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VANGUARD HEALTH SYSTEMS 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended December 31, 2011

OR

 

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

For the transition period from                          to                     

Commission File Number: 001-35204

 

 

 

LOGO

VANGUARD HEALTH SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   62-1698183

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

20 Burton Hills Boulevard, Suite 100

Nashville, TN 37215

(Address and zip code of principal executive offices)

(615) 665-6000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the 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.

 

Large accelerated filer  ¨      Accelerated filer                    ¨

Non-accelerated filer    x

  (Do not check if a smaller reporting company)    Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes     x  No

As of January 31, 2012, there were 76,894,087 shares of the Registrant’s common stock outstanding.

 

 

 


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

     Page  

PART I FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited):

  

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2011

     3   

Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2010 and 2011

     4   

Condensed Consolidated Statements of Equity for the six months ended December 31, 2011

     5   

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4. Controls and Procedures

     57   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     58   

Item 1A. Risk Factors

     58   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     58   

Item 6. Exhibits

     58   

Signatures

     59   

Exhibit Index

     60   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

VANGUARD HEALTH SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

September 30, September 30,
       Recast         
       June 30, 2011      December 31, 2011  
      

(In millions, except share and

per share amounts)

 

ASSETS

    

Current assets:

       

Cash and cash equivalents

     $ 936.6       $ 178.7   

Restricted cash

       2.3         8.8   

Accounts receivable, net of allowance for doubtful accounts of approximately $205.0 and $306.0, respectively

       484.4         576.9   

Inventories

       83.9         92.9   

Deferred tax assets

       92.9         79.1   

Prepaid expenses and other current assets

       157.9         252.4   
    

 

 

    

 

 

 

Total current assets

       1,758.0         1,188.8   

Property, plant and equipment, net of accumulated depreciation

       1,830.5         2,050.0   

Goodwill

       757.1         768.4   

Intangible assets, net of accumulated amortization

       94.0         84.3   

Deferred tax assets, noncurrent

       27.5         50.0   

Investments in securities

       63.3         49.8   

Other assets

       65.8         84.3   
    

 

 

    

 

 

 

Total assets

     $ 4,596.2       $ 4,275.6   
    

 

 

    

 

 

 

LIABILITIES AND EQUITY

       

Current liabilities:

       

Accounts payable

     $ 314.3       $ 361.2   

Accrued salaries and benefits

       248.9         198.9   

Accrued health plan claims and settlements

       114.9         119.0   

Accrued interest

       62.3         61.1   

Other accrued expenses and current liabilities

       221.6         207.2   

Current maturities of long-term debt

       461.8         12.4   
    

 

 

    

 

 

 

Total current liabilities

       1,423.8         959.8   

Professional and general liability and workers compensation reserves

       289.7         299.3   

Pension benefit obligation

       188.0         171.3   

Other liabilities

       125.8         158.5   

Long-term debt, less current maturities

       2,325.8         2,332.0   

Commitments and contingencies

       

Redeemable non-controlling interests

       —           51.8   

Equity:

       

Vanguard Health Systems, Inc. stockholders’ equity:

       

Common Stock of $0.01 par value; 500,000,000 shares authorized; 71,482,000 and 75,347,000 issued and outstanding at June 30, 2011 and December 31, 2011, respectively

       0.7         0.8   

Additional paid-in capital

       330.5         399.2   

Accumulated other comprehensive income

       20.6         19.7   

Retained deficit

       (116.8      (123.9
    

 

 

    

 

 

 

Total Vanguard Health Systems, Inc. stockholders’ equity

       235.0         295.8   

Non-controlling interests

       8.1         7.1   
    

 

 

    

 

 

 

Total equity

       243.1         302.9   
    

 

 

    

 

 

 

Total liabilities and equity

     $ 4,596.2       $
4,275.6
  
    

 

 

    

 

 

 

See accompanying notes.

 

 

3


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

September 30, September 30, September 30, September 30,
       Three months ended December 31,      Six months ended December 31,  
       2010      2011      2010      2011  
       (In millions, except share and per share amounts)  

Patient service revenues

     $ 748.8       $ 1,420.9       $ 1,442.1       $ 2,779.6   

Less: Provision for doubtful accounts

       (51.2      (141.5      (103.0      (267.7
    

 

 

    

 

 

    

 

 

    

 

 

 

Patient service revenues, net

       697.6         1,279.4         1,339.1         2,511.9   

Premium revenues

       211.8         188.8         432.4         399.8   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       909.4         1,468.2         1,771.5         2,911.7   

Costs and Expenses:

             

Salaries and benefits (includes stock compensation of of $1.7, $3.9, $2.9 and $4.6, respectively)

       375.5         702.4         730.3         1,367.4   

Health plan claims expense

       164.8         147.3         338.9         312.0   

Supplies

       133.5         227.9         254.5         441.5   

Rents and leases

       11.7         18.7         22.7         36.7   

Other operating expenses

       139.2         264.7         263.9         524.8   

Medicare and Medicaid EHR incentive payments

       —           (22.6      —           (22.6

Depreciation and amortization

       38.6         65.8         75.8         128.4   

Interest, net

       35.1         43.2         69.9         89.0   

Debt extinguishment costs

       —           —           —           38.9   

Acquisition related expenses

       1.3         0.4         5.0         12.6   

Other

       1.9         (1.8      3.0         (4.2
    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

       7.8         22.2         7.5         (12.8

Income tax benefit (expense)

       (9.7      (9.0      (7.3      4.6   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations

       (1.9      13.2         0.2         (8.2

Loss from discontinued operations, net of taxes

       (2.3      (0.3      (2.2      (0.4
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

       (4.2      12.9         (2.0      (8.6

Net loss (income) attributable to non-controlling interests

       (0.8      (0.8      (1.8      1.5   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (5.0    $ 12.1       $ (3.8    $ (7.1
    

 

 

    

 

 

    

 

 

    

 

 

 

Amounts attributable to Vanguard Health Systems, Inc. stockholders:

             

Income (loss) from continuing operations, net of taxes

     $ (2.7    $ 12.4       $ (1.6    $ (6.7

Loss from discontinued operations, net of taxes

       (2.3      (0.3      (2.2      (0.4
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (5.0    $ 12.1       $ (3.8    $ (7.1
    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders

             

Basic

             

Continuing operations

     $ (0.06    $ 0.17       $ (0.04    $ (0.10

Discontinued operations

       (0.05      (0.01      (0.05      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

       (0.11    $ 0.16       $ (0.09    $ (0.10
    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

             

Continuing operations

     $ (0.06    $ 0.16       $ (0.04    $ (0.10

Discontinued operations

       (0.05      (0.01      (0.05      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (0.11    $ 0.15       $ (0.09    $ (0.10
    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares (in thousands):

             

Basic

       44,635         75,325         44,635         75,090   
    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

       44,635         78,732         44,635         75,090   
    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

4


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Six months ended December 31, 2011

(Unaudited)

 

xxxx xxxx xxxx xxxx xxxx xxxx xxxx
    Vanguard Health Systems, Inc. Stockholders              
                      Accumulated                    
                      Other           Non-        
    Common Stock     Additional     Comprehensive     Retained     Controlling     Total  
    Shares     Amount     Paid-In Capital     Income     Deficit     Interests     Equity  
    (In millions, except share amounts)  

Balance at June 30, 2011

    71,482,000      $ 0.7      $ 330.5      $ 20.6      $ (116.8   $ 8.1      $ 243.1   

Stock compensation (non-cash)

    —          —          4.6        —          —          —          4.6   

Issuance of common stock

    3,750,000        0.1        66.0        —          —          —          66.1   

Common stock issued under stock incentive plans, net

    115,000        —          (0.9     —          —          —          (0.9

Dividends to equity holders and related equity payments, net of taxes

    —          —          (0.4     —          —          —          (0.4

Distributions paid to non-controlling interests, net

    —          —          —          —          —          (1.2     (1.2

Acquired non-controlling interests

    —          —          —          —          —          1.7        1.7   

Accretion of redeemable non-controlling interest

    —          —          (0.6     —          —          —          (0.6

Comprehensive income (loss):

             

Change in fair value of auction rate securities (net of tax)

    —          —          —          0.8        —          —          0.8   

Change in fair value of available-for-sale investments (net of tax)

    —          —          —          (1.7     —          —          (1.7

Net income (loss)

    —          —          —          —          (7.1     (1.5     (8.6
       

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

          (0.9     (7.1     (1.5     (9.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    75,347,000      $ 0.8      $ 399.2      $ 19.7      $ (123.9   $ 7.1      $
302.9
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

September 30, September 30,
       Six months ended December 31,  
       2010      2011  
       (In millions)  

Operating activities:

       

Net loss

     $ (2.0    $ (8.6

Adjustments to reconcile net loss to net cash provided by operating activities:

