TEAM HEALTH HOLDINGS 10-Q 2015
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended September 30, 2015
For the transition period from to
Commission File Number 001-34583
Team Health Holdings, Inc.
(Exact name of registrant as specified in its charter)
265 Brookview Centre Way
Knoxville, Tennessee 37919
(Address, zip code, and telephone number, including area code, of registrant’s principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 30, 2015, there were outstanding 72,583,573 shares of common stock of Team Health Holdings, Inc., with a par value of $0.01.
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical facts and that reflect the current view of Team Health Holdings, Inc. (the Company) about future events and financial performance are hereby identified as “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “could,” “should,” “may,” “plan,” “project,” “predict” and similar expressions. The Company cautions readers of this Form 10-Q that such “forward looking statements,” including without limitation, those relating to the Company’s future business prospects, the pending IPC Healthcare, Inc. acquisition, revenue, working capital, professional liability expense, liquidity, capital needs, interest costs and income, wherever they occur in this Form 10-Q or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the “forward looking statements.” Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
For a more detailed discussion of these factors, see the information under the caption “Risk Factors” herein and in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s most recent Annual Report on Form 10-K.
The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made. The Company disclaims any intent or obligation to update any “forward looking statement” made in this Form 10-Q to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
TEAM HEALTH HOLDINGS, INC.
QUARTERLY REPORT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
See accompanying notes to consolidated financial statements.
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
See accompanying notes to consolidated financial statements.
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
TEAM HEALTH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Team Health Holdings, Inc. (the Company) its subsidiaries and its affiliates, including its affiliated medical groups, and have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial reporting, 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 U.S. GAAP for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet of the Company at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements. These financial statements and the notes thereto should be read in conjunction with the December 31, 2014 audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for fiscal year 2014 filed with the Securities and Exchange Commission (the SEC).
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.
Note 2. Recently Adopted and Recently Issued Accounting Guidance
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016. We have not yet determined the effects, if any, that adoption of this new accounting standard may have on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern," which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU No. 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The adoption of this standard's update is not expected to impact the Company's consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation: Amendments to the Consolidation Analysis," which amends the criteria for determining which entities are considered variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE, and ends the deferral granted to investment companies for application of the VIE consolidation model. ASU No. 2015-02 is effective for public entities for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. We have not yet determined the effects, if any, that adoption of this new accounting standard may have on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," 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. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated balance sheets.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for annual reporting periods after December 15, 2015, and interim periods within those fiscal years. The new guidance will be applied prospectively. Early adoption is permitted and the Company chose to do so effective September 30, 2015.
Note 3. Acquisitions and Contingent Purchase Obligations
During the nine months ended September 30, 2015, the Company paid a total of $116.3 million related to acquisitions including $113.0 million for the operations of six businesses acquired during the period. These acquisitions consist of the following:
These acquisitions have expanded the Company’s presence in emergency medicine, hospital medicine and anesthesia staffing in those respective markets. The results of operations of the acquired businesses have been included in the Company’s consolidated financial statements beginning on the acquisition date. The consolidated Statement of Comprehensive Earnings for the three and nine months ended September 30, 2015 includes revenue of $44.0 million and $94.1 million, respectively, related to acquisitions completed in 2015.
The purchase price for these acquisitions was allocated, based on management’s estimates, in accordance with ASC Topic 805, “Business Combinations” (ASC 805). The Company’s purchase price allocation for business combinations completed during recent periods is preliminary and may be subject to revision as additional information about the fair value of acquired working capital becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred. The purchase price for the acquisitions completed during the nine months ended September 30, 2015 was allocated as shown in the table below (in thousands):
During 2015, factors became known that resulted in changes to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to certain acquisitions completed during 2014. These changes resulted in an increase to accrued liabilities of $1.9 million, and a net decrease in deferred tax liabilities of $0.9 million, resulting in a net increase to goodwill of $1.0 million.
The following unaudited pro forma information combines the consolidated results of operations of the Company and the historical financial results of the acquisitions completed during 2014 and 2015 as if the transactions had occurred on January 1, 2014 (in thousands, except for per share data):
The pro forma results are based on estimates and assumptions, which the Company believes are reasonable and do not necessarily represent results that would have occurred if the acquisitions had taken place at the beginning of the periods, nor are they indicative of the future results of these combined operations.
