RADIATION THERAPY SERVICES HOLDINGS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. This section of this Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. These statements may be identified by the use of forward-looking terminology such as "anticipate", "believe", "continue", "could", "estimate", "intend", "may", "might", "plan", "potential", "predict", "should", or "will" or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this Quarterly Report on Form 10-Q in the section titled "Risk Factors" and in the sections titled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" in the Company's Annual Report on Form 10-K for the year ended
Overview
We own, operate and manage treatment centers focused principally on providing comprehensive radiation treatment alternatives ranging from conventional external beam radiation, Intensity Modulated Radiation Therapy ("IMRT"), as well as newer, more technologically-advanced procedures. We believe we are the largest company in
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connection with the Closing, Vestar, its affiliates and these management investors invested approximately
We use a number of metrics to assist management in evaluating financial condition and operating performance, and the most important follow:
† The number of relative value units (RVU) delivered per day in our freestanding centers;
† The percentage change in RVUs per day in our freestanding centers; † The number of treatments delivered per day in our freestanding centers; † The average revenue per treatment in our freestanding centers;
† The ratio of funded debt to pro-forma adjusted earnings before interest, taxes, depreciation and amortization (leverage ratio) and
† Facility gross profit Revenue Drivers
Our revenue growth is primarily driven by expanding the number of our centers, optimizing the utilization of advanced technologies at our existing centers and benefiting from demographic and population trends in most of our local markets. New centers are added or acquired based on capacity, demographics, and competitive considerations.
The average revenue per treatment is sensitive to the mix of services used in treating a patient's tumor. The reimbursement rates set by
Operating Costs
The principal costs of operating a treatment center are (1) the salary and benefits of the physician and technical staff, and (2) equipment and facility costs. The capacity of each physician and technical position is limited to a number of delivered treatments, while equipment and facility costs for a treatment center are generally fixed. These capacity factors cause profitability to be very sensitive to treatment volume. Profitability will tend to increase as resources from fixed costs including equipment and facility costs are utilized.
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Table of Contents Sources of Revenue By Payer
We receive payments for our services rendered to patients from the government
Year Ended Three Months Ended December 31, March 31, Domestic U.S. 2011 2012 2011 Payer Medicare 44.9 % 43.8 % 47.3 % Commercial 50.9 52.2 48.4 Medicaid 2.8 3.0 2.7 Self pay 1.4 1.0 1.6
Total net patient service revenue 100.0 % 100.0 % 100.0 %
Medicare andMedicaid
Since cancer disproportionately affects elderly people, a significant portion of our net patient service revenue is derived from the
In the final
The 2012 Physician Fee Schedule includes reductions in RVUs for many of the Company's treatment codes. As a result, payment rates are expected to decline approximately 7% for the Company's
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In addition, the
Commercial
Commercial sources include private health insurance as well as related payments for co-insurance and co-payments. We enter into contracts with private health insurance and other health benefit groups by granting discounts to such organizations in return for the patient volume they provide.
Most of our commercial revenue is from managed care business and is attributable to contracts where a set fee is negotiated relative to services provided by our treatment centers. We do not have any contracts that individually represent over 10% of our total net patient service revenue. We receive our managed care contracted revenue under two primary arrangements. Approximately 98% of our managed care business is attributable to contracts where a fee schedule is negotiated for services provided at our treatment centers. For the three months ended
Self Pay
Self pay consists of payments for treatments by patients not otherwise covered by third-party payers, such as government or commercial sources. Because the incidence of cancer is much higher in those over the age of 65, most of our patients have access to
We grant a discount on gross charges to self pay payers not covered under other third party payer arrangements. The discount amounts are excluded from patient service revenue. To the extent that we realize additional losses resulting from nonpayment of the discounted charges, such additional losses are included in the provision for doubtful accounts.