       

Loss from discontinued operations

       2.2         0.4   

Depreciation and amortization

       75.8         128.4   

Amortization of loan costs

       2.5         3.2   

Accretion of principal on notes

       1.4         5.2   

Debt extinguishment costs

       —           38.9   

Acquisition related expenses

       5.0         12.6   

Stock compensation

       2.9         4.6   

Deferred income taxes

       5.7         (6.2

Other

       1.1         (1.1

Changes in operating assets and liabilities, net of the impact of acquisitions

       34.7         (170.8
    

 

 

    

 

 

 

Net cash provided by operating activities – continuing operations

       129.3         6.6   

Net cash used in operating activities – discontinued operations

       (2.2      (0.4
    

 

 

    

 

 

 

Net cash provided by operating activities

       127.1         6.2   

Investing activities:

       

Acquisitions and related expenses, net of cash acquired

       (457.9      (208.8

Capital expenditures

       (79.4      (137.2

Proceeds from sale of investments in securities

       7.0         42.3   

Purchases of investments in securities

       —           (30.4

Other

       (1.0      (0.7
    

 

 

    

 

 

 

Net cash used in investing activities

       (531.3      (334.8

Financing activities:

       

Payments of long-term debt and capital lease obligations

       (4.1      (460.7

Proceeds from debt borrowings

       216.6         —     

Payments of refinancing costs and fees

       (5.6      —     

Proceeds from issuance of common stock

       —           67.5   

Payments of IPO related costs

       —           (6.9

Payments of tender premiums on note redemption

       —           (27.6

Distributions paid to non-controlling interests and other

       (2.0      (1.6
    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

       204.9         (429.3
    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

       (199.3      (757.9

Cash and cash equivalents, beginning of period

       257.6         936.6   
    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 58.3       $ 178.7   
    

 

 

    

 

 

 

Supplemental cash flow information:

       

Net cash paid for interest

     $ 69.6       $ 81.0   
    

 

 

    

 

 

 

Net cash paid (received) for income taxes

     $ (0.3    $
0.6
  
    

 

 

    

 

 

 

See accompanying notes.

 

6


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

(Unaudited)

1. BUSINESS AND BASIS OF PRESENTATION

Initial Public Offering

In June 2011, Vanguard Health Systems, Inc. (the “Company”) completed the initial public offering of 25,000,000 shares of common stock. The Company’s common stock is now traded on the New York Stock Exchange (symbol “VHS”). Including the exercise of the underwriters’ over-allotment in July 2011 of 3,750,000 shares, a total of 28,750,000 shares were sold. Immediately prior to the public offering, the Company completed a 59.584218-to-1 split of its issued and outstanding common shares. All common share and per common share amounts in these condensed consolidated financial statements and notes to the condensed consolidated financial statements reflect the stock split.

The Company is an investor-owned healthcare company whose subsidiaries and affiliates own and operate hospitals and related healthcare businesses in urban and suburban areas. As of December 31, 2011, the Company’s subsidiaries and affiliates owned and operated 28 acute care and specialty hospitals with 7,064 licensed beds and related outpatient service locations complementary to the hospitals providing healthcare services in San Antonio, Harlingen and Brownsville, Texas; metropolitan Detroit, Michigan; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts. The Company also owns managed health plans in Chicago, Illinois; Harlingen, Texas; and Phoenix, Arizona and two surgery centers in Orange County, California.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of subsidiaries and affiliates controlled by the Company. The Company generally defines control as the ownership of the majority of an entity’s voting interests. The Company also consolidates any variable interest entities for which it is deemed to be the primary beneficiary. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts from the accompanying condensed consolidated financial statements have been reclassified to conform to current year presentation, including the impact of the presentation of the provision for doubtful accounts as further discussed in Note 2. The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative include certain corporate office costs, which approximated $16.4 million and $12.4 million for the three months ended December 31, 2010 and 2011, respectively, and $33.7 million and $26.3 million for the six months ended December 31, 2010 and 2011, respectively.

The unaudited condensed consolidated financial statements as of December 31, 2011 and for the three and six months ended December 31, 2010 and 2011 have been prepared in conformity with accounting principles generally accepted in the United States for interim reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the expected results for the fiscal year ending June 30, 2012. The interim unaudited condensed consolidated financial statements should be read in connection with the audited consolidated financial statements as of and for the year ended June 30, 2011 included in the Company’s Annual Report on Form 10-K (the “10-K”) filed with the Securities and Exchange Commission on August 25, 2011. The accompanying condensed consolidated balance sheet at June 30, 2011 has been derived from the audited consolidated financial statements included in the 10-K, but recast to reflect the impact of updated estimates of liabilities assumed (including the related income tax effect) subsequent to June 30, 2011 in the acquisition of The Detroit Medical Center (“DMC”) as described in Note 4.

Use of Estimates

In preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the amounts recorded or classification of items in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

7


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

2. REVENUE DEDUCTIONS AND UNCOMPENSATED CARE

Allowance for Doubtful Accounts

In July 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-07, “Health Care Entities” (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU 2011-07”). ASU 2011-07 is effective for fiscal years and interim periods beginning after December 31, 2011, with early adoption permitted. Changes to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. ASU 2011-07 states that a healthcare entity that recognizes significant amounts of patient service revenue at the time the services are rendered even though it does not assess the patient’s ability to pay must present the allowance for doubtful accounts as a reduction of net patient revenue and not include it as a separate item in operating expenses. The Company early adopted this guidance effective July 1, 2011.

The Company estimates the allowance for doubtful accounts using a standard policy that reserves all accounts aged greater than 365 days subsequent to the discharge date plus percentages of uninsured accounts and self-pay after insurance accounts less than 365 days old. The Company analyzes the allowance for doubtful accounts quarterly using a hindsight calculation that utilizes write-off data for all payer classes during the previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. The Company also supplements the analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. The standard percentages in the allowance for doubtful accounts reserve are adjusted as necessary given changes in trends from these analyses or policy changes. Significant changes in payer mix, business office operations, general economic conditions and healthcare coverage provided by federal or state governments or private insurers may have a significant impact on the Company’s estimates and significantly affect its liquidity, results of operations and cash flows. The Company’s estimate of the allowance for doubtful accounts and recoveries of accounts previously written off determine its provision for doubtful accounts recorded during a period. The Company records the provision for doubtful accounts at the time the services are provided for uninsured patients, since historical experience shows that the significant majority of uninsured balances will not be collected. The Company records the provision for doubtful accounts related to self-pay after insurance accounts at the time the insurance payment has been received.

The allowance for doubtful accounts was approximately $205.0 million and $306.0 million as of June 30, 2011 and December 31, 2011, respectively. These balances as a percent of accounts receivable net of contractual adjustments were approximately 29.7% and 34.6% as of June 30, 2011 and December 31, 2011, respectively. On a same hospital basis, the Company’s combined allowance for doubtful accounts, uninsured discounts and charity care covered approximately 92.5% and 96.2% of combined uninsured and self-pay after insurance accounts receivable as of June 30, 2011 and December 31, 2011, respectively. The increase in the allowance for doubtful accounts during the six months ended December 31, 2011 was primarily the result of an increase in uninsured and self-pay after insurance accounts receivable from 20.4% of the Company’s total accounts receivable as of June 30, 2011 to 23.6% as of December 31, 2011.

Charity Care

In August 2010, the FASB issued ASU No. 2010-23, “Health Care Entities” (Topic 954): Measuring Charity Care for Disclosure (“ASU 2010-23”). Due to the lack of comparability that previously existed due to the use of either revenue or cost as the basis for disclosure of charity care, ASU 2010-23 standardizes cost as the basis for charity care disclosures and specifies the elements of cost to be used in charity care disclosures. The Company adopted ASU 2010-23 on July 1, 2011.

In the ordinary course of business, the Company provides services to patients who are financially unable to pay for hospital care. The Company includes charity care as a revenue deduction measured by the value of its services, based on standard charges, to patients who qualify under the Company’s charity care policy (typically those who meet certain minimum income guidelines and do not otherwise qualify for reimbursement under a governmental program). The estimated cost incurred by the Company to provide these services to patients who qualify for charity care was approximately $6.2 million and $17.3 million for three months ended December 31, 2010 and 2011 and $12.1 million and $31.5 million for the six months ended December 31, 2010 and 2011, respectively. These estimates were determined using a ratio of cost to gross charges calculated from the Company’s most recently filed Medicare cost reports and applying that ratio to the gross charges associated with providing charity care for the period.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

3. MEDICARE AND MEDICAID EHR INCENTIVE PAYMENTS

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011for eligible hospitals and professionals that implement and achieve meaningful use of certified electronic health record (“EHR”) technology. For Medicare and Medicaid EHR incentive payments prior to December 31, 2011, the Company utilized a grant accounting model to recognize these revenues. Under this accounting policy, EHR incentive payments were recognized as revenues when attestation that the EHR meaningful use criteria for the required period of time was demonstrated and were recognized ratably over the relevant cost report period to determine the amount of reimbursement. Accordingly, the Company recognized approximately $11.9 million of EHR revenues during its fiscal year ended June 30, 2011, comprised of $6.1 million of Medicaid revenues and $5.8 million of Medicare revenues. During the quarter ended September 30, 2011, the Company recognized approximately $7.2 million of EHR revenues, comprised of $5.1 million of Medicaid revenues and $2.1 million of Medicare revenues.