On August 4, 2015, the Company and its wholly owned subsidiary Intrepid Merger Sub, Inc. (Merger Sub) entered into an Agreement and Plan of Merger with IPC Healthcare, Inc., a Delaware corporation (IPC), providing for the acquisition of IPC by the Company (the IPC Transaction). Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into IPC (the Merger), with IPC surviving the Merger as a wholly owned subsidiary of the Company. The merger consideration provided in the Merger Agreement (as further described below) is $80.25 per share of IPC common stock in cash, or approximately $1.6 billion in enterprise value. The Company has entered into a debt commitment letter with certain lenders (see Debt Commitment Letter below) in connection with the financing of the acquisition.
At the effective time of the Merger, each share of IPC common stock issued and outstanding immediately prior to the effective time (other than shares (i) owned by the Company or Merger Sub, (ii) held in treasury by IPC or (iii) owned by stockholders who have perfected and not withdrawn a demand for appraisal under Delaware law) will be automatically canceled and converted into the right to receive $80.25 in cash, without interest.
Consummation of the Merger is subject to customary conditions, including without limitation (i) requisite approval of IPC’s stockholders, (ii) there being no law or order temporary, preliminary or permanent prohibiting the consummation of the merger, (iii) subject to specified materiality standards, the accuracy of the representations and warranties of the other party, and (iv) compliance by the other party in all material respects with its covenants.
The Merger Agreement contains certain termination rights for the Company and IPC. Upon termination of the Merger Agreement, under specified circumstances, IPC will be required to pay the Company a termination fee of $47.0 million.
A special meeting of IPC's stockholders is scheduled to be held on November 16, 2015 to vote upon the adoption of the merger Agreement. There is no assurance that the conditions to the Merger will be satisfied or that the Merger will close on this date or at all.
Debt Commitment Letter
On August 25, 2015, in connection with entering into the Merger Agreement, the Company and Team Health, Inc. (the Borrower) entered into an amended and restated debt commitment letter (as amended, the Debt Commitment Letter) with Citigroup Global Markets Inc. (Citi) and the other lenders party thereto (the Lenders), pursuant to which, subject to the conditions set forth therein, Citi and the Lenders have committed to provide either (a) (1) a senior secured tranche B term loan facility in an aggregate principal amount of $965.0 million (the New Tranche B Facility) to be obtained pursuant to an amendment and restatement of the Borrower’s existing credit agreement (the Existing Credit Agreement) for the Borrower’s existing senior secured credit facilities (the Existing Credit Facilities) and (2) senior unsecured increasing rate term loans under a new senior unsecured bridge facility of $545.0 million (the New Senior Bridge Facility), or (b) in the event that the amendments to the Existing Credit Agreement were not obtained in order to permit the incurrence of loans under the New Tranche B Facility and the New Senior Bridge Facility and the consummation of the IPC Acquisition, to refinance the Existing Credit Facilities into new facilities consisting of (1) (x) a senior secured revolving credit facility in an aggregate principal amount not to exceed $650.0 million, (y) a senior secured tranche A term loan facility in an aggregate principal amount not to exceed $588.75 million and (z) the New Tranche B Facility and (2) the New Senior Bridge Facility (collectively, the Facilities).
On October 2, 2015 the Borrower and certain of the lenders under the Existing Credit Facilities entered into an amendment to the Existing Credit Agreement (the First Amendment). The First Amendment allows for the amendment and restatement of the Existing Credit Agreement to permit the New Tranche B Facility in an aggregate principal amount not to exceed $1.15 billion on the date on which the IPC Acquisition is consummated and amends the Existing Credit Agreement to (a) permit the incurrence of the notes offered hereunder and the New Senior Bridge Facility in an aggregate principal amount not to exceed $1.00 billion, provided that the aggregate principal amount of the notes and any loans made under the New Tranche B Facility and New Senior Bridge Facility cannot exceed $1.95 billion and (b) to effect such other changes as contemplated therein. In connection with Merger and related transactions, the Company expects to enter into an amended and restated credit agreement. The proceeds of the Debt Financing will be used to partially finance the aggregate Merger Consideration, repay or redeem the existing indebtedness of IPC other than certain letters of credit that are permitted to remain outstanding, pay costs and expenses related to the Merger and finance the ongoing working capital and other general corporate purposes of the Company, after consummation of the Merger.
