a gain of $185.4 million for the three months ended June 30, 2016 as a result of the contribution and change of control of previously owned freestanding facilities to the joint venture with THR.
This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.
Interest Expense
Interest expense primarily consists of interest on our Senior Secured Credit Facility. Our interest expense decreased by $2.1 million to $1.8 million for the three months ended June 30, 2016, compared to $3.9 million for the three months ended June 30, 2015. This decrease was primarily attributable to lower borrowing rates as a result of refinancing our Senior Secured Credit Facility in October 2015.
Income Before Provision for Income Taxes
As a result of the factors described above, we recorded income before provision for income taxes of $195.5 million for the three months ended June 30, 2016, compared to net income of $34.0 million for the three months ended June 30, 2015.
Provision for Income Taxes
For the three months ended June 30, 2016, we recorded income tax expense of $47.3 million, which consists of $46.9 million of federal income tax expense and Texas margin tax of $0.4 million.
Net Income
As a result of the factors described above, we recorded net income of $148.2 million for the three months ended June 30, 2016, compared to net income of $27.7 million for the three months ended June 30, 2015.
Six months ended June 30, 2016 Compared to Six months ended June 30, 2015
The following table summarizes our results of operations for the six months ended June 30, 2016 and 2015 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
Change from prior
|
|
net patient
|
|
|
|
|
|
|
|
|
period
|
|
service revenue
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient service revenue
|
|
$
|
234,883
|
|
$
|
200,265
|
|
$
|
34,618
|
|
17.3
|
%
|
|
|
|
|
|
|
Provision for bad debt
|
|
|
(43,726)
|
|
|
(32,459)
|
|
|
(11,267)
|
|
34.7
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
|
191,157
|
|
|
167,806
|
|
|
23,351
|
|
13.9
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Management and contract services revenue
|
|
|
21,779
|
|
|
3,234
|
|
|
18,545
|
|
573.4
|
|
|
11.4
|
|
|
1.9
|
|
Total net operating revenue
|
|
|
212,936
|
|
|
171,040
|
|
|
41,896
|
|
24.5
|
|
|
111.4
|
|
|
101.9
|
|
Equity in earnings of unconsolidated joint ventures
|
|
|
4,936
|
|
|
2,927
|
|
|
2,009
|
|
68.6
|
|
|
2.6
|
|
|
1.7
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
128,945
|
|
|
100,004
|
|
|
28,941
|
|
28.9
|
|
|
67.5
|
|
|
59.6
|
|
General and administrative
|
|
|
29,279
|
|
|
21,834
|
|
|
7,445
|
|
34.1
|
|
|
15.3
|
|
|
13.0
|
|
Other operating expenses
|
|
|
27,106
|
|
|
23,846
|
|
|
3,260
|
|
13.7
|
|
|
14.2
|
|
|
14.2
|
|
Depreciation and amortization
|
|
|
7,783
|
|
|
9,279
|
|
|
(1,496)
|
|
(16.1)
|
|
|
4.1
|
|
|
5.5
|
|
Total operating expenses
|
|
|
193,113
|
|
|
154,963
|
|
|
38,150
|
|
24.6
|
|
|
101.0
|
|
|
92.3
|
|
Income from operations
|
|
|
24,759
|
|
|
19,004
|
|
|
5,755
|
|
30.3
|
|
|
13.0
|
|
|
11.3
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on contribution to joint venture
|
|
|
185,336
|
|
|
24,250
|
|
|
161,086
|
|
664.3
|
|
|
97.0
|
|
|
14.5
|
|
Interest expense
|
|
|
(3,648)
|
|
|
(7,172)
|
|
|
3,524
|
|
(49.1)
|
|
|
(1.9)
|
|
|
(4.3)
|
|
Total other income
|
|
|
181,688
|
|
|
17,078
|
|
|
164,610
|
|
963.9
|
|
|
95.0
|
|
|
10.2
|
|
Income before provision for income taxes
|
|
|
206,447
|
|
|
36,082
|
|
|
170,365
|
|
472.2
|
|
|
108.0
|
|
|
21.5
|
|
Provision for income taxes
|
|
|
50,388
|
|
|
6,806
|
|
|
43,582
|
|
640.3
|
|
|
26.4
|
|
|
4.1
|
|
Net income
|
|
$
|
156,059
|
|
$
|
29,276
|
|
$
|
126,783
|
|
433.1
|
%
|
|
81.6
|
%
|
|
17.4
|
%
|
Overall
Our results for the six months ended June 30, 2016 reflect a 24.5% increase in net operating revenue to $212.9 million and net income of $156.1 million compared to net income of $29.3 million for the six months ended June 30, 2015. The net income is primarily attributable to a $41.9 million increase in net operating revenue coupled with increases of $2.0 million and $161.1 million in earnings of unconsolidated joint ventures and a gain on our contribution and change of control of previously owned freestanding facilities to a joint venture with THR, respectively. These increases are partially offset by a $28.9 million increase in salaries, wages and benefits, $10.7 million increase in other costs related to our growth initiatives, an increase in the provision for income tax of $43.6 million, and decreases of $1.5 million in depreciation expense and $3.5 million in interest expense associated with our long-term debt.