During the quarter ended December 31, 2011, based upon the Company’s understanding of informal guidance provided by the United States Securities and Exchange Commission (the “SEC”), the Company reclassified the $7.2 million of revenues recognized during the quarter ended September 30, 2011 to other income, as separately stated in the costs and expenses section of the Company’s statement of operations. The Company recorded an additional $15.4 million of other income related to EHR incentive payments during the quarter ended December 31, 2011, $13.3 million of which related to Medicaid and $2.1 million of which related to Medicare. In addition to changing the classification for EHR incentive payments, the Company changed its recognition policy to a contingency based model for all payments received after December 31, 2011 based upon the Company’s understanding of the informal guidance provided by the SEC and certain other non-authoritative guidance. Under this new accounting policy, EHR incentive payments are recognized when all contingencies relating to the incentive payment have been satisfied. For recognition of Medicaid EHR incentive payments, this model does not differ from the Company’s previous model because Medicaid payments for the states in which the Company operates are based upon historical cost reports with no subsequent payment adjustment. However, for Medicare EHR incentive payments, recognition will be deferred until both the Medicare federal fiscal year during which EHR meaningful use was demonstrated ends and the cost report information utilized to determine the final amount of reimbursement is known.

4. BUSINESS COMBINATIONS

Acquisition related expenses were $1.3 million and $0.4 million for three months ended December 31, 2010 and 2011, respectively, and $5.0 million and $12.6 million for the six months ended December 31, 2010 and 2011, respectively. Most of the acquisition related expenses during the six months ended December 31, 2011 relate to the acquisition of Valley Baptist Health System and are included in acquisition related expenses on the accompanying condensed consolidated statements of operations.

Acquisition of Valley Baptist

Effective September 1, 2011, the Company acquired a 51% controlling interest in Valley Baptist Medical Center, a 586-bed acute care hospital in Harlingen, Texas, and Valley Baptist Medical Center—Brownsville, a 280-bed acute care hospital in Brownsville, Texas, as well as the assets of certain other incidental healthcare businesses, partnerships, physician practices and medical office buildings operated as part of such hospital businesses (collectively “Valley Baptist”). The Valley Baptist partnership is consolidated by the Company. In connection with this acquisition, the Company entered into a management agreement with Valley Baptist, in which the Company is responsible for the management of Valley Baptist’s operations.

The Company paid approximately $200.5 million in cash at closing to acquire the net assets of Valley Baptist. In addition to the cash investment, the Company also assumed certain of the seller’s debt and issued a 49% interest in the partnership to the seller. The Company funded the cash investment with cash on hand.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

The Valley Baptist purchase price is subject to working capital and certain other customary post-closing adjustments once the closing balance sheets for the hospital businesses become available. The purchase price is required to be allocated to identifiable assets acquired, liabilities assumed and non-controlling interests based upon their estimated fair values as of September 1, 2011. The redeemable non-controlling interest resulted from an option the seller was granted as part of the acquisition to require the Company to redeem all or a portion of its 49% equity interest in the partnership on the third or fifth anniversary of the acquisition date at a stated redemption value. The value of such redeemable non-controlling interest has been determined based upon the discounted expected redemption value as of December 31, 2011. The Company will accrete the discounted expected redemption value up to the expected redemption value during the three years subsequent to acquisition until the third anniversary. If Valley Baptist exercises this option, the Company may purchase the non-controlling interest with cash or by issuing stock. If the option is exercised, it is the Company’s intent to settle the purchase in cash. If the option were to be settled in shares, approximately 5,755,000 shares of the Company’s common stock would be required to be issued based upon the closing price of the Company’s common stock on December 31, 2011. Any excess of the purchase price allocation over the fair values of the assets acquired, liabilities assumed and non-controlling interests is recorded as goodwill. The Company is in the process of finalizing the purchase price allocation for the assets acquired and liabilities assumed; therefore, the fair values set forth below (in millions) are subject to adjustment once the valuations are complete:

 

September 30,

Accounts receivable

     $ 43.1   

Inventories

       7.2   

Prepaid expenses and other current assets

       16.6   

Property and equipment

       246.2   

Goodwill

       5.3   

Other assets

       14.1   
    

 

 

 

Total assets acquired

       332.5   

Accounts payable

       30.4   

Other current liabilities

       24.0   

Other long term liabilities

       14.3   

Long term debt and capital leases

       12.6   

Redeemable non-controlling interest

       51.2   

Noncontrolling interests

       (0.5
    

 

 

 

Total liabilities and equity assumed

       132.0   
    

 

 

 

Net assets acquired

     $ 200.5   
    

 

 

 

DMC Acquisition

Effective January 1, 2011, the Company purchased substantially all of the assets of DMC, a Michigan non-profit corporation, and certain of its affiliates, which assets consist of eight acute care and specialty hospitals in the Detroit, Michigan metropolitan area and related healthcare facilities. The Company had substantially completed its fair value estimates of the individual assets acquired and liabilities assumed related to the acquisition as of June 30, 2011. However, the Company continued to assess the fair value of certain liabilities assumed in the acquisition during the six months ended December 31, 2011.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

As a result of additional information that became available after June 30, 2011 relating to the fair value of these assumed liabilities given facts and circumstances that existed at the acquisition date, the Company revised its estimate of these assumed liabilities and the related income tax effect as of December 31, 2011. The Company recast its June 30, 2011 balance sheet to reflect these revised estimates. The table below summarizes the final recast DMC purchase price allocation resulting from these revised estimates. Any adjustments to purchase price estimates subsequent to December 31, 2011 will impact the condensed consolidated statement of operations in future periods.

 

September 30, September 30,
       As previously        As  
       reported        recast  
       (In millions)  

Cash

     $ 6.4         $ 6.4   

Accounts receivable

       115.1           115.1   

Inventories

       26.7           26.7   

Prepaid expenses and other current assets

       95.6           106.0   

Property and equipment

       524.6           524.6   

Goodwill

       84.3           101.7   

Other intangible assets

       10.7           10.7   

Investments in securities

       166.4           166.4   

Other assets

       85.2           85.2   
    

 

 

      

 

 

 

Total assets acquired

       1,115.0           1,142.8   
    

 

 

      

 

 

 

Accounts payable

       80.9           80.9   

Other current liabilities

       160.5           188.3   

Pension benefit obligation

       228.0           228.0   

Other non-current liabilities

       282.3           282.3   
    

 

 

      

 

 

 

Total liabilities and equity assumed

       751.7           779.5   
    

 

 

      

 

 

 

Net assets acquired

     $ 363.3         $ 363.3   
    

 

 

      

 

 

 

Pro Forma Information

Revenues of approximately $140.3 million for the Valley Baptist acquisition (effective September 1, 2011) are included in the Company’s condensed consolidated statement of operations for the six months ended December 31, 2011. The following table provides certain pro forma financial information for the Company as if the Valley Baptist, DMC and Resurrection acquisitions occurred at the beginning of fiscal year 2011 (in millions).

 

September 30, September 30,
       Six months ended
December 31,
 
       2010        2011  

Total revenues

     $ 2,924.1         $ 2,969.7   
    

 

 

      

 

 

 

Income (loss) from continuing operations, before income taxes

     $ 15.5         $ (17.8
    

 

 

      

 

 

 

5. FAIR VALUE MEASUREMENTS

The Company’s financial assets recorded at fair value on a recurring basis primarily relate to investments in available-for-sale securities held by one of its captive insurance subsidiaries. The following tables present information about the assets that are measured at fair value on a recurring basis as of December 31, 2011 (in millions). The following tables also indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. The Company considers a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset, and include situations where there is little, if any, market activity for the asset. The Company’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.

 

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

September 30, September 30, September 30, September 30,
                Quoted Prices        Significant           
                in Active        Other        Significant  
                Markets for        Observable        Unobservable  
                Identical Assets        Inputs        Inputs  
       December 31, 2011        (Level 1)        (Level 2)        (Level 3)  

United States short-term treasury bills

     $ 21.0         $ 0.1         $ 20.9         $ —     

Corporate bonds

       11.5           —             11.5           —     

Common stock—domestic

       9.3           0.1           9.2           —     

Common stock—international

       7.8           7.6           0.2           —     

Preferred stock—international

       0.2           0.2           —             —     
    

 

 

      

 

 

      

 

 

      

 

 

 

Investments in securities

     $ 49.8         $ 8.0         $ 41.8         $ —     
    

 

 

      

 

 

      

 

 

      

 

 

 

The following table provides a reconciliation of the beginning and ending balances for the six months ended December 31, 2011 for those fair value measurements using significant Level 3 unobservable inputs (in millions).