Citi and certain of its affiliates may have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Company. They have received, or may in the future receive, customary fees and commissions for these transactions.
In October 2015, the Company completed the acquisition of the operations of an emergency staffing business located in Nevada. This acquisition will add approximately 370,000 patient visits annually to the Company's existing emergency medicine staffing operations. The Company is still in the process of completing the purchase price allocation for this acquisition.
Contingent Purchase Obligations
In accordance with ASC 805, when contingent payments are tied to continuing employment, such amounts are recognized ratably over the defined performance period as compensation expense which is included as a component of general and administrative expense (and parenthetically disclosed with other acquisition-related compensation expense) in the Company's results of operations. The payment of contingent purchase obligations tied to continuing employment is included as a component of operating cash flows. When contingent payments are not tied to continuing employment, such amounts are recognized as a contingent purchase liability at the acquisition date.
As of September 30, 2015, the Company estimates it may have to pay $49.4 million (including $6.0 million related to transactions completed during 2015) in future contingent payments for acquisitions made prior to September 30, 2015, based upon the current projected performance of the acquired operations of which $24.1 million is recorded as a liability in other liabilities and other non-current liabilities on the Company’s consolidated balance sheet. The remaining estimated liability of $25.2 million will be recorded as contingent purchase compensation expense over the remaining performance periods. The current estimate of future contingent payments could increase or decrease depending upon the actual performance of the acquisition over the respective performance periods. These payments will be made should the acquired operations achieve the financial targets or certain contract terms as agreed to in the respective acquisition agreements, including the requirements for continuing employment. When measured on a recurring basis, this liability is considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.
The contingent purchase and other acquisition compensation expense recognized for the nine months ended September 30, 2014 and 2015 was $22.5 million and $12.2 million, respectively. Included in the expense recognized in 2014 and 2015 is $0.2 million and $0.8 million, respectively, related to acquisition related payments made to non-owners of the acquired operations.
The changes to the Company’s accumulated contingent purchase liability for the nine months ended September 30, 2015 are as follows (in thousands):
Estimated unrecognized contingent purchase compensation expense as of September 30, 2015 is as follows (in thousands):
In the nine months ended September 30, 2014 and 2015, the Company recognized transaction costs of $5.7 million and $7.2 million, respectively, which related to external costs associated with due diligence and acquisition activity.
Note 4. Fair Value Measurements
The Company applies the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (ASC Topic 820), in determining the fair value of its financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
ASC Topic 820 prioritizes the inputs used in measuring fair value into the following hierarchy:
The following table provides information on those assets and liabilities the Company currently measures at fair value on a recurring basis as of December 31, 2014 and September 30, 2015 (in thousands):
The Company’s insurance subsidiaries investments are valued using market prices on active markets (Level 1) and less active markets (Level 2), in addition to using alternative information when market data is not available (Level 3). Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from readily available pricing sources for comparable investment or identical investments in less active markets. The fair values of the Company’s supplemental employee retirement investments are based on quoted prices. Level 3 investment valuations require significant management judgment and are based on transaction price, company performance, and market conditions. For the nine months ended September 30, 2015 there were no transfers between Levels 1, 2 or 3. See Note 5 for more information regarding the Company’s investments.
The Company classified its municipal bonds, mutual funds, and corporate bonds within Level 2 because these securities were valued based on quoted prices in markets that are less active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.
The Company classified its private investments within Level 3 because active market pricing is not readily available and, as such, we use net asset values as an estimate of fair value as a practical expedient. The valuation of non-public private equity investments requires significant management judgment due to the absence of observable quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These investments are valued initially based upon transaction price. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions.