Other Material Factors Other material factors that we believe will also impact our future financial performance include: † Patient volume and census; † Continued advances in technology and the related capital requirements; † Continued affiliation with physician specialties other
than radiation oncology;
† Changes in accounting for business combinations requiring
that all acquisition-related costs be expensed as incurred;
† Our ability to achieve identified cost savings and
operational efficiencies;
† Increased costs associated with development and
optimization of our internal infrastructure; and
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Table of Contents Results of Operations The following table summarizes key operating statistics of our results of operations for our domestic U.S. operations for the three months endedMarch 31, 2012 and 2011: Three Months Ended March 31, Domestic U.S. 2012 2011 * % Change Number of treatment days 64 64 Total RVU's - freestanding centers 2,932,832 3,093,311 -5.2 % RVU's per day - freestanding centers 45,826 48,333 -5.2 % Percentage change in RVU's per day - freestanding centers - same practice basis -5.4 % 7.4 % Total treatments - freestanding centers 125,316 122,556 2.3 % Treatments per day - freestanding centers 1,958 1,915 2.3 % Percentage change in revenue per treatment - freestanding centers - same practice basis -2.8 % 3.0 % Percentage change in treatments per day - freestanding centers - same practice basis 2.1 % -1.5 % Number of regions at period end (global) 9 9 Number of local markets at period end 28 28 Treatment centers - freestanding (global) 121 112 8.0 % Treatment centers - hospital / other groups (global) 5 6 -16.7 % 126 118 6.8 % Days sales outstanding at quarter end 39 40 Percentage change in freestanding revenues - same practice basis -0.8 % 3.1 % Net patient service revenue - professional services only (in thousands) $ 48,735 $ 42,097
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* Excludes the impact of the termination of a capitated contract in
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The following table summarizes key operating statistics of our results of operations for our international operations for the three months endedMarch 31, 2012 and 2011: Three Months Ended March 31, International 2012 2011** % Change Number of treatments 2-D treatments 1,359 1,354 3-D treatments 2,023 1,588 IMRT / IGRT treatments 436 312 Total 3,818 3,254 17.3 %
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** includes full period operating statistics, including period prior to our acquisition on
International
Medical Developers' net patient service revenue were
Facility gross profit increased
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The following table presents summaries of our results of operations for the three months ended
Three Months Ended Three Months Ended March 31, 2012 March 31, 2011 Revenues: Net patient service revenue $ 175,548 98.9 % $ 155,083 99.1 % Other revenue 1,897 1.1 1,454 0.9 Total revenues 177,445 100.0 156,537 100.0 Expenses: Salaries and benefits 93,843 52.9 80,899 51.7 Medical supplies 15,460 8.7 12,491 8.0 Facility rent expenses 9,590 5.4 7,823 5.0 Other operating expenses 8,701 4.9 7,458 4.8 General and administrative expenses 19,682 11.1 17,836 11.4 Depreciation and amortization 15,196 8.6 12,455 8.0 Provision for doubtful accounts 5,061 2.9 3,801 2.4 Interest expense, net 17,555 9.9 14,493 9.3 Gain on fair value adjustment of previously held equity investment - - (234 ) -0.1 Foreign currency transaction loss 49 - 10 - Loss on foreign currency derivative contracts 594 0.3 116 0.1 Total expenses 185,731 104.7 157,148 100.6 Loss before income taxes (8,286 ) -4.7 (611 ) -0.6 Income tax expense 110 0.1 2,466 1.6 Net loss (8,396 ) -4.8 (3,077 ) -2.2 Net income attributable to noncontrolling interests - redeemable and non-redeemable (1,153 ) -0.6 (1,439 ) -0.9 Net loss attributable to Radiation Therapy Services Holdings, Inc. shareholder $ (9,549 ) -5.4 % $ (4,516 ) -3.1 %
Comparison of the Three Months Ended
Revenues
Net patient service revenue. For the three months ended
Other revenue. For the three months ended
Total revenues. Total revenues increased by