 

September 30, September 30, September 30, September 30, September 30,
                                Increase in           
       Balance at               Realized loss        fair value,        Balance at  
       June 30, 2011        Redemptions      on redemptions        pre tax        December 31, 2011  

Auction rate securities

     $ 8.8         $ (10.0    $ —           $ 1.2         $ —     
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

 

Investments in securities

As of December 31, 2011, the Company held $49.8 million in total available-for-sale investments in debt and equity securities, which are included in investments in securities on the condensed consolidated balance sheets. The investment securities are held within one of the Company’s wholly-owned captive insurance subsidiaries for the purpose of providing the funding source to pay professional liability claims.

Investments in corporate bonds, valued at approximately $11.5 million at December 31, 2011, consist of corporate bonds and other fixed income investments with average maturities of approximately 10 years.

The Company calculates realized gain or loss on sales of investments using the amortized cost basis, as determined by specific identification. The amortized cost basis of these investments was approximately $51.1 million as of December 31, 2011. The investments in securities are classified as “available-for-sale” and are recorded at fair value. The Company adjusts the book value of these investments to fair value on a quarterly basis.

The following table provides a reconciliation of the beginning and ending balance for investment securities, exclusive of the auction rate securities, for the six months ended December 31, 2011 (in millions).

 

                  Realized gain     Decrease in        
Fair value at     Proceeds from     Purchases of     on sales,     fair value,     Fair value at  
June 30, 2011     sales     securities     pre-tax     pre-tax     December 31, 2011  
$  54.5      $ (32.3   $ 30.4      $ 0.2      $ (3.0   $ 49.8   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

The Company determines whether an other-than-temporary decline in market value has occurred by considering the duration that, and extent to which, the fair value of the investment is below its amortized cost, the financial condition and near-term prospects of the issuer or underlying collateral of a security; and the Company’s intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity and debt securities that the Company intends to sell or would be more-likely-than-not be required to sell before the expected recovery of the amortized cost basis are charged to other (income) or expense in the period in which the loss occurs. The gross unrealized loss for the investments in securities was approximately $1.3 million ($0.8 million, net of taxes) at December 31, 2011.

Cash and Cash Equivalents and Restricted Cash

The carrying amounts reported for cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity of these instruments.

Accounts Receivable and Accounts Payable

The carrying amounts reported for accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

Long-Term Debt

The fair values of the 8.0% Senior Unsecured Notes, the 2010 term loan facility, the 7.750% Senior Notes and the 10.375% Senior Discount Notes as of December 31, 2011 were approximately $1,169.1 million, $789.9 million, $343.9 million and $14.5 million, respectively, based upon stated market prices (Level 1) for the notes and quoted market prices (Level 2) for the term loan facility.

6. STOCK BASED COMPENSATION

The Company issues stock-based awards, including stock options and other stock-based awards (restricted stock units and performance-based awards) in accordance with the Company’s various Board-approved compensation plans.

In June 2011, the Company adopted the 2011 Stock Incentive Plan (the “2011 Plan”), which effectively replaced the 2004 Stock Incentive Plan, from which stock-based awards were granted prior to the initial public offering. The 2011 Plan allows for the issuance of 14,000,000 shares of common stock, all of which may be granted as incentive stock awards. During the three months ended December 31, 2011, the Company granted 54,058 time-based restricted stock units. As of December 31, 2011, 5,559,811 options and 540,173 restricted stock units were outstanding under the 2004 Stock Incentive Plan and 1,392,899 options, 1,245,430 restricted stock units and 1,530,139 shares of restricted stock were outstanding under the 2011 Plan. The options issued to date during fiscal year 2012 vest and become exercisable ratably over three years, while the time-based and performance-based restricted stock units vest ratably over four years.

As of December 31, 2011, included in the outstanding 1,245,430 restricted stock units under the 2011 Plan were 501,683 performance-based restricted stock units. The actual number of performance units earned may be increased or decreased based upon the Company’s fiscal 2012 financial performance. The Company is recognizing estimated expense for the performance units based upon achieving 100% of the Company’s financial performance metrics for fiscal 2012.

The Company recognized stock compensation expense related to outstanding equity awards of $1.7 million and $3.9 million for three months ended December 31, 2010 and 2011, respectively, and $2.9 million and $4.6 million for six months ended December 31, 2010 and 2011, respectively. Compensation cost related to stock-based awards will be adjusted for future changes in estimated forfeitures and actual results of performance measures.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

7. GOODWILL AND INTANGIBLE ASSETS

The following table provides information regarding the intangible assets, including deferred loan costs, included on the accompanying condensed consolidated balance sheets as of June 30, 2011 and December 31, 2011 (in millions).

 

September 30, September 30, September 30, September 30,
       Gross Carrying Amount        Accumulated Amortization  

Class of Intangible Asset

     June 30, 2011        December 31, 2011        June 30, 2011        December 31, 2011  

Amortized intangible assets:

                   

Deferred loan costs

     $ 65.0         $ 52.9         $ 8.2         $ 10.6   

Contracts

       31.4           31.4           21.2           22.7   

Physician income and other guarantees

       35.4           40.4           29.8           32.4   

Other

       8.9           9.1           3.5           4.1   
    

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       140.7           133.8           62.7           69.8   

Indefinite-lived intangible assets:

                   

License and accreditation

       16.0           20.3           —             —     
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 156.7         $ 154.1         $ 62.7         $ 69.8   
    

 

 

      

 

 

      

 

 

      

 

 

 

Amortization expense for contract-based intangibles and other intangible assets was approximately $0.9 million and $1.0 million for the three months ended December 31, 2010 and 2011, respectively, and $2.0 million and $2.1 million for the six months ended December 31, 2010 and 2011, respectively.

Amortization of deferred loan costs of approximately $1.3 million and $1.6 million during the three months ended December 31, 2010 and 2011, respectively, and $2.5 million and $3.2 million during the six months ended December 31, 2010 and 2011, respectively, is included in net interest. Amortization of physician income and other guarantees of approximately $1.4 million and $1.4 million during the three months ended December 31, 2010 and 2011, respectively, and $2.5 million and $2.6 million for the six months ended December 31, 2010 and 2011, respectively, is included in other operating expenses.

During the six months ended December 31, 2011, goodwill increased by approximately $11.3 million, with approximately $6.0 million and $5.3 million of this increase related to the acute care services segment acquisitions and the health plan services segment acquisitions, respectively.

8. FINANCING ARRANGEMENTS

A summary of the Company’s long-term debt as of June 30, 2011 and December 31, 2011 follows (in millions).

 

September 30, September 30,
       June 30, 2011      December 31, 2011  

10.375% Senior Discount Notes due 2016

     $ 465.0       $ 15.2   

8.0% Senior Unsecured Notes due 2018

       1,156.3         1,157.7   

7.750% Senior Notes due 2019

       350.0         350.0   

Term loans payable under credit facility due 2016

       806.9         802.9   

Capital leases and other long-term debt

       9.4         18.6   
    

 

 

    

 

 

 
       2,787.6         2,344.4   

Less: current maturities

       (461.8      (12.4
    

 

 

    

 

 

 
     $ 2,325.8       $ 2,332.0   
    

 

 

    

 

 

 

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

Redemption of 10.375% Senior Discount Notes

On January 26, 2011, the Company issued, in a private placement, senior discount notes due 2016 (the “Senior Discount Notes”) with a stated principal amount at maturity of approximately $747.2 million. The sale of the Senior Discount Notes generated approximately $444.7 million of gross proceeds. The Senior Discount Notes are not guaranteed by any of the Company’s subsidiaries.

During the three months ended September 30, 2011, the Company used the net proceeds from its initial public offering in June 2011 and the exercise of the over-allotment option by the offering underwriters in July 2011 to redeem approximately $450.0 million accreted value of the Senior Discount Notes and to pay $27.6 million of redemption premiums thereof. The redemptions resulted in approximately $14.7 million of remaining unredeemed accreted value of these notes outstanding immediately after the redemptions were completed and resulted in the recognition of debt extinguishment costs of approximately $38.9 million, $25.3 million net of taxes or $0.34 per share, representing tender premiums and other costs to redeem the Senior Discount Notes and the write-off of net deferred loan costs associated with the redeemed notes. The remaining outstanding Senior Discount Notes are not callable until February 1, 2013.