In addition to the preceding disclosures prescribed by the provisions of FASB ASC Topic 820, ASC Topic 825 “Financial Instruments” requires the disclosure of the estimated fair value of financial instruments. The Company’s short term financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
The fair value of the Company's debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities (Level 2). At September 30, 2015, the estimated fair value of the Company’s outstanding debt was $741.9 million compared to a carrying value of $755.0 million.
Note 5. Investments
Investments are primarily comprised of securities held by the Company and its captive insurance subsidiaries and by the Company in connection with its participant directed supplemental employee retirement plan. Investments held by the Company and its captive insurance subsidiaries are classified as available-for-sale securities. The unrealized gains or losses of investments held by the Company and its captive insurance subsidiaries are included in accumulated other comprehensive earnings as a separate component of shareholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such securities until their full cost can be recovered, in which case such securities are written down to fair value and the loss is charged to current period earnings.
The investments held by the Company in connection with its participant directed supplemental employee retirement plan are classified as trading securities; therefore, changes in fair value associated with these investments are recognized as a component of earnings.
At December 31, 2014 and September 30, 2015, amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by investment type were as follows (in thousands):
At December 31, 2014 and September 30, 2015, the amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by contractual maturities were as follows (in thousands):
A summary of the Company’s temporarily impaired available-for-sale investment securities as of December 31, 2014 and September 30, 2015 follows (in thousands):
(a) Unrealized loss is less than $1,000.
The unrealized losses resulted from changes in market interest rates, not from changes in the probability of contractual cash flows. Because the Company has the ability and intent to hold the investments until a recovery of carrying value and full collection of the amounts due according to the contractual terms of the investments is expected, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015.
During the nine months ended September 30, 2015, the Company recorded a gain of approximately $0.1 million on the sale of specifically identified investments.
As of September 30, 2015, and December 31, 2014, the investments related to the participant directed supplemental employee retirement plan totaled $41.9 million and $37.2 million, respectively, and are included in other assets in the accompanying consolidated balance sheets. The net trading gains on those investments for the nine months ended on September 30, 2014 and September 30, 2015 that were still held by the Company as of September 30, 2014 and September 30, 2015 are as follows (in thousands):
During the first quarter of 2015, the Company sold its investment in a provider of hospital-based telemedicine consultations previously recorded in other assets on the consolidated balance sheet and accounted for as a cost method investment. In connection with the sale, the Company received proceeds of $4.0 million. This sale resulted in a gain of $2.0 million that was recorded in other (income) expenses, net in the results of the Company's operations.
Note 6. Net Revenue
Net revenue consists of fee for service revenue, contract revenue and other revenue. The Company’s net revenue is principally derived from the provision of healthcare staffing services to patients within healthcare facilities and is recorded in the period the services are rendered. Under the fee for service arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. Fee for service revenue reflects gross fee for service charges less contractual allowances and policy discounts, where applicable. Contractual adjustments represent the Company’s estimate of discounts and other adjustments to be recognized from gross fee for service charges under contractual payment arrangements, primarily with commercial, managed care and governmental payment plans such as Medicare and Medicaid when the Company’s providers participate in such plans. Contractual adjustments are not reflected in self-pay fee for service revenue. Contract revenue represents revenue generated under contracts in which the Company provides physician and other
healthcare staffing and administrative services in return for a contractually negotiated fee. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-to hourly rates, monthly contractual rates, or certain operational or financial metrics. Revenue in such cases is recognized as the hours are worked by the Company’s affiliated staff and contractors or as metrics are realized. Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. The Company also records a provision for uncollectible accounts based primarily on historical collection experience to record accounts receivables at the estimated amounts expected to be collected.
Net revenue for the three and nine months ended September 30, 2014 and 2015 consisted of the following (in thousands):
The Company employs several methodologies for determining its allowance for uncollectibles depending on the nature of the net revenue before provision for uncollectibles recognized. The Company initially determines gross revenue for its fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in estimated net revenue before provision for uncollectibles. Net revenue before provision for uncollectibles is then reduced for management’s estimate of uncollectible amounts. Fee for service net revenue represents estimated cash to be collected from such patient visits and is net of management’s estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately fifteen million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each fee for service contract by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by the Company’s billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenue is billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances are prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon periodic reviews of specific accounts and invoices once it is concluded that such amounts are not likely to be collected. Approximately 99% of the Company’s allowance for doubtful accounts is related to receivables for fee for service patient visits. The principal exposure for uncollectible fee for service visits is centered in self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance. While the Company does not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of September 30, 2015 was equal to approximately 93% of outstanding self-pay fee for service patient accounts. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2014 and 2015.