Revenue
Patient Service Revenue
Patient service revenue increased by $34.6 million, or 17.30%, to $234.9 million for the six months ended June 30, 2016 from $200.3 million for the six months ended June 30, 2015. This increase was primarily attributable to the impact of patient volumes from new consolidated freestanding facilities and gross charge increases, offset by the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture.
Provision for Bad Debt
Our provision for bad debt increased by $11.3 million to $43.7 million for the six months ended June 30, 2016, from $32.5 million for the six months ended June 30, 2015. This increase was primarily attributable to bad debts associated with revenue generated from the expansion of the number of consolidated freestanding facilities, offset by the deconsolidation of our Dallas/Fort Worth locations due to the THR joint venture.
Net Patient Service Revenue
As a result of the factors described above, our net patient service revenue increased by $23.4 million, or 13.9%, to $191.2 million for the six months ended June 30, 2016, from $167.8 million for the six months ended June 30, 2015.
Management and Contract Services Revenue
Management and contract services revenue was $21.8 million for the six months ended June 30, 2016 compared to $3.2 million for the six months ended June 30, 2015. The increase is a result of our management and contract services agreement associated with our joint venture agreements, which increased due to the addition of the joint venture with THR in May 2016.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of joint ventures consists of our ownership interest, which ranges from 49.0% to 50.1%, of earnings generated from our non-controlling equity investments. Our equity in earnings of unconsolidated joint ventures increased by $2.0 million to $4.9 million for the six months ended June 30, 2016 from earnings of approximately $2.9 million for the six months ended June 30, 2015. The increase is attributable to entering a joint venture with THR in May 2016.
Operating Expenses
Salaries, Wages and Benefits
Salaries, wages and benefits increased by $28.9 million to $128.9 million for the six months ended June 30, 2016, from $100.0 million for the six months ended June 30, 2015. This increase was primarily attributable to our continued efforts to support new facility growth, including $11.2 million in facility and corporate compensation, coupled with an increase of $24.8 million for physician labor, which includes both owned and managed facilities as we provide physician services to each facility, offset by billing and collection salaries, wages and benefits outsourced to a third party revenue cycle company and the deconsolidation of salaries attributable to joint ventures.
General and Administrative
General and administrative expenses increased by $7.4 million to $29.3 million for the six months ended June 30, 2016, from $21.8 million for the six months ended June 30, 2015. This increase was primarily attributable to $3.3 million in costs related to outsourcing billing and collections to a third party revenue cycle company, $1.1 million in additional facility utilities and insurance expenses, $2.1 million in legal and accounting expenses, $0.2 million in travel expenses associated with increased headcount and the opening of new facilities outside of the Dallas/Fort Worth market and $1.7 million in other corporate expenses, offset by reductions of $0.5 million in marketing costs associated with opening new facilities and our consumer awareness program, $0.5 million in costs associated with the secondary offerings in the current period compared to the prior year and the deconsolidation of costs attributable to joint ventures.
Other Operating Expenses
Other operating expenses increased by $3.3 million to $27.1 million for the six months ended June 30, 2016, from $23.8 million for the six months ended June 30, 2015. This increase was primarily attributable to $4.0 million in additional lease costs for buildings and medical equipment at new and existing facilities and $0.6 million in building and
equipment maintenance for new and existing facilities. These costs were offset by decreases of $0.7 million in patient care and supply costs for new and existing facilities, $0.7 million in lease costs for corporate office space, as a charge of $0.4 million for lease termination expense in prior year did not recur, and the deconsolidation of costs attributable to joint ventures.