Credit Facility Debt

The Company’s senior secured credit facilities (the “2010 credit facilities”) include a six-year term loan facility (“2010 term loan facility”) in the amount of $815.0 million and a five-year $260.0 million revolving credit facility (the “2010 revolving facility”). The Company’s remaining borrowing capacity under the 2010 revolving facility, net of letters of credit outstanding, was $225.6 million as of December 31, 2011.

The 2010 term loan facility bears interest at a rate equal to, at the Company’s option, LIBOR (subject to a 1.50% floor) plus 3.50% per annum or a base rate plus 2.50% per annum. The interest rate applicable to the 2010 term loan facility was approximately 5.0% as of December 31, 2011. The Company also makes quarterly principal payments equal to one-fourth of one percent of the outstanding principal balance of the 2010 term loan facility and will continue to make such payments until the maturity of the term debt.

Any future borrowings under the 2010 revolving facility will bear interest at a rate equal to, at the Company’s option, LIBOR plus 3.50% per annum or a base rate plus 2.50% per annum, both of which are subject to a decrease of up to 0.25% dependent upon the Company’s consolidated leverage ratio. The Company may utilize the 2010 revolving facility to issue up to $100.0 million of letters of credit ($34.4 million of which were outstanding at December 31, 2011). The Company also pays a commitment fee to the lenders under the 2010 revolving facility in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum. The Company also pays customary letter of credit fees under this facility.

9. DMC PENSION PLAN

The components of periodic pension plan expense (credit) for the Company’s defined benefit pension plan for the six months ended December 31, 2011 are as follows (in millions):

 

September 30, September 30,

Interest cost on projected benefit obligation

          $ 26.0   

Expected return on assets

            (28.6
         

 

 

 

Total net pension plan credit

          $ (2.6
         

 

 

 

The accompanying condensed consolidated balance sheets as of June 30, 2011 and December 31, 2011 include a long-term liability for the DMC pension plan (the “DMC Pension Plan”) of approximately $188.0 million and $169.9 million, respectively. The Company recognizes changes in the funded status of the DMC Pension Plan as an increase or decrease in equity through accumulated other comprehensive income. The cumulative increase in equity recognized by the Company as of June 30, 2011 and December 31, 2011 was $31.8 million ($19.7 million, net of tax) in the accompanying condensed consolidated balance sheets.

The Company made cash contributions of $15.4 million related to the DMC Pension Plan during the six months ended December 31, 2011.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

10. COMPREHENSIVE INCOME

Comprehensive income consists of two components: net income (loss) attributable to Vanguard Health Systems, Inc. stockholders and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under the guidance related to accounting for comprehensive income are recorded as elements of equity, but are excluded from net income (loss) attributable to Vanguard Health Systems, Inc. stockholders. The following table presents the components of comprehensive income, net of taxes, for the three and six months ended December 31, 2010 and 2011 (in millions).

 

September 30, September 30, September 30, September 30,
       Three months ended December 31,      Six months ended December 31,  
       2010      2011      2010      2011  

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (5.0    $ 12.1       $ (3.8    $ (7.1

Change in fair value of investments in securities

       3.0         1.4         3.0         (1.8

Change in income tax expense

       (1.1      (0.5      (1.1      0.9   

Net income (loss) attributable to non-controlling interests

       0.8         0.8         1.8         (1.5
    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

     $ (2.3    $ 13.8       $ (0.1    $ (9.5
    

 

 

    

 

 

    

 

 

    

 

 

 

The components of accumulated other comprehensive income, net of taxes, as of June 30, 2011 and December 31, 2011 are as follows (in millions):

 

September 30, September 30,
       June 30, 2011      December 31, 2011  

Unrealized holding gain (loss) on investments in securities

     $ 0.5       $ (1.3

Defined benefit pension plan

       31.8         31.8   

Post-employment defined benefit plan

       0.9         0.9   

Income tax expense

       (12.6      (11.7
    

 

 

    

 

 

 

Accumulated other comprehensive income

     $ 20.6       $ 19.7   
    

 

 

    

 

 

 

11. EARNINGS PER SHARE

The Company computes basic earnings (loss) per share using the weighted average number of common shares outstanding. The Company computes diluted earnings (loss) per share using the weighted average number of common shares outstanding, plus the dilutive effect of restricted common shares and the dilutive effect of outstanding stock options, warrants for equity incentive units and restricted stock units, computed using the treasury stock method.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six months ended December 31, 2010 and 2011 (dollars in millions, except per share and share amounts):

 

September 30, September 30, September 30, September 30,
       Three months ended December 31,      Six months ended December 31,  
       2010      2011      2010      2011  

Numerator for basic and diluted earnings (loss) per share:

             

Income (loss) from continuing operations

     $ (2.7    $ 12.4       $ (1.6    $ (6.7

Loss from discontinued operations

       (2.3      (0.3      (2.2      (0.4
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (5.0    $ 12.1       $ (3.8    $ (7.1
    

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

             

Weighted average common shares outstanding

       44,635         75,325         44,635         75,090   

Effect of dilutive securities

       —           3,407         —           —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Shares used for diluted earnings per share

       44,635         78,732         44,635         75,090   
    

 

 

    

 

 

    

 

 

    

 

 

 

Basic net earnings (loss) per share:

             

Basic earnings (loss) from continuing operations

     $ (0.06    $ 0.17       $ (0.04    $ (0.10

Basic loss from discontinued operations

       (0.05      (0.01      (0.05      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (0.11    $ 0.16       $ (0.09    $ (0.10
    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net earnings (loss) per share:

             

Diluted earnings (loss) from continuing operations

     $ (0.06    $ 0.16       $ (0.04    $ (0.10

Diluted loss from discontinued operations

       (0.05      (0.01      (0.05      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

     $ (0.11    $ 0.15       $ (0.09    $ (0.10
    

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended December 31, 2011, diluted weighted average outstanding shares would have been 78,803,000 if the Company had income from continuing operations during such period. The Company excluded 4,471,000 and 3,622,000 potentially dilutive stock options and other stock-based awards from the calculation of diluted weighted average shares outstanding during the three and six months ended December 31, 2011, respectively, because their inclusion would be anti-dilutive.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

12. INCOME TAXES

Significant components of the provision for income taxes from continuing operations are as follows (in millions):

 

September 30, September 30,
       Six months ended December 31,  
       2010      2011  

Current:

       

Federal

     $ 0.8       $ 0.5   

State

       0.8         1.5   
    

 

 

    

 

 

 

Total current

       1.6         2.0   

Deferred:

       

Federal

       1.6         (8.4

State

       (0.5      0.9   
    

 

 

    

 

 

 

Total deferred

       1.1         (7.5

Change in valuation allowance

       4.6         0.9   
    

 

 

    

 

 

 

Total income tax (benefit) expense

     $ 7.3       $ (4.6
    

 

 

    

 

 

 

As of December 31, 2011, the Company had generated net operating loss (“NOL”) carryforwards for federal income tax and state income tax purposes of approximately $90.0 million and $679.0 million, respectively. The remaining federal and state NOL carryforwards expire from 2020 to 2032 and 2012 to 2032, respectively.

The tax benefit for the six months ended December 31, 2011 includes a $4.5 million reduction in the Company’s reserve for an uncertain tax position relating to success-based transaction costs incurred in its recapitalization during the fiscal year ended June 30, 2005. The Internal Revenue Service (“IRS”) issued an audit directive on July 28, 2011 instructing its examining agents not to challenge success-based transaction costs that meet certain safe harbor conditions stipulated in the directive. Management has determined that the success-based transaction costs incurred during the Company’s fiscal year ended June 30, 2005 are within the scope and parameters of the IRS audit directive safe harbor and therefore has reversed the tax reserves related to these transaction costs during the six months ended December 31, 2011.

The Company’s U.S. federal income tax returns for tax years 2006 and subsequent years remain subject to examination by the IRS.

13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income” (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 would eliminate the Company’s currently elected option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 would require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. As of December 31, 2011, the Company recognized comprehensive income related to changes in the fair value of investments in securities and certain defined benefit plans (see Note 10). In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income” (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-12 (“ASU 2011-12”). The ASU 2011-12 deferral was issued due to certain stakeholder concerns surrounding the implementation and requirements of ASU No. 2011-05.

In August 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other” (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. ASU 2011-08 is not expected to significantly impact the Company’s financial position, results of operations or cash flows.

14. SEGMENT INFORMATION

The Company’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e., urban markets). Accordingly, the Company’s reportable operating segments consist of 1) acute care hospitals and related healthcare businesses, collectively, and 2) health plans consisting of MacNeal Health Plan, a contracting entity for outpatient services provided by MacNeal Hospital and Weiss Memorial Hospital and participating physicians in the Chicago, Illinois area, Phoenix Health Plan (“PHP”), a Medicaid managed health plan operating in Arizona, Abrazo Advantage Health Plan, a Medicare and Medicaid dual eligible managed health plan operating in Arizona, and Valley Baptist Insurance Company (“VBIC”), which offers health maintenance organization, preferred provider organization, and self-funded products to its members in the form of large group, small group, and individual product offerings in south Texas. The following tables provide unaudited condensed financial information by operating segment for the three and six months ended December 31, 2010 and 2011, including a reconciliation of Segment EBITDA to income (loss) from continuing operations before income taxes (in millions).