Note 7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during the year ended December 31, 2014 and the nine months ended September 30, 2015 were as follows (in thousands):
The following is a summary of intangible assets and related amortization as of December 31, 2014 and September 30, 2015 (in thousands):
Intangible assets are amortized over their estimated life, which is approximately three to six years. As of September 30, 2015, the weighted average remaining amortization period for intangible assets was 3.9 years.
Note 8. Long-Term Debt
Long-term debt as of September 30, 2015 consisted of the following (in thousands):
As of September 30, 2015, the Company's senior secured credit facilities (Credit Facility) consist of a $600.0 million term loan facility (Term Loan A Facility) and a $650.0 million revolving credit facility (Revolving Credit Facility). These facilities have a maturity date of October 2, 2019. The maturity dates under the Credit Facility are subject to extension with lender consent according to the terms of the agreement.
The interest rate on any outstanding Revolving Credit Facility borrowings and Term A Loan Facility borrowings, and the commitment fee applicable to undrawn revolving commitments, is priced off a grid based upon the Company’s first lien net leverage ratio and is currently LIBOR + 1.75% in the case of revolving credit borrowings under the Revolving Credit Facility and Term A Loan Facility and 0.30% in the case of unused revolving commitments. The weighted average interest rate for the nine months ended September 30, 2015 was 1.94% for amounts outstanding under the Term A Loan Facility.
The Company had $170.0 million of borrowings outstanding under the Revolving Credit Facility as of September 30, 2015, and the Company had $6.4 million of standby letters of credit outstanding against the Revolving Credit Facility commitment.
The Credit Facility agreement contains both affirmative and negative covenants, including limitations on the Company’s ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business and pay dividends, and requires the Company to comply with a maximum total leverage ratio, tested quarterly. At September 30, 2015, the Company was in compliance with all covenants under the senior credit facility agreement. The Credit Facility is secured by substantially all of the Company’s U. S. subsidiaries’ assets.
Aggregate annual maturities of long-term debt as of September 30, 2015 are as follows (in thousands):
Note 9. Professional Liability Insurance
The Company’s professional liability loss reserves included in other accrued liabilities and other non-current liabilities in the accompanying consolidated balance sheets consisted of the following (in thousands):
The changes to the Company’s estimated losses under self-insured programs as of September 30, 2015 were as follows (in thousands):
The Company provides for its estimated professional liability losses through a combination of self-insurance and commercial insurance programs. Losses under commercial insurance programs in excess of the limit of coverage remain as a self-insured obligation of the Company. A portion of the professional liability loss risks being provided for through self-insurance (claims-made basis) are transferred to and funded into captive insurance companies. The accounts of the captive insurance companies are fully consolidated with those of the other operations of the Company in the accompanying consolidated financial statements.
The self-insurance components of our risk management program include reserves for future claims incurred but not reported (IBNR). As of December 31, 2014, of the $190.1 million of estimated losses under self-insured programs, approximately $117.3 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $72.8 million representing specific case reserves. Of the specific case reserves as of December 31, 2014, $1.9 million represented case reserves that had settled but not yet funded, and $70.9 million reflected unsettled case reserves.
As of September 30, 2015, of the $219.4 million of estimated losses under self-insurance programs, approximately $134.8 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $84.6 million representing specific case reserves. Of the specific case reserves as of September 30, 2015, $1.9 million represented case reserves that had been settled but not yet funded, and $82.7 million reflected unsettled case reserves.
The Company’s provisions for losses under its self-insurance components are estimated using the results of periodic actuarial studies. Such actuarial studies include numerous underlying estimates and assumptions, including assumptions as to future claim losses, the severity and frequency of such projected losses, loss development factors and others. The Company’s provisions for losses under its self-insured components are subject to subsequent adjustment should future actuarial projected results for such periods indicate projected losses greater or less than previously projected.