Depreciation and Amortization
Depreciation and amortization expenses decreased by $1.5 million to $7.8 million for the six months ended June 30, 2016, from $9.3 million for the six months ended June 30, 2015. This decrease was primarily attributable to the deconsolidation of costs attributable to joint ventures and a decrease in capital expenditures on new facility construction as we shifted toward third-party developers to fund all new construction.
Other Income (Expense)
Gain on Contribution to Joint Venture
The Company recorded a gain of $185.4 million for the six months ended June 30, 2016 as a result of the
contribution and change of control of previously owned freestanding facilities to the joint venture with THR.
This gain is net of a $9.6 million reduction of the goodwill related to the business associated with the facilities contributed to the joint venture.
Interest Expense
Interest expense primarily consists primarily of interest on our Senior Secured Credit Facility. Our interest expense decreased by $3.5 million to $3.6 million for the six months ended June 30, 2016, compared to $7.2 million for the six months ended June 30, 2015. This decrease was primarily attributable to lower borrowing rates as a result of refinancing our Senior Secured Credit Facility in October 2015.
Income Before Provision for Income Taxes
As a result of the factors described above, we recorded income before provision for income taxes of $206.4 million for the six months ended June 30, 2016, compared to $36.1 million for the six months ended June 30, 2015.
Provision for Income Taxes
For the six months ended June 30, 2016, we recorded income tax expense of $50.4 million, which consists of $49.4 million of federal income tax expense and state tax expense of $1.0 million.
Net Income
As a result of the factors described above, we recorded net income of $156.1 million for the six months ended June 30, 2016, compared to net income of $29.3 million for the six months ended June 30, 2015.
Liquidity and Capital Resources
We rely on cash flows from operations, the Senior Secured Credit Facility and the MPT Agreements (each as described below) as our primary sources of liquidity.
On October 6, 2015, the Company entered into a senior secured credit facility (the “New Facility”) for a $125.0 million term loan and a $50.0 million revolving facility. The New Facility matures on October 6, 2020. The revolving credit facility includes a sub-limit of $15.0 million for letters of credit and a sub-limit of $50.0 million for swing line loans. In addition, the New Facility contains an option to borrow up to an additional $50.0 million under certain conditions. All of the assets of the Company’s subsidiaries are pledged as collateral under the New Facility, and
such subsidiaries guarantee the New Facility. Borrowings under the New Facility replace the Company’s existing credit facility and will be used by the Company to provide financing for working capital and capital expenditures.
Upon the consummation of our initial public offering, we entered into a tax receivable agreement with the Unit holders of Adeptus Health LLC, which provides for the payment from time to time by us to the Unit holders of Adeptus Health LLC of 85% of the amount of the benefits, if any, that we deemed to realize as a result of increases in tax basis and certain other tax benefits related to exchanges of LLC Units pursuant to the exchange agreement, including tax benefits attributable to payments under the tax receivable agreement.
These payment obligations are obligations of Adeptus Health Inc.
; h
owever, payments to LLC Unit holders will only be paid as tax benefits for the Company are realized. For purposes of the tax receivable agreement, the benefit deemed realized by Adeptus Health Inc. will be computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of Adeptus Health LLC as a result of the exchanges and had Adeptus Health Inc. not entered into the tax receivable agreement.
Our primary cash needs are capital expenditures on new facilities, compensation of our personnel, purchases of medical supplies, facility leases, equipment rentals, marketing initiatives, service of long-term debt and any payments made under the tax receivable agreement. We believe that cash we expect to generate from operations, the availability of borrowings under the Senior Secured Credit Facility and funds available under the MPT Agreements will be sufficient to meet liquidity requirements, including any payments made under the tax receivable agreement, anticipated capital expenditures and payments due under our Senior Secured Credit Facility and MPT Agreements for at least 12 months.
As of June 30, 2016, our principal sources of liquidity included cash of $3.7 million, funds available under our Senior Secured Credit Facility line of credit of $34.0 million, net of $10.2 million for outstanding letters of credit, subject to meeting certain debt covenants. As of June 30, 2016, we also had $72.9 million available under the MPT Agreements.