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

 

September 30, September 30, September 30, September 30,
       Three months ended December 31, 2010  
       Acute Care      Health                
       Services      Plans      Eliminations      Consolidated  

Patient service revenues, net (1)

     $ 697.6       $ —         $ —         $ 697.6   

Premium revenues

       —           211.8         —           211.8   

Intersegment revenues

       11.0         —           (11.0      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       708.6         211.8         (11.0      909.4   

Salaries and benefits (excludes stock compensation)

       365.5         8.3         —           373.8   

Health plan claims expense (1)

       —           164.8         —           164.8   

Supplies

       133.4         0.1         —           133.5   

Other operating expenses-external

       140.7         10.2         —           150.9   

Operating expenses-intersegment

       —           11.0         (11.0      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA (2)

       69.0         17.4         —           86.4   

Less:

             

Interest, net

       36.0         (0.9      —           35.1   

Depreciation and amortization

       37.5         1.1         —           38.6   

Equity method income

       (0.3      —           —           (0.3

Stock compensation

       1.7         —           —           1.7   

Loss on disposal of assets

       0.1         —           —           0.1   

Realized loss on investments

       0.1         —           —           0.1   

Monitoring fees and expenses

       1.1         —           —           1.1   

Acquisition related expenses

       1.3         —           —           1.3   

Impairment and restructuring charges

       0.9         —           —           0.9   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     $ (9.4    $ 17.2       $ —         $ 7.8   
    

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

     $ 34.7       $ 0.1       $ —         $ 34.8   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company eliminates in consolidation those patient service revenues earned by its healthcare facilities attributable to services provided to members in its owned health plans and eliminates the corresponding medical claims expenses incurred by the health plans for those services. Amount is net of the provision for doubtful accounts consistent with the presentation in ASU 2011-07.

 

(2) Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). Management uses Segment EBITDA to measure performance of the Company’s segments and to develop strategic objectives and operating plans for those segments. Segment EBITDA eliminates the uneven effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Segment EBITDA also eliminates the effects of changes in interest rates which management believes relate to general trends in global capital markets, but are not necessarily indicative of the operating performance of the Company’s segments. Management believes that Segment EBITDA provides useful information about the financial performance of the Company’s segments to investors, lenders, financial analysts and rating agencies. Additionally, management believes that investors and lenders view Segment EBITDA as an important factor in making investment decisions and assessing the value of the Company. Segment EBITDA is not a substitute for net income (loss), operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Segment EBITDA, as presented, may not be comparable to similar measures of other companies.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

 

September 30, September 30, September 30, September 30,
       Three months ended December 31, 2011  
       Acute Care      Health                
       Services      Plans      Eliminations      Consolidated  

Patient service revenues, net (1)

     $ 1,279.4       $ —         $ —         $ 1,279.4   

Premium revenues

       —           188.8         —           188.8   

Intersegment revenues

       10.5         —           (10.5      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       1,289.9         188.8         (10.5      1,468.2   

Salaries and benefits (excludes stock compensation)

       689.2         9.3         —           698.5   

Health plan claims expense (1)

       —           147.3         —           147.3   

Supplies

       227.9         —           —           227.9   

Other operating expenses-external

       271.2         12.2         —           283.4   

Operating expenses-intersegment

       —           10.5         (10.5      —     

Medicare and Medicaid EHR incentive payments

       (22.6      —           —           (22.6
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA (2)

       124.2         9.5         —           133.7   

Less:

             

Interest, net

       43.8         (0.6      —           43.2   

Depreciation and amortization

       64.6         1.2         —           65.8   

Equity method income

       (0.6      —           —           (0.6

Stock compensation

       3.9         —           —           3.9   

Loss on disposal of assets

       0.4         —           —           0.4   

Acquisition related expenses

       0.4         —           —           0.4   

Pension credits

       (1.6      —           —           (1.6
    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     $ 13.3       $ 8.9       $ —         $ 22.2   
    

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

     $ 73.2       $ 0.6       $ —         $ 73.8   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company eliminates in consolidation those patient service revenues earned by its healthcare facilities attributable to services provided to members in its owned health plans and eliminates the corresponding medical claims expenses incurred by the health plans for those services. Amount is net of the provision for doubtful accounts consistent with the presentation in ASU 2011-07.

 

(2) Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). Management uses Segment EBITDA to measure performance of the Company’s segments and to develop strategic objectives and operating plans for those segments. Segment EBITDA eliminates the uneven effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Segment EBITDA also eliminates the effects of changes in interest rates which management believes relate to general trends in global capital markets, but are not necessarily indicative of the operating performance of the Company’s segments. Management believes that Segment EBITDA provides useful information about the financial performance of the Company’s segments to investors, lenders, financial analysts and rating agencies. Additionally, management believes that investors and lenders view Segment EBITDA as an important factor in making investment decisions and assessing the value of the Company. Segment EBITDA is not a substitute for net income (loss), operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Segment EBITDA, as presented, may not be comparable to similar measures of other companies.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

September 30, September 30, September 30, September 30,
       Six months ended December 31, 2010  
       Acute Care      Health                
       Services      Plans      Eliminations      Consolidated  

Patient service revenues, net (1)

     $ 1,339.1       $ —         $ —         $ 1,339.1   

Premium revenues

       —           432.4         —           432.4   

Intersegment revenues

       21.8         —           (21.8      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       1,360.9         432.4         (21.8      1,771.5   

Salaries and benefits (excludes stock compensation)

       710.9         16.5         —           727.4   

Health plan claims expense (1)

       —           338.9         —           338.9   

Supplies

       254.4         0.1         —           254.5   

Other operating expenses-external

       265.9         20.7         —           286.6   

Operating expenses-intersegment

       —           21.8         (21.8      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA (2)

       129.7         34.4         —           164.1   

Less:

             

Interest, net

       71.1         (1.2      —           69.9   

Depreciation and amortization

       73.6         2.2         —           75.8   

Equity method income

       (0.6      —           —           (0.6

Stock compensation

       2.9         —           —           2.9   

Loss on disposal of assets

       0.1         —           —           0.1   

Realized loss on investments

       0.1         —           —           0.1   

Monitoring fees and expenses

       2.5         —           —           2.5   

Acquisition related expenses

       5.0         —           —           5.0   

Impairment and restructuring charges

       0.9         —           —           0.9   
    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     $ (25.9    $ 33.4       $ —         $ 7.5   
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

     $ 2,816.6       $ 158.7       $ —         $ 2,975.3   
    

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

     $ 79.3       $ 0.1       $ —         $ 79.4   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company eliminates in consolidation those patient service revenues earned by its healthcare facilities attributable to services provided to members in its owned health plans and eliminates the corresponding medical claims expenses incurred by the health plans for those services. Amount is net of the provision for doubtful accounts consistent with the presentation in ASU 2011-07.

 

(2) Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). Management uses Segment EBITDA to measure performance of the Company’s segments and to develop strategic objectives and operating plans for those segments. Segment EBITDA eliminates the uneven effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Segment EBITDA also eliminates the effects of changes in interest rates which management believes relate to general trends in global capital markets, but are not necessarily indicative of the operating performance of the Company’s segments. Management believes that Segment EBITDA provides useful information about the financial performance of the Company’s segments to investors, lenders, financial analysts and rating agencies. Additionally, management believes that investors and lenders view Segment EBITDA as an important factor in making investment decisions and assessing the value of the Company. Segment EBITDA is not a substitute for net income (loss), operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Segment EBITDA, as presented, may not be comparable to similar measures of other companies.