The Company’s most recent actuarial valuation was completed in October 2015. Based on the results of the actuarial study completed in October 2015, management determined no additional change was necessary in the consolidated reserves for professional liability losses during the third quarter of 2015 related to prior year loss estimates. The discount rate on professional liability reserves was 1.2% at September 30, 2015 compared to 1.1% at December 31, 2014.
Note 10. Contingencies
We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services
provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.
On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Company’s services at hospitals that are affiliated with Health Management Associates, Inc. (HMA) and any of HMA’s affiliates. The Company is cooperating with the government in its investigation.
On August 14, 2015, a purported shareholder of IPC filed a complaint in the Delaware Court of Chancery captioned Smukler v. IPC Healthcare, Inc., et al. (Case No. 11392-CB), on behalf of a purported class of IPC shareholders. The lawsuit names IPC, each of its current directors, the Company, and Sub as defendants. The lawsuit alleges that the individual defendants breached their fiduciary duties by, among other things, failing to take appropriate steps to maximize the value of IPC to its shareholders, failing to value IPC properly, and taking steps to avoid competitive bidding by alternate potential acquirers. The lawsuit also alleges that IPC, the Company, and Sub aided and abetted those alleged breaches of fiduciary duties by the individual defendants. The lawsuit seeks, among other things, certification of the action as a class action; injunctive relief enjoining the merger; an accounting of all damages purportedly suffered by the plaintiff and the class including rescissory damages in favor of the plaintiff and the class; and the fees and costs associated with the litigation. On August 18, 2015, an additional lawsuit was filed in the Delaware Court of Chancery, asserting similar claims and allegations to those in the Smukler lawsuit and seeking similar relief on behalf of the same putative class. Crescente v. Singer, et al. (Case No. 11405-CB).
Additionally, on August 19, 2015, a lawsuit was filed in the Superior Court for the State of California in Los Angeles County. Khemthong v. IPC Healthcare Networks, Inc., et al. (No. BC 591953). The lawsuit asserted similar claims and allegations to those in the Smukler lawsuit and sought similar relief on behalf of the same putative class. On August 27, 2015, the plaintiff filed a request for voluntary dismissal of the suit without prejudice, and on August 28, 2015, the court entered an order granting that request.
By Order dated September 11, 2015 (the Consolidation Order), the Smukler and Crescente actions were consolidated, and all further litigation relating to or arising out of the merger were directed to be consolidated with such actions under the caption In re IPC Healthcare, Inc. Stockholders Litigation, C.A. No. 11392-CB (the “Consolidated Action”). On September 17, 2015, an action captioned Spencer v. IPC Healthcare, Inc., C.A. No. 11516-CB, was filed in the Delaware Court of Chancery. Under the Consolidation Order, such action is required to be consolidated with the previously-filed actions. On September 18, 2015, a Verified Consolidated Class Action Complaint was filed in the Consolidated Action. On October 2, 2015, the defendants moved to dismiss the operative complaint.
Healthcare Regulatory Matters
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action. From time to time, governmental regulatory agencies conduct inquiries and audits of the Company’s practices. It is the Company’s current practice and future intent to cooperate fully with such inquiries.
In addition to laws and regulations governing the Medicare and Medicaid programs, there are a number of federal and state laws and regulations governing such matters as the corporate practice of medicine and fee splitting arrangements, anti-kickback statutes, physician self-referral laws, false or fraudulent claims filing and patient privacy requirements. The failure to comply with any of such laws or regulations could have an adverse impact on our operations and financial results. It is management’s belief that the Company is in substantial compliance in all material respects with such laws and regulations.