Cash Flows
The following table summarizes our cash flows for the periods indicated
(in thousands
):
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
Net cash (used in) provided by operating activities
|
|
$
|
(15,993)
|
|
$
|
1,075
|
Net cash used in investing activities
|
|
|
(4,421)
|
|
|
(758)
|
Net cash provided by financing activities
|
|
|
8,095
|
|
|
43,810
|
Net (decrease) increase in cash
|
|
$
|
(12,319)
|
|
$
|
44,127
|
Net Cash from Operating Activities
Net cash used by operating activities increased by $17.1 million to $16.0 million for the six months ended June 30, 2016, from $1.1 million provided by operating activities for the same period in 2015. This increase was primarily attributable to the gain and impact of deferred taxes associated with the contribution and change of control of previously owned facilities to the joint venture with THR, coupled with increases in receivables from joint ventures.
Net Cash from Investing Activities
Net cash used in investing activities increased by $3.6 million to $4.4 million for the six months ended June 30, 2016, from $0.8 million used by investing activities for the same period in 2015. This increase was primarily attributable to our investment in joint ventures with Ochsner Health System and Mount Carmel Health System, offset by proceeds from the sale of property and equipment in 2015 which did not recur in the current period.
Net Cash from Financing Activities
Net cash provided by financing activities decreased by $35.7 million to $8.1 million for the six months ended June 30, 2016, from $43.8 million for the same period in 2015. This decrease results primarily from a decrease in borrowings under our Senior Secured Credit Facility in the current period compared to prior period, coupled with the reduction in outstanding debt due to payments of principal which began in December 2015.
Off Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose arrangements. We lease certain medical facilities and equipment under various non-cancelable operating leases. See "—Obligations and Commitments—Operating Lease Obligations."
As a result of our strategy of partnering with leading healthcare providers, we do not own a controlling interest in our facilities in Colorado, Arizona and Dallas/Fort Worth. At June 30, 2016, we accounted for these joint ventures under the equity method. Our ownership percentage ranges from 49.0% to 50.1% in each joint venture at June 30, 2016.
As described above, our unconsolidated joint ventures
are structured as limited liability corporations. These joint ventures do not provide financing, liquidity, or market or credit risk support for us.
Obligations and Commitments
The following is a summary of our contractual obligations as of June 30, 2016 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
Long-term debt obligations
|
|
$
137,341
|
|
$
3,760
|
|
$
16,800
|
|
$
116,781
|
|
$ -
|
Capital lease obligations(1)
|
|
243
|
|
24
|
|
98
|
|
98
|
|
23
|
Operating lease obligations
|
|
832,378
|
|
34,433
|
|
134,908
|
|
110,819
|
|
552,218
|
Total
|
|
$
969,962
|
|
$
38,217
|
|
$
151,806
|
|
$
227,698
|
|
$
552,241
|
|
(1)
|
|
Includes amounts representing interest.
|
Senior Secured Credit Facility
On October 31, 2013, we entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan which matured on October 31, 2018. The Facility included an additional $165.0 million delayed draw term loan commitment, which expired in April 2015 and a $10.0 million revolving commitment that matured on October 31, 2018. All of our assets were pledged as collateral under the Facility. The borrowings under the Facility was used by us to provide financing for working capital, capital expenditures and for new facility expansion and replaced an existing credit facility.
On June 11, 2014, we amended the Facility to, among other things, provide for a borrowing under the delayed draw term loan in an aggregate principal amount of up to $75.0 million, $60.0 million in principal amount of which was used to make specified distributions and up to $10.0 million in principal amount which was used to repay certain revolving loans. On June 11, 2014, we drew $75.0 million and made the $60.0 million dividend distribution on June 24, 2014.
On April 20, 2015, we amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by MPT under the MPT Agreements to $500.0 million. In April 2015, we drew $30.0 million on the delayed draw term loan prior to its expiration.
Borrowings under the Facility bore interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The margin for the Facility was 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans.
The Facility included an unused line fee of 0.50% per annum on the revolving commitment and delayed draw term loan commitment, a draw fee of 1.0% of the principal amount of each borrowing on the delayed draw term loan and an annual Agency fee of $0.1 million. The Company repaid the total outstanding balance in October 2015.