 

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

 

September 30, September 30, September 30, September 30,
       Six months ended December 31, 2011  
       Acute Care      Health                
       Services      Plans      Eliminations      Consolidated  

Patient service revenues, net (1)

     $ 2,511.9       $ —         $ —         $ 2,511.9   

Premium revenues

       —           399.8         —           399.8   

Intersegment revenues

       19.1         —           (19.1      —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       2,531.0         399.8         (19.1      2,911.7   

Salaries and benefits (excludes stock compensation)

       1,344.5         18.3         —           1,362.8   

Health plan claims expense (1)

       —           312.0         —           312.0   

Supplies

       441.4         0.1         —           441.5   

Other operating expenses-external

       538.6         22.9         —           561.5   

Operating expenses-intersegment

       —           19.1         (19.1      —     

Medicare and Medicaid EHR incentive payments

       (22.6      —           —           (22.6
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment EBITDA (2)

       229.1         27.4         —           256.5   

Less:

             

Interest, net

       89.9         (0.9      —           89.0   

Depreciation and amortization

       126.1         2.3         —           128.4   

Equity method income

       (0.7      —           —           (0.7

Stock compensation

       4.6         —           —           4.6   

Gain on disposal of assets

       (0.8      —           —           (0.8

Acquisition related expenses

       12.6         —           —           12.6   

Debt extinguishment costs

       38.9         —           —           38.9   

Impairment and restructuring charges

       (0.1      —           —           (0.1

Pension credits

       (2.6      —           —           (2.6
    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     $ (38.8    $ 26.0       $ —         $ (12.8
    

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

     $ 4,042.1       $ 233.5       $ —         $ 4,275.6   
    

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

     $ 136.6       $ 0.6       $ —         $ 137.2   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company eliminates in consolidation those patient service revenues earned by its healthcare facilities attributable to services provided to members in its owned health plans and eliminates the corresponding medical claims expenses incurred by the health plans for those services. Amount is net of the provision for doubtful accounts consistent with the presentation in ASU 2011-07.

 

(2) Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). Management uses Segment EBITDA to measure performance of the Company’s segments and to develop strategic objectives and operating plans for those segments. Segment EBITDA eliminates the uneven effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Segment EBITDA also eliminates the effects of changes in interest rates which management believes relate to general trends in global capital markets, but are not necessarily indicative of the operating performance of the Company’s segments. Management believes that Segment EBITDA provides useful information about the financial performance of the Company’s segments to investors, lenders, financial analysts and rating agencies. Additionally, management believes that investors and lenders view Segment EBITDA as an important factor in making investment decisions and assessing the value of the Company. Segment EBITDA is not a substitute for net income (loss), operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Segment EBITDA, as presented, may not be comparable to similar measures of other companies.

 

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VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

15. CONTINGENCIES AND HEALTHCARE REGULATION

Contingencies

The Company is presently, and from time to time, subject to various claims and lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s financial position or results of operations, except for the implantable cardioverter defibrillator matter as discussed below under “Governmental Regulation.”

Capital Expenditure Commitments

As part of its acquisition of DMC, the Company committed to spend a total of $850.0 million over a five-year period, $500.0 million of which related to a specific list of expansion projects. As of December 31, 2011, the Company had spent approximately $83.2 million related to this commitment, including approximately $38.0 million related to the specific project list. Under the terms of the DMC acquisition agreement, the Company was required to spend at least $80.0 million related to the specific list of expansion projects as of December 31, 2011. Since this commitment was not met, the Company will be required in February 2012 to deposit approximately $42.0 million of cash into an escrow fund restricted for the purpose of funding capital expenditures related to the specific project list. The cash escrow funds will be utilized to fund DMC capital expenditures on the specific project list incurred subsequent to January 1, 2012. As of December 31, 2011, the Company estimated its remaining commitments, excluding DMC, to complete all capital projects in process to be approximately $9.9 million until the escrow is depleted.

Professional and General Liability Insurance

Given the nature of its operating environment, the Company is subject to professional and general liability claims and related lawsuits in the ordinary course of business. The Company maintains professional and general liability insurance with unrelated commercial insurance carriers to provide for losses up to $65.0 million in excess of its self-insured retention (such self-insured retention is maintained through the Company’s captive insurance subsidiaries and/or other of its subsidiaries) of $10.0 million through June 30, 2010 but increased to $15.0 million for its Illinois hospitals subsequent to June 30, 2010.

During the three and six months ended December 31, 2011, the Company reduced its professional and general liability reserves by $5.8 million ($3.6 million, or $0.05 per diluted share, net of taxes) and $7.0 million ($4.3 million, or $0.06 per share, net of taxes), respectively, for changes in claims development related to prior years. Adjustments to the professional and general liability reserves during the prior year periods were not significant.

Patient Service Revenues

Settlements under reimbursement agreements with third party payers are initially estimated during the period the related services are provided, with final estimates made at the time the applicable payer cost reports are filed. Final settlements are typically not known until future periods. There is at least a reasonable possibility that recorded estimates will change by a material amount when final settlements are known. Differences between estimates made at the cost report filing date and subsequent revisions (including final settlements) are included in the condensed consolidated statements of operations in the period in which the revisions are made. Management believes that adequate provision has been made for adjustments that may result from final determination of amounts earned under the Medicare and Medicaid programs and other managed care plans with settlement provisions. Net adjustments for final third party settlements positively impacted the Company’s income (loss) from continuing operations before income taxes by $4.7 million ($2.9 million, or $0.06 per share, net of taxes) and $4.5 million ($2.7 million, or $0.03 per diluted share, net of taxes) for the three months ended December 31, 2010 and 2011, respectively, and by $5.4 million ($3.3 million, or $0.07 per share, net of taxes) and $4.9 million ($3.0 million, or $0.04 per share, net of taxes) for the six months ended December 31, 2010 and 2011, respectively. The Company recorded $22.2 million and $61.3 million of charity care deductions during the three months ended December 31, 2010 and 2011, respectively, and $42.8 million and $111.7 million of charity care deductions during the six months ended December 31, 2010 and 2011, respectively. See Note 2 for additional disclosures related to the Company’s adoption of ASU 2010-23, for measuring and disclosing the costs of providing charity care.

 

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Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

Governmental Regulation

In September 2010, the Company received a letter, which was signed jointly by an Assistant United States Attorney in the Southern District of Florida and an attorney from the Department of Justice (“DOJ”) Civil Division. This letter stated that the DOJ is conducting an investigation to determine whether or not certain hospitals have submitted claims for payment for the implantation of implantable cardioverter defibrillators (“ICDs”) that were not medically indicated or otherwise violated Medicare payment policy. The letter also noted that the investigation covers the time period commencing with Medicare’s expansion of coverage of ICDs in 2003 through the date of the letter, and that the DOJ’s preliminary but continuing review indicates that many of the Company’s hospitals may have submitted claims for ICDs and related services that were excluded from coverage. Upon receipt of this letter, the Company immediately took steps to preserve all records and information pertaining or related to ICDs. DMC received a similar letter from the DOJ in respect of ICDs in December 2010. The Company and DMC are working cooperatively with the DOJ to identify potential Medicare claims that should not have been billed for these excluded services. The Company intends to continue to cooperate with the DOJ with respect to both the claims of its existing hospitals and those of DMC, which the Company acquired effective January 1, 2011. To date, the DOJ has not asserted any specific claim of damages against any of the Company’s hospitals or any of the DMC hospitals. Because this investigation is in its early stages, the Company is unable to predict its timing or outcome at this time. However, the Company understands that this investigation is being conducted under the False Claims Act (“FCA”), which could expose the Company to the FCA’s treble damages provision should the DOJ’s initial analysis of the Company’s ICD claims be substantiated. Such damages could materially adversely impact the Company’s financial position, results of operations and cash flows. The Company is not aware of any material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing, except for this ICD matter.

Reimbursement

Laws and regulations governing Medicare, Medicaid and the other federal healthcare programs are complex and subject to interpretation. The Company’s management believes that it is in compliance in all material respects with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing related to Medicare and Medicaid programs, except for the ICD matter discussed above. Moreover, the Company’s compliance with such laws and regulations is subject to future government review and interpretation. Non-compliance with such laws and regulations could result in significant regulatory action, including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs.

Acquisitions

The Company has acquired, and expects to continue to acquire, businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company institutes policies designed to conform practices to its standards following the completion of its acquisitions, there can be no assurance that it will not become liable for past activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification or, if covered, that such indemnification will be adequate to cover potential losses and fines.

Guarantee

As part of its contract with the Arizona Health Care Cost Containment System, one of the Company’s health plans, PHP, is required to maintain a performance guarantee, the amount of which is based upon its membership and capitation premiums received. As of December 31, 2011, the Company maintained this performance guarantee in the form of $55.0 million of surety bonds with independent third party insurers.

 

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Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR SUBSIDIARIES

The Company conducts substantially all of its business through its subsidiaries. Most of the Company’s subsidiaries jointly and severally guarantee the Company’s 8.0% Senior Unsecured Notes due 2018 and its 7.750% Senior Notes due 2019. Certain of the Company’s other consolidated wholly-owned and non-wholly-owned entities do not guarantee these Senior Notes or the Company’s remaining Senior Discount Notes in conformity with the provisions of the indentures governing those notes and do not guarantee the 2010 credit facilities in conformity with the provisions thereof. The accompanying condensed consolidating financial information for the parent company, the issuers of the senior notes and term debt, the issuers of the Senior Discount Notes, the subsidiary guarantors, the non-guarantor subsidiaries, certain eliminations and consolidated Company as of June 30, 2011 and December 31, 2011 and for the three and six months ended December 31, 2010 and 2011 follows.