The Patient Protection and Affordable Care Act (the PPACA), signed into law on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, collectively referred to as the Healthcare Reform Laws, significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court (the Supreme Court) upheld the constitutionality of the requirement in the PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. The Supreme Court upheld the PPACA provision expanding Medicaid eligibility to new populations as constitutional, but only so long as the expansion of the Medicaid program is optional for the states. States that choose not to expand their Medicaid programs to newly eligible populations in the PPACA can only lose the new federal
Medicaid funding in the PPACA but not their eligibility for existing federal Medicaid matching payments. We continue to monitor those states that remain undecided or, in certain instances, involved in ongoing internal dialogue on whether or not the state will elect to expand its Medicaid program’s eligibility. In addition, on June 25, 2015, the Supreme Court upheld the provision of tax credits and federal subsidies to individuals who purchase health insurance through a federally-facilitated exchange.
Additional challenges to the Healthcare Reform Laws could further impact the implementation of these laws. While the ultimate impact of these laws and implementing regulations will not be known until all provisions are fully implemented, the Company believes that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. Since the implementation of increased access to health benefits through the expansion of Medicaid programs and through exchange enrollment beginning in 2014, we have realized a decline in the percentage of self-pay visits by our consolidated fee for service volume and an increase in the percentage of Medicaid visits that we believe is a result of healthcare reform. Other provisions, however, such as Medicare payment reforms and reductions that could reduce provider payments, may have an adverse effect on the reimbursement rates the Company receives for services provided by affiliated healthcare professionals.
Note 11. Share-based Compensation
Stock Incentive Plan
In May 2013, the Company's shareholders approved the Team Health Holdings, Inc. Amended and Restated 2009 Stock Incentive Plan (the Stock Plan) that amended the 2009 Stock Incentive Plan.
Purpose. The purpose of the Stock Plan is to aid in recruiting and retaining key employees, directors, consultants, and other service providers of outstanding ability and to motivate those employees, directors, consultants, and other service providers to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of options, stock appreciation rights and other stock-based awards.
Shares Subject to the Plan. The Stock Plan provides that the total number of shares of common stock that may be issued is 15,100,000, of which approximately 2,426,000 are available to grant as of September 30, 2015. Shares of the Company’s common stock covered by awards that terminate or lapse without the payment of consideration may be granted again under the Stock Plan.
The following table summarizes the status of options under the Stock Plan as of September 30, 2015:
Intrinsic value is the amount by which the stock price as of September 30, 2015 exceeds the exercise price of the options. The Company granted 510,000 options during the nine months ended September 30, 2015. The fair value of the options granted in 2015 was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 1.6%, implied volatility of 33.8% and an expected life of the options of 5.25 years. The weighted average estimated fair value of options granted during 2015 was $20.27. As of September 30, 2015, the Company had approximately $15.4 million of unrecognized compensation expense, net of estimated forfeitures related to unvested options, which will be recognized over the remaining requisite service period.
Equity based compensation expense and the resulting tax benefits were as follows (in thousands):
Restricted awards are grants of restricted stock and grants of restricted stock units that are not vested (Restricted Awards). The Company granted 185,000 shares of Restricted Awards in 2015. The Company had $19.4 million of expense remaining to be recognized over the requisite service period for Restricted Awards at September 30, 2015. The Restricted Awards generally vest annually over a three to four-year period from the initial grant date for the grants made to the independent board members and management.
A summary of changes in total outstanding unvested restricted awards for the nine months ended September 30, 2015 is as follows (in thousands):
Stock Purchase Plans
In May 2010, the Company’s Board of Directors (the Board) adopted the 2010 Employee Stock Purchase Plan (ESPP) and the 2010 Nonqualified Stock Purchase Plan (NQSPP).
The ESPP provides for the issuance of up to 600,000 shares to the Company’s employees. All eligible employees are granted identical rights to purchase common stock in each Board authorized offering under the ESPP. Rights granted pursuant to any offering under the ESPP terminate immediately upon cessation of an employee’s employment for any reason. In general, an employee may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 5% discount on shares purchased under the ESPP. Rights granted under the plan are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in April and October. As of September 30, 2015, contributions under the ESPP totaled $2.5 million. In October 2015, approximately 47,000 shares of the Company’s common stock were issued to plan participants.