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Table of Contents Date Sites Location Market Type Latin America, Central America, Mexico and the March 2011 26 Caribbean International Acquisition Hospital-based / June 2011 1 London, Kentucky Central Kentucky other groups August 2011 Andalusia, Southeastern 1 Alabama Alabama De Novo August 2011 Redding, Northern 1 California California Acquisition Broward County - Broward County - Hospital-based / September 2011 2 Florida Florida other groups November 2011 4 Latin America International Acquisition Goldsboro and Sampson, North Eastern North December 2011 2 Carolina Carolina Acquisition February 2012 Asheville, North Western North 1 Carolina Carolina Acquisition Transition from Broward County - Broward County - Hospital-based March 2012 2 Florida Florida to freestanding Sarasota/Manatee Lakewood Ranch - Counties - March 2012 1 Florida Florida Acquisition
Revenue from CMS for the 2012 PQRI program increased approximately
Expenses
Salaries and benefits. Salaries and benefits increased by
For existing practices and centers within our local markets, salaries and benefits increased
Medical supplies. Medical supplies increased by
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Facility rent expenses. Facility rent expenses increased by
Other operating expenses. Other operating expenses increased by
General and administrative expenses. General and administrative expenses increased by
Depreciation and amortization. Depreciation and amortization increased by
Provision for doubtful accounts. The provision for doubtful accounts increased by
Interest expense, net. Interest expense, increased by
Gain on fair value adjustment of previously held equity investment. As result of the acquisition of MDLLC, in which we acquired an effective ownership interest of approximately 91.0% on
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Loss on foreign currency derivative contracts. We are exposed to a significant amount of foreign exchange risk, primarily between the U.S. dollar and the Argentine peso. This exposure relates to the provision of radiation oncology services to patients at our Latin American operations and purchases of goods and services in foreign currencies. We maintain four foreign currency derivative contracts which mature on a quarterly basis. For the three months ended
Income taxes. Our effective tax rate was (1.3)% in the first quarter of fiscal 2012 and (403.6)% in the first quarter of fiscal 2011. The change in the effective rate for the first quarter of 2012 compared to the same period of the year prior is primarily the result of the reduction of the deferred tax liability on the amount of goodwill and trade name impaired in the third quarter of 2011, the benefit related to the termination of the interest swap, the Company's application of ASC 740-270 to exclude certain jurisdictions (U.S. and certain states) for which the Company is unable to benefit from losses that are not more likely than not to be realized. On an absolute dollar basis, the expense for income taxes decreased to
Our future effective tax rates could be affected by changes in the relative mix of taxable income and taxable loss jurisdictions, changes in the valuation of deferred tax assets or liabilities, or changes in tax laws or interpretations thereof. We monitor the assumptions used in estimating the annual effective tax rate and make adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual effective tax rates, future income tax expense (benefit) could be materially affected.
In addition, we are periodically under audit by federal, state, or local authorities in the areas of income taxes and other taxes. These audits include questioning the timing and amount of deductions and compliance with federal, state, and local tax laws. We regularly assess the likelihood of adverse outcomes from these audits to determine the adequacy of our provision for income taxes. To the extent we prevail in matters for which accruals have been established or is required to pay amounts in excess of such accruals, the effective tax rate could be materially affected.
Net loss. Net loss increased by
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Table of Contents Seasonality and Quarterly Fluctuations
Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to fluctuate. Many of the patients of our
Liquidity and Capital Resources
Our principal capital requirements are for working capital, acquisitions, medical equipment replacement and expansion and de novo treatment center development. Working capital and medical equipment are funded through cash from operations, supplemented, as needed, by five-year fixed rate lease lines of credit. Borrowings under these lease lines of credit are recorded on our balance sheets. The construction of de novo treatment centers is funded directly by third parties and then leased to us. We finance our operations, capital expenditures and acquisitions through a combination of borrowings and cash generated from operations.