 

26


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

VANGUARD HEALTH SYSTEMS, INC.

Condensed Consolidating Balance Sheets

June 30, 2011 (Recast)

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
     Parent     Issuers of
Senior
Notes and
Term Debt
    Issuers of
Senior
Discount
Notes
    Guarantor
Subsidiaries
    Combined
Non-
Guarantors
    Eliminations     Total
Consolidated
 
    (In millions)  

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ —        $ —        $ —        $ 644.1      $ 292.5      $ —        $ 936.6   

Restricted cash

    —          —          —          0.7        1.6        —          2.3   

Accounts receivable, net

    —          —          —          448.1        36.3        —          484.4   

Inventories

    —          —          —          83.6        0.3        —          83.9   

Prepaid expenses and other current assets

    —          —          —          241.3        9.5        —          250.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          —          —          1,417.8        340.2        —          1,758.0   

Property, plant and equipment, net

    —          —          —          1,773.4        57.1        —          1,830.5   

Goodwill

    —          —          —          673.5        83.6        —          757.1   

Intangible assets, net

    —          37.4        19.4        25.3        11.9        —          94.0   

Investments in consolidated subsidiaries

    608.8        —          —          —          —          (608.8     —     

Investments in securities

    —          —          —          63.3        —          —          63.3   

Other assets

    —          —          —          84.3        9.0        —          93.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 608.8      $ 37.4      $ 19.4      $ 4,037.6      $ 501.8      $ (608.8   $ 4,596.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Accounts payable

  $ —        $ —        $ —        $ 280.6      $ 33.7      $ —        $ 314.3   

Accrued expenses and other current liabilities

    —          62.3        —          457.0        128.4        —          647.7   

Current maturities of long-term debt

    —          8.2        450.6        3.0        —          —          461.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          70.5        450.6        740.6        162.1        —          1,423.8   

Other liabilities

    —          —          —          565.5        38.0        —          603.5   

Long-term debt, less current maturities

    —          2,305.0        14.4        6.4        —          —          2,325.8   

Intercompany

    365.7        (1,488.8     (412.7     1,927.1        (9.4     (381.9     —     

Total equity

    243.1        (849.3     (32.9     798.0        311.1        (226.9     243.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 608.8      $ 37.4      $ 19.4      $ 4,037.6      $ 501.8      $ (608.8   $ 4,596.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

VANGUARD HEALTH SYSTEMS, INC.

Condensed Consolidating Balance Sheets

December 31, 2011

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
     Parent     Issuers of
Senior
Notes and
Term Debt
    Issuers of
Senior
Discount
Notes
    Guarantor
Subsidiaries
    Combined
Non-
Guarantors
    Eliminations     Total
Consolidated
 
    (In millions)  

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ —        $ —        $ —        $ 51.4      $ 127.3      $ —        $ 178.7   

Restricted cash

    —          —          —          2.2        6.6        —          8.8   

Accounts receivable, net

    —          —          —          473.4        103.5        —          576.9   

Inventories

    —          —          —          89.2        3.7        —          92.9   

Prepaid expenses and other current assets

    —          —          —          304.2        37.2        (9.9     331.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          —          —          920.4        278.3        (9.9     1,188.8   

Property, plant and equipment, net

    —          —          —          1,753.8        296.2        —          2,050.0   

Goodwill

    —          —          —          679.4        89.0        —          768.4   

Intangible assets, net

    —          34.7        7.7        27.0        14.9        —          84.3   

Investments in consolidated subsidiaries

    608.8        —          —          —          —          (608.8     —     

Investments in securities

    —          —          —          39.4        10.4        —          49.8   

Other assets

    —          —          —          124.3        10.0        —          134.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 608.8      $ 34.7      $ 7.7      $ 3,544.3      $ 698.8      $ (618.7   $ 4,275.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Accounts payable

  $ —        $ —        $ —        $ 291.7      $ 69.5      $ —        $ 361.2   

Accrued expenses and other current liabilities

    —          61.1        —          368.6        156.5        —          586.2   

Current maturities of long-term debt

    —          8.2        —          2.2        2.0        —          12.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          69.3        —          662.5        228.0        —          959.8   

Other liabilities

    —          —          —          559.4        79.6        (9.9     629.1   

Long-term debt, less current maturities

    —          2,302.4        15.2        4.7        9.7        —          2,332.0   

Intercompany

    305.9        (1,401.5     29.2        1,488.1        (39.8     (381.9     —     

Redeemable non-controlling interests

    —          —          —          —          51.8        —          51.8   

Total equity

    302.9        (935.5     (36.7     829.6        369.5        (226.9     302.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 608.8      $ 34.7      $ 7.7      $ 3,544.3      $ 698.8      $ (618.7   $ 4,275.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

VANGUARD HEALTH SYSTEMS, INC.

Condensed Consolidating Statements of Operations

For the three months ended December 31, 2010

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
     Parent     Issuers of
Senior
Notes and
Term Debt
    Issuers of
Senior
Discount
Notes
    Guarantor
Subsidiaries
    Combined
Non-
Guarantors
    Eliminations     Total
Consolidated
 
    (In millions)  

Patient service revenues, net

  $ —        $ —        $ —        $ 660.7      $ 44.6      $ (7.7   $ 697.6   

Premium revenues

    —          —          —          13.4        198.2        0.2        211.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    —          —          —          674.1        242.8        (7.5     909.4   

Salaries and benefits

    1.7        —          —          348.1        25.7        —          375.5   

Health plan claims expense

    —          —          —          7.4        165.1        (7.7     164.8   

Supplies

    —          —          —          125.5        8.0        —          133.5   

Purchased services

    —          —          —          55.5        7.0        —          62.5   

Other operating expenses

    —          —          —          64.8        11.7        0.2        76.7   

Rents and leases

    —          —          —          9.8        1.9        —          11.7   

Depreciation and amortization

    —          —          —          35.8        2.8        —          38.6   

Interest, net

    —          36.4        —          (2.3     1.0        —          35.1   

Impairment and restructuring charges

    —          —          —          0.9        —          —          0.9   

Management fees

    —          —          —          (4.1     4.1        —          —     

Other

    —          —          —          2.3        —          —          2.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    1.7        36.4        —          643.7        227.3        (7.5     901.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (1.7     (36.4     —          30.4        15.5        —          7.8   

Income tax benefit (expense)

    (9.7     —          —          —          (5.9     5.9        (9.7

Equity in earnings of subsidiaries

    6.4        —          —          —          —          (6.4     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (5.0     (36.4     —          30.4        9.6        (0.5     (1.9

Loss from discontinued operations, net of taxes

    —          —          —          (0.5     (1.8     —          (2.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (5.0     (36.4     —          29.9        7.8        (0.5     (4.2

Less: Net income attributable to non-controlling interests

    —          —          —          (0.8     —          —          (0.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders

  $ (5.0   $ (36.4   $ —        $ 29.1      $ 7.8      $ (0.5   $ (5.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

VANGUARD HEALTH SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

VANGUARD HEALTH SYSTEMS, INC.

Condensed Consolidating Statements of Operations

For the three months ended December 31, 2011

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
          Issuers of     Issuers of                          
          Senior     Senior           Combined              
          Notes and     Discount     Guarantor     Non-           Total  
    Parent     Term Debt     Notes     Subsidiaries     Guarantors     Eliminations     Consolidated  
    (In millions)  

Patient service revenues, net

  $ —        $ —        $ —        $ 1,132.2      $ 152.9      $ (5.7   $ 1,279.4   

Premium revenues

    —          —          —          25.3        167.3        (3.8     188.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    —          —          —          1,157.5        320.2        (9.5     1,468.2   

Salaries and benefits

    3.9        —          —          628.9        69.6        —          702.4   

Health plan claims expense

    —          —          —          5.8        147.2        (5.7     147.3   

Supplies

    —          —          —          202.9        25.0        —          227.9   

Rents and leases

    —          —          —          15.2        3.5        —          18.7   

Other operating expenses

    —          —          —          224.9        43.6        (3.8     264.7   

Medicare and Medicaid EHR incentive payments

    —          —          —          (22.6     —          —          (22.6

Depreciation and amortization

    —          —          —          56.1        9.7        —          65.8   

Interest, net

    —          43.5        0.4        (4.8     4.1        —          43.2   

Management fees

    —          —          —          (7.2     7.2        —          —     

Acquisition related expenses

    —          —          —          0.2        0.2        —          0.4   

Other

    —          —          —          (1.4     (0.4     —          (1.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    3.9        43.5        0.4        1,098.0        309.7        (9.5     1,446.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (3.9     (43.5     (0.4     59.5        10.5        —          22.2   

Income tax benefit (expense)

    (9.0     —          —          —          4.3        (4.3     (9.0

Equity in earnings of subsidiaries

    25.0        —          —