On October 6, 2015, we entered into a new Senior Secured Credit Facility (the “New Facility”) for a $125.0 million term loan and a $50.0 million revolving facility. The New Facility matures on October 6, 2020. The revolving credit facility includes a sub-limit of $15.0 million for letters of credit and a sub-limit of $5.0 million for swing line loans. In addition, the New Facility contains an option to borrow up to an additional $50.0 million under certain conditions. All of the assets of the Company’s subsidiaries are pledged as collateral under the New Facility, and such subsidiaries guarantee the New Facility. Borrowings under the New Facility replace our existing credit facility and will be used by us to provide financing for working capital and capital expenditures.
Borrowings under the New Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The applicable margin for the New Facility ranges, based on our consolidated net leverage ratio, from 2.25% to 3.00% in the case of base rate loans and from 3.25% to 4.00% in the case of LIBOR loans. The New Facility includes an unused line fee ranging, based on our consolidated net leverage ratio, from 0.40% to 0.50% per annum on the revolving commitment. We had $23.8 million available under the revolving commitment at June 30, 2016, subject to certain debt covenants. During the six months ended June 30, 2016, we made mandatory principal payments under the New Facility of $3.1 million.
The New Facility contains a number of significant negative covenants. Such negative covenants, among other things and subject to certain exceptions, restrict Adeptus Health, Inc. and its subsidiaries’ ability to incur additional indebtedness, make guarantees and enter into hedging agreements; create liens on assets; engage in mergers or consolidations; transfer assets; pay dividends and distributions; change the nature of our business; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; amend certain material agreements, including the MPT Agreements and organizational documents; enter into certain joint ventures; enter into certain restrictive agreements and make certain changes to our accounting practices. In addition, the New Facility contains financial covenants that, among other things, require us to maintain a consolidated net leverage ratio of at most 5.00 to 1.00 as of June 30, 2016 (decreasing to 2.00 to 1.00 as of September 30, 2019); a consolidated fixed charge coverage ratio of at least 1.25 to 1.00; and a minimum Non-MPT Facility EBITDA as of the end of any fiscal quarter of not less than $40.0 million. The financial covenant calculations are based on Adeptus Health Inc. and its subsidiaries as a consolidated group. In addition, the New Facility includes certain limitations on intercompany indebtedness. The affirmative covenants, negative covenants, and financial covenants, are measured on a quarterly basis and, as of June 30, 2016, we were in compliance with all covenant requirements.
Capital Lease Obligations
Assets under capital leases totaled approximately $0.2 million as of June 30, 2016, and were included within the medical equipment component of net property and equipment. We began recording amortization expense associated with these capital lease assets on July 1, 2016.
Operating Lease Obligations
We lease certain medical facilities and equipment under various non-cancelable operating leases. In June 2013, we entered into a Master Funding and Development Agreement (the “Initial MPT Agreement”) with an affiliate of Medical Properties Trust (“MPT) to fund future facilities.
In July 2014, the Company entered into an additional Master Funding and Development Agreement (the “Additional MPT Agreement” and, together with the Initial MPT Agreement, the “MPT Agreements”) with MPT to fund future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to our Initial MPT Agreement. All material terms remain consistent with the Initial MPT Agreement.
Pursuant to the MPT Agreements, as amended, MPT will acquire parcels of land, fund the ground-up construction of new freestanding emergency room facilities and lease the facilities to us upon completion of construction. Under the terms of the MPT Agreement, MPT is required to fund all hard and soft costs, including the project purchase price, closing costs and pursuit costs for the assets relating to the construction of a fixed number of facilities with a maximum aggregate funding of $500.0 million, of which,
$72.9
million remained uncommitted as of June 30, 2016. Each completed project will be leased for an initial term of 15 years, with three five-year renewal options. We follow the guidance in Accounting Standards Codification, or ASC, 840,
Leases
, and ASC 810,
Consolidation
, in evaluating the lease as a build-to-suit lease transaction to determine whether we would be considered the accounting owner of the facilities during the construction period.
In addition to the MPT Agreements, the Company has entered into similar agreements with certain developers to fund and lead the development efforts on the construction of future facilities. As of June 30, 2016, the Company had total receivables of $10.1 million from the lessor to the MPT Agreements and certain developers for soft costs incurred for facilities currently under development.