Cash Flows From Operating Activities
Net cash provided by operating activities for the three month periods ended
Net cash provided by operating activities increased by
Cash at
Cash Flows From Investing Activities
Net cash used in investing activities for the three month periods ended
Net cash used in investing activities decreased by
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Cash Flows From Financing Activities
Net cash provided by financing activities for the three month periods ended
Net proceeds from revolving credit facility during the first quarter of 2012 of
Senior Secured Credit Facilities Senior Subordinated Notes
In connection with the 2008 Merger, we entered into our current senior secured credit facilities, which consists of a senior secured term loan facility and a senior secured revolving credit facility. At the Closing, we borrowed
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Agreement"), by and among the Company, RTS, the subsidiaries of RTS identified therein as the guarantors, the institutions from time to time party thereto as lenders,
Our senior secured credit facilities:
† is secured by a pledge of substantially all our tangible and intangible assets, including accounts receivable, inventory and capital stock of its existing and future subsidiaries, and requires that borrowings and other amounts due under it will be guaranteed by its existing and future subsidiaries;
† requires us to make mandatory prepayments of outstanding borrowings, with a corresponding reduction in the maximum amount of borrowings available under the senior secured credit facility, with net proceeds from insurance recoveries and asset sales, and with the net proceeds from the issuance of equity or debt securities, subject to specified exceptions;
† includes a number of restrictive covenants including, among other things, limitations on leverage, capital and acquisitions expenditures, and requirements that we maintain minimum ratios of cash flow to interest;
† limits our ability to pay dividends on its capital stock; and
† contains customary events of default, including an event of default upon a change in control.
The senior secured credit facility requires that we comply with certain financial covenants, including:
Requirement at March 31, 2012 Level at March 31, 2012 Maximum permitted consolidated leverage ratio <5.75 to 1.00 5.36 to 1.00
Minimum permitted consolidated interest coverage ratio >2.00 to 1.00 2.35 to 1.00
The maximum permitted consolidated leverage ratio required is <6.00 to 1.00 from July 1, 2011 through December 31, 2011, <5.75 to 1.00 from January 1, 2012 to June 30, 2012, <5.50 to 1.00 from July 1, 2012 to June 30, 2013 and <5.25 to 1.00 thereafter.
The minimum permitted consolidated interest coverage ratio required is >2.00 to 1.00 through
The senior secured credit facility also requires that we comply with various other covenants, including, but not limited to, restrictions on new indebtedness, asset sales, capital expenditures, acquisitions and dividends, with which we were in compliance as of
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revolving loans under the revolving credit facility provided for under the senior secured credit facility by 50 basis points. Both the senior secured term loan and amounts borrowed under the revolving credit facility will now bear interest based (i) with respect to extended revolving loans and the senior secured term loans, on either (A)
The amendment modified the financial covenant levels, including to modify (x) the total leverage ratio to 6.00 to 1.00 for the Company's fiscal quarters ending
The amendment also made several modifications to the permitted investments baskets, the permitted indebtedness baskets and several definitions in the senior secured credit facility.
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Senior Secured Second Lien Notes
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The Notes were issued pursuant to an indenture, dated
In connection with the issuance of the Notes, on
Interest is payable on the Notes on each
The Indenture contains covenants that, among other things, restrict the ability for us, and certain of our subsidiaries to incur, assume or guarantee additional indebtedness; pay dividends or redeem or repurchase capital stock; make other restricted payments; incur liens; redeem debt that is junior in right of payment to the Notes; sell or otherwise dispose of assets, including capital stock of subsidiaries; enter into mergers or consolidations; and enter into transactions with affiliates. These covenants are subject to a number of important exceptions and qualifications. In addition, in certain circumstances, if the Company sells assets or experiences certain changes of control, it must offer to purchase the Notes.
We used the proceeds to repay our existing senior secured revolving credit facility and the Term Loan B portion of our senior secured credit facilities, which were prepaid in their entirety, cancelled and replaced with the new Revolving Credit Facility described below, and to pay related fees and expenses. Any remaining net proceeds will be used for general corporate purposes.