The NQSPP provides for the issuance of up to 800,000 shares to our independent contractors. All eligible contractors are granted identical rights to purchase common stock in each Board authorized offering under the NQSPP. Rights granted pursuant to any offering under the NQSPP terminate immediately upon cessation of a contractor’s relationship with the Company for any reason. In general, a contractor may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Contractors receive a 5% discount on shares purchased under the NQSPP. Rights granted under the NQSPP are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in April and October. As of September 30, 2015, contributions under the NQSPP totaled $1.2 million. In October 2015, approximately 23,000 shares of the Company’s common stock were issued to plan participants.
Note 12. Earnings Per Share
The Company computes basic earnings per share using the weighted average number of shares outstanding. The Company computes diluted earnings per share using the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options, restricted awards, and stock purchase plans. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Note 13. Noncontrolling Interests in Consolidated Entity
The Company is party to two joint venture arrangements. The joint ventures provide administrative management and billing services to certain existing and planned urgent care clinics the Company and joint venture partners operate. The consolidated financial statements include all assets, liabilities, revenues and expenses of the less than 100% owned entity that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of this entity. In connection with these arrangements, the Company received joint venture contributions of $1.7 million during the nine months ended September 30, 2015.
Note 14. Accumulated Other Comprehensive Earnings (Loss)
The changes in accumulated other comprehensive earnings (loss) related to available-for-sale securities were as follows (in thousands):
Note 15. Segment Reporting
The Company provides services through ten operating segments which are aggregated into two reportable segments, Healthcare Staffing and Other Services. The Healthcare Staffing segment, which is an aggregation of emergency medicine, anesthesia, specialty surgery and locums staffing, provides comprehensive healthcare service programs to users and providers of healthcare services on a fee for service as well as a cost plus or contract basis. The Other Services segment is an aggregation of hospital medicine, military and government healthcare staffing, clinical services, nurse call center operations, After Hours Pediatrics as well as billing, collection and consulting services that provides a range of other comprehensive healthcare services. The operating segments included in the Other Services reportable segment, while similar in the types of services provided by those operating segments included in the Healthcare Staffing segment, do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenue, where intercompany charges have been eliminated. Certain corporate expenses are not allocated to the segments. These unallocated expenses are corporate expenses, net interest expense, depreciation and amortization, transaction costs and income taxes. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.
The following table presents financial information for each reportable segment. Depreciation, amortization, management fee and other expenses separately identified in the consolidated statements of operations are included as a reduction to the respective segments’ operating earnings for each period below (in thousands):
We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States, based upon revenues and patient visits. Our regional operating models also include comprehensive programs for inpatient care, anesthesiology, inpatient specialty care, pediatrics and other healthcare services, principally within hospital departments and other healthcare treatment facilities. We have historically focused, however, primarily on providing outsourced services to hospital emergency departments, or EDs, which accounts for the majority of our net revenue.
Factors and Trends that Affect Our Results of Operations
In reading our financial statements, you should be aware of the following factors and trends we believe are important in understanding our financial performance.
General Economic Conditions
Any lingering effects of the recent economic conditions may adversely impact our ability to collect for the services we provide as higher unemployment and reductions in commercial managed care and governmental healthcare enrollment may also increase the number of uninsured and underinsured patients seeking healthcare at one of our staffed EDs or other clinical facilities. We could be negatively affected if the federal government or the states reduce funding of Medicare, Medicaid and other federal and state healthcare programs in response to increasing deficits in their budgets. Also, patient volume trends in our staffed hospital clinical departments could be adversely affected as individuals potentially defer or forgo seeking care in such departments due to the loss or reduction of coverage previously available to such individuals under commercial insurance or governmental healthcare programs.
In 2010, the President of the United States (U.S.) and the U.S. Congress enacted significant reforms to the U.S. healthcare system. The Healthcare Reform Laws significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court, upheld the constitutionality of the requirement in the PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. Additionally, the U.S. Supreme Court held in the same ruling that states were not obligated to expand their Medicaid programs as stipulated in the PPACA to eligible recipients based solely on income. Consequently, each state retained the option whether to choose to expand their Medicaid roles. In addition, on June 25, 2015, the Supreme Court upheld the provision of tax credits and federal subsidies to individuals who purchase health insurance through a federally-facilitated exchange.
The Healthcare Reform Laws triggered numerous changes to the U.S. healthcare system, some of