We lease approximately 80,000 square feet for our corporate headquarters. Lease expense associated with this lease was $0.6 million for the six months ended June 30, 2016.
We have sublease agreements with the joint ventures in Arizona, Colorado and Dallas/Fort Worth under which the Company subleases certain freestanding emergency room facilities, ground leases and equipment leases to the joint ventures. Under these agreements, the Company received $8.4 million, $2.5 million, $13.0 million and $3.2 million during the three and six months ended June 30, 2016 and 2015, respectively, as rental income which is accounted for as a reduction of rent expense.
Capital Expenditures
Our current plans for our business contemplate capital expenditures to expand our operations. The MPT Agreements will be used to fund a significant portion of our new facilities. We typically incur approximately $0.2 million in capital expenditures related to each MPT-funded facility. Facilities funded under the MPT Agreements will be operating leases and thus not considered a capital expenditure.
The table below provides our total capital expenditures for the period (
in thousands
):
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
Leasehold improvements
|
|
$
|
201
|
|
$
|
1,303
|
Computer equipment
|
|
|
1,503
|
|
|
927
|
Medical equipment
|
|
|
1,135
|
|
|
21
|
Office equipment
|
|
|
879
|
|
|
1,019
|
|
|
$
|
3,718
|
|
$
|
3,270
|
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods
or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is permitted to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-02, “
Consolidation: Amendments to the Consolidation Analysis” (Topic 810)
. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company adopted amendments under ASU 2015-02 retrospectively on January 1, 2016. The adoption of the standard did not have an impact on the Company’s condensed consolidated financial statements as there was no change to the entities currently consolidated by the Company.
In April 2015, the FASB issued ASU No. 2015-03,
"Simplifying the Presentation of Debt Issuance Costs,"
(Subtopic 835-30)
which changes the presentation of debt issuance costs in financial statements. ASU No. 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015. We retrospectively adopted the provisions of ASU 2015-03 as of January 1, 2016. As if December 31, 2015, $3.7 million of debt issuance costs were reclassified in the consolidated balance sheet from other long-term assets to long-term debt, less current portion. The adoption of ASU 2015-03 impacted the presentation of our consolidated financial position and had no impact on our results of operations, or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, which amended the balance sheet classification requirements for deferred income taxes to simplify their presentation in the statement of financial position. The ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 31, 2016, with early adoption permitted. The Company early adopted the provisions of this ASU for the presentation and classification of its deferred tax assets at December 31, 2015 and has reflected the change on the consolidated balance sheet for all periods presented.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). This new standard establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. The standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. We are evaluating the impact of the new standard on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” (Topic 718). This new standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the potential impact of the new standard on our consolidated financial statements.
Critical Accounting Policies
Our application of critical accounting policies require our management to make certain assumptions about matters that are uncertain at the time the accounting estimate is made, where our management could reasonably use
different estimates, or where accounting changes may reasonably occur from period to period, and in each case could have a material effect on our financial statements.
For a discussion of our critical accounting estimates, see the Part II., Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no material changes in our critical accounting policies since December 31, 2015.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risks related to changes in variable interest rates. As of June 30, 2016, we had $137.3 million of indebtedness (excluding capital leases) which is at variable interest rates. We have not engaged in hedging activity related to the New Credit Facility nor do we use leveraged financial instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were not effective due to the material weakness described in Managements’ Annual Report on Internal Control Over Financial Reporting as reported in our Annual Report on Form 10-K at December 31, 2015.
Changes in Internal Control Over Financial Reporting
During the period ended June 30, 2016, our management was engaged in the implementation of remediation efforts to address the material weakness that was identified in our Annual Report on Form 10-K for the year ended December 31, 2015. These remediation efforts were designed both to address the identified weakness and to enhance our overall financial reporting control environment. The Company is implementing controls over the completeness and accuracy of revenue transaction data exchanged with the third-party provider. In addition, the Company plans to obtain an appropriate annual internal control report from the third-party service organization utilized in coding and billing payors for the year ended December 31, 2016. This report will not be available until the fourth quarter of 2016, and as such, the material weakness cannot be fully remediated until that time.
Other than the controls related to the material weakness described above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.