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Table of Contents Credit Agreement
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The credit facilities provided under the Credit Agreement consist of a revolving credit facility providing for up to
Loans under the Revolving Credit Facility are subject to the following interest rates:
(a) for loans which are Eurodollar loans, for any interest period, at a rate per annum equal to a percentage equal to (i) the rate per annum determined on the basis of the rate for deposits in dollars for a period equal to such interest period commencing on the first day of such interest period appearing on Reuters Screen LIBOR01 Page as of
(b) for loans which are base rate loans, (i) the greatest of (A) the Administrative Agent's prime lending rate at such time, (B) the overnight federal funds rate at such time plus ½ of 1%, and (C) the Eurodollar Rate for a Eurodollar Loan with a one-month interest period commencing on such day plus 1.00%, plus (ii) an applicable margin based upon a total leverage pricing grid.
We will pay certain recurring fees with respect to the Revolving Credit Facility, including (i) fees on the unused commitments of the lenders under the Revolving Credit Facility, (ii) letter of credit fees on the aggregate face amounts of outstanding letters of credit and (iii) administration fees.
The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) for us and certain of our subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; engage in mergers or other fundamental changes; sell certain property or assets; pay dividends of other distributions; consummate acquisitions; make investments, loans and advances; prepay certain indebtedness, including the Notes; change the nature of their business; engage in certain transactions with affiliates; and incur restrictions on the ability of our subsidiaries to make distributions, advances and asset transfers. In addition, under the Revolving Credit Facility, we will be required to comply with a specific first lien leverage ratio.
The Revolving Credit Facility contains customary events of default, including with respect to nonpayment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty when made; failure to perform or observe covenants; cross-default to other material indebtedness; bankruptcy and insolvency events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation and a change of control.
As of the Closing Date, the obligations under the Revolving Credit Facility are guaranteed by us and each direct and indirect, domestic subsidiaries.
The Revolving Credit Facility and any interest rate protection and other hedging arrangements provided by any lender party to the Revolving Credit Facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the Company's and each guarantor's tangible and intangible assets (subject to certain exceptions).
We believe available borrowings under our credit facilities, together with our cash flows from operations, will be sufficient to fund our currently anticipated operating requirements. To the extent available borrowings and cash flows from operations are insufficient to fund future requirements, we may be required to seek additional financing through additional increases in our senior secured credit facilities, negotiate additional credit facilities with other lenders or institutions or seek additional capital through private placements or public offerings of equity or debt securities. No assurances can be given that we will be able to extend or increase our senior secured credit facilities, secure additional bank borrowings or lease line of credit or complete additional debt or equity financings on terms favorable to us or at all. Our ability to meet our
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funding needs could be adversely affected if we experience a decline in our results of operations, or if we violate the covenants and other restrictions to which we are subject under our senior secured credit facilities.
Finance Obligation
We lease certain of our treatment centers (each, a "facility" and, collectively, the "facilities") and other properties from partnerships that are majority-owned by related parties (each, a "related party lessor" and, collectively, the "related party lessors"). See "Certain Relationships and Related Party Transactions." The related party lessors construct the facilities in accordance with our plans and specifications and subsequently lease these facilities to us. Due to the related party relationship, we are considered the owner of these facilities during the construction period pursuant to the provisions of Accounting Standards Codification ("ASC") 840-40, "Sale-Leaseback Transactions" ("ASC 840-40"). In accordance with ASC 840-40, we record a construction in progress asset for these facilities with a corresponding finance obligation during the construction period. These related parties guarantee the debt of the related party lessors, which is considered to be "continuing involvement" pursuant to ASC 840-40. Accordingly, these leases did not qualify as a normal sale-leaseback at the time that construction was completed and these facilities were leased to us. As a result, the costs to construct the facilities and the related finance obligation are recorded on our consolidated balance sheets after construction was completed. The construction costs are included in "Real Estate Subject to Finance Obligation" in the condensed consolidated balance sheets and the accompanying notes, included in this Annual Report on Form 10-K. The finance obligation is amortized over the lease during the construction period term based on the payments designated in the lease agreements.
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Billing and Collections
Our billing system in the U.S. utilizes a fee schedule for billing patients, third-party payers and government sponsored programs, including
Insurance information is requested from all patients either at the time the first appointment is scheduled or at the time of service. A copy of the insurance card is scanned into our system at the time of service so that it is readily available to staff during the collection process. Patient demographic information is collected for both our clinical and billing systems.
It is our policy to collect co-payments from the patient at the time of service. Insurance benefit information is obtained and the patient is informed of their deductible and co-payment responsibility prior to the commencement of treatment.
Charges are posted to the billing system by coders in our offices or in our central billing office. After charges are posted, edits are performed, any necessary corrections are made and billing forms are generated, then sent electronically to our clearinghouse whenever electronic submission is possible. Any bills not able to be processed through the clearinghouse are printed and mailed from our print mail service. Statements are automatically generated from our billing system and
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mailed to the patient on a regular basis for any amounts still outstanding from the patient. Daily, weekly and monthly accounts receivable analysis reports are utilized by staff and management to prioritize accounts for collection purposes, as well as to identify trends and issues. Strategies to respond proactively to these issues are developed at weekly and monthly team meetings. Our write-off process is manual and our process for collecting accounts receivable is dependent on the type of payer as set forth below.
Our central billing office staff expedites the payment process from insurance companies and other payers via electronic inquiries, phone calls and automated letters to ensure timely payment. Our billing system generates standard aging reports by date of billing in increments of 30 day intervals. The collection team utilizes these reports to assess and determine the payers requiring additional focus and collection efforts. Our accounts receivable exposure on
In the event of denial of payment, we follow the payer's standard appeals process, both to secure payment and to lobby the payers, as appropriate, to modify their medical policies to expand coverage for the newer and more advanced treatment services that we provide which, in many cases, is the payer's reason for denial of payment. If all reasonable collection efforts with these payers have been exhausted by our central billing office staff, the account receivable is written-off.
Self-Pay Balances
We administer self-pay account balances through our central billing office and our policy is to first attempt to collect these balances although after initial attempts we often send outstanding self-pay patient claims to collection agencies at designated points in the collection process. In some cases monthly payment arrangements are made with patients for the account balance remaining after insurance payments have been applied. These accounts are reviewed monthly to ensure payments continue to be made in a timely manner. Once it has been determined by our staff that the patient is not responding to our collection attempts, a final notice is mailed. This generally occurs more than 120 days after the date of the original bill. If there is no response to our final notice, after 30 days the account is assigned to a collection agency and, as appropriate, recorded as a bad debt and written off. We also have payment arrangements with patients for the self-pay portion due in which monthly payments are made by the patient on a predetermined schedule. Balances under
Acquisitions and Developments
The following table summarizes our growth in treatment centers and the local markets in which we operate for the periods indicated:
Three Months Year Ended Ended December 31, March 31, 2010 2011 2012 Treatment centers at beginning of period 97 95 127 Internally developed 2 1 - Transitioned to freestanding - - 2 Internally (consolidated / closed / sold) (5 ) (5 ) (1 ) Acquired 2 33 2 Hospital-based / other groups (1 ) 3 (2 ) Hospital-based (ended / transitioned) - - (2 ) Treatment centers at period end 95 127 126 Number of regions at period end 8 9 9 Number of local markets at period end 28 28 28 48
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In 2010, we internally developed two new radiation centers, sold one radiation center, closed four radiation centers, acquired two radiation centers, consolidated a hospital-based radiation center and acquired the assets of several physician practices as follows:
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During the fourth quarter of 2010, we closed and consolidated two radiation centers in
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During 2010, we acquired the assets of several physician practices in
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During 2011, the Company acquired the assets of several physician practices in
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During 2012, we acquired the assets of several physician practices in
The operations of the foregoing acquisitions have been included in the accompanying condensed consolidated statements of comprehensive loss from the respective dates of each acquisition. When we acquire a treatment center, the purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values.
During the first quarter of 2011, we closed two treatment facilities in
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As of
We have been selected by a consortium of leading
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
We believe the following critical accounting policies are important to the portrayal of our financial condition and results of operations and require our management's subjective or complex judgment because of the sensitivity of the methods, assumptions and estimates used in the preparation of our consolidated financial statements.
Variable Interest Entities
We evaluate certain of our radiation oncology practices in order to determine if they are variable interest entities ("VIE"). This evaluation resulted in determining that certain of our radiation oncology practices were potential variable interests. For each of these practices, we have determined (1) the sufficiency of the fair value of the entities' equity investments at risk to absorb losses, (2) that, as a group, the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities' significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, and (c) the right to receive the expected residual return of the entity, and (3) substantially all of the entities' activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both. ASC 810, "Consolidation" ("ASC 810"), requires a company to consolidate VIEs if the company is the primary beneficiary of the activities of those entities. Certain of our radiation oncology practices are variable interest entities and we have a variable interest in certain of these practices through our administrative services agreements. Pursuant to ASC 810, through our variable interests in these practices, we have the power to direct the activities of these practices that most significantly impact the entity's economic performance and we would absorb a majority of the expected losses of these practices should they occur. Based on these determinations, we have included these radiation oncology practices in our condensed consolidated financial statements for all periods presented. All significant intercompany accounts and transactions have been eliminated.
We adopted updated accounting guidance beginning with the first quarter of 2010, by providing an ongoing qualitative rather than quantitative assessment of our ability to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and our rights or obligations to receive benefits or absorb losses, in order to determine whether those entities will be required to be consolidated in our consolidated financial statements. The adoption of the new guidance had no material impact to our financial position and results of operations.
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Net Patient Service Revenue and Allowances for Contractual Discounts
We have agreements with third-party payers that provide us payments at amounts different from our established rates. Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payers and others for services rendered. Net patient service revenue is recognized as services are provided.
We derive a significant portion of our revenues from
During the three months ended
Accounts Receivable and Allowances for Doubtful Accounts
Accounts receivable are reported net of estimated allowances for doubtful accounts and contractual adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from third-party payers and patients. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying amount of such receivables to their estimated net realizable value. The credit risk for other concentrations (other than
The amount of the provision for doubtful accounts is based upon our assessment of historical and expected net collections, business and economic conditions, trends in Federal and state governmental healthcare coverage and other collection indicators. The primary tool used in our assessment is an annual, detailed review of historical collections and write-offs of accounts receivable as they relate to aged accounts receivable balances. The results of our detailed review of historical collections and write-offs, adjusted for changes in trends and conditions, are used to evaluate the allowance amount for the current period. If the actual bad debt allowance percentage applied to the applicable aging categories would change by 1% from our estimated bad debt allowance percentage for the year ended
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired by the Company in business combinations. Goodwill and indefinite life intangible assets are not amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise. During the third quarter of 2011 we recognized
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goodwill impairment of approximately
The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including the unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. Based on (i) assessment of current and expected future economic conditions, (ii) trends, strategies and forecasted cash flows at each reporting unit and (iii) assumptions similar to those that market participants would make in valuing the reporting units.
The estimated fair value measurements were developed using significant unobservable inputs (Level 3). For goodwill, the primary valuation technique used was an income methodology based on estimates of forecasted cash flows for each reporting unit, with those cash flows discounted to present value using rates commensurate with the risks of those cash flows. In addition, a market- based valuation method involving analysis of market multiples of revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") for (i) a group of comparable public companies and (ii) recent transactions, if any, involving comparable companies. Assumptions used are similar to those that would be used by market participants performing valuations of regional divisions. Assumptions were based on analysis of current and expected future economic conditions and the strategic plan for each reporting unit.
Intangible assets consist of trade names, non-compete agreements, licenses and hospital contractual relationships. Trade names have an indefinite life and are tested annually for impairment. Non-compete agreements, licenses and hospital contractual relationships are amortized over the life of the agreement (which typically ranges from 2 to 20 years) using the straight-line method. No intangible asset impairment loss was recognized for any period presented.
During the second quarter of 2011, certain of our regions' patient volume have stabilized in their respective markets. Although we have had a stabilization of patient volume, we reviewed our anticipated growth expectations in certain of our reporting units and are considering adjusting our expectations for the remainder of the year. If our previously projected cash flows for these reporting units are not achieved, it may be necessary to revise these estimated cash flows and obtain a valuation analysis and appraisal that will enable us to determine if all or a portion of the recorded goodwill or any portion of other long-lived assets are impaired.
During the third quarter of 2011, we completed an interim impairment test for goodwill and indefinite-lived intangible assets. In performing this test, we assessed the implied fair value of our goodwill and intangible assets. We determined that the carrying value of goodwill and trade name in certain U.S. Domestic markets, including North East United States (
During the fourth quarter of 2011, we decided to rebrand our current trade name of 21st Century Oncology. As a result of the rebranding initiative and concurrent with our annual impairment test for goodwill and indefinite-lived intangible assets, we incurred an impairment loss of approximately
Impairment of Long-Lived Assets
In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. Assessment of possible impairment of a particular asset is based on our ability to
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recover the carrying value of such asset based on our estimate of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying value of such asset, an impairment charge would be recognized for the amount by which the asset's carrying value exceeds its estimated fair value.
Stock-Based Compensation
All share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense in the statement of operations and comprehensive loss over the requisite service period.
For purposes of determining the compensation expense associated with equity grants, we value the business enterprise using a variety of widely accepted valuation techniques, which considered a number of factors such as the financial performance of the Company, the values of comparable companies and the lack of marketability of the Company's equity. The Company then uses the option pricing method to determine the fair value of equity units at the time of grant using the following assumptions: a term of five years, which is based on the expected term in which the units will be realized; a risk-free interest rate of 1.96% and 0.53% for grants issued in 2010 and 2011, respectively, which is the five-year U.S. federal treasury bond rate consistent with the term assumption; and expected volatility of 50% and 55% for grants issued in 2010 and 2011, respectively, which is based on the historical data of equity instruments of comparable companies.
The estimated fair value of the units, less an assumed forfeiture rate of 2.7%, is recognized in expense in the Company's financial statements on a straight-line basis over the requisite service periods of the awards for Class
Income Taxes
We make estimates in recording our provision for income taxes, including determination of deferred tax assets and deferred tax liabilities and any valuation allowances that might be required against the deferred tax assets. ASC 740, "Income Taxes" ("ASC 740") requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In 2009, we determined that a valuation allowance of
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
We are subject to taxation in
Our future effective tax rates could be affected by changes in the relative mix of taxable income and taxable loss jurisdictions, changes in the valuation of deferred tax assets or liabilities, or changes in tax laws, interpretations thereof. We monitor the assumptions used in estimating the annual effective tax rate and makes adjustments, if required, throughout the year. If actual results differ from the assumptions used in estimating our annual effective tax rates, future income tax expense (benefit) could be materially affected.
In addition, we are routinely under audit by federal, state, or local authorities in the areas of income taxes and other taxes. These audits include questioning the timing and amount of deductions and compliance with federal, state, and local tax laws. We regularly assess the likelihood of adverse outcomes from these audits to determine the adequacy of our provision for income taxes. To the extent we prevail in matters for which accruals have been established or is required to
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pay amounts in excess of such accruals, the effective tax rate could be materially affected. We are currently undergoing a Federal income tax audit for tax years 2007 through 2008 and
New Pronouncements
In
In
In
Reimbursement, Legislative And Regulatory Changes
Legislative and regulatory action has resulted in continuing changes in reimbursement under the
Within the statutory framework of the
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operations. Additionally, there may be a continued rise in managed care programs and future restructuring of the financing and delivery of healthcare in
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
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