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SSY > SEC Filings for SSY > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SUNLINK HEALTH SYSTEMS INC

Form 10-Q for SUNLINK HEALTH SYSTEMS INC


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -

(dollars in thousands, except per share and admissions data)

Forward-Looking Statements

This Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions

general economic and business conditions in the U.S., both nationwide and in the states in which we operate;

increases in uninsured and/or underinsured patients due to unemployment or other conditions resulting in higher bad debt amounts;

the competitive nature of the U.S. community hospital, nursing home, homecare and specialty pharmacy businesses;

demographic changes in areas where we operate;

the availability of new long-term financing to replace our existing credit facility;

the availability of cash or borrowings to fund working capital, renovations, replacements, expansions and capital improvements at existing hospital facilities and for acquisitions and replacement hospital facilities;

changes in accounting principles generally accepted in the U.S.; and,

fluctuations in the market value of equity securities including SunLink common shares;

Operational Factors

inability to operate profitability in one or more segments of the healthcare business;

the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists and staff personnel for our operations;

timeliness and amount of reimbursement payments received under government programs;

increases in interest rates under our indebtedness;

the inability to refinance existing indebtedness and potential defaults under existing indebtedness;

restrictions imposed by debt agreements;

the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;

the efforts of insurers, healthcare providers, and others to contain healthcare costs;

the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or in alternative healthcare settings, such as surgery centers or urgent care centers;

changes in medical and other technology;

risks of changes in estimates of self insurance claims and reserves;

increases in prices of materials and services utilized in our Healthcare Facilities and Specialty Pharmacy Segments;

increases in wages as a result of inflation or competition for management, physician, nursing, pharmacy and staff positions;

increases in the amount and risk of collectability of accounts receivable, including deductibles and co-pay amounts;

the functionality of, or costs with respect to our information systems for our Healthcare Facilities and Specialty Pharmacy Segments and our corporate office, including both software and hardware; and

the availability of and competition from alternative drugs or treatments provided by our Specialty Pharmacy Segment;


Liabilities, Claims, Obligations and Other Matters

claims under leases, guarantees and other obligations relating to discontinued operations, including sold facilities, retained or acquired subsidiaries and former subsidiaries;

potential adverse consequences of known and unknown government investigations;

claims for product and environmental liabilities from continuing and discontinued operations;

professional, general and other claims which may be asserted against us; and,

natural disasters and weather-related events such as earthquakes, flooding, snow, ice and wind damage and population evacuations affecting areas in which we operate.

Regulation and Governmental Activity

existing and proposed governmental budgetary constraints;

the regulatory environment for our businesses, including state certificate of need laws and regulations, rules and judicial cases relating thereto;

anticipated adverse changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLink's healthcare services including the payment arrangements and terms of managed care agreements;

changes in or failure to comply with federal, state or local laws and regulations affecting the healthcare industry including federal healthcare reform legislation and,

the possible enactment of federal healthcare reform laws or reform laws in states where we operate hospital and pharmacy facilities (including Medicaid waivers and other reforms);

Acquisition Related Matters

the availability and terms of capital to fund acquisitions;

impairment or uncollectibility of certain acquired assets;

assumed liabilities discovered subsequent to an acquisition;

our ability to integrate acquired healthcare businesses and implement our business strategy; and,

competition in the market for acquisitions of hospitals and healthcare businesses.

The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.

We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the risk factors set forth elsewhere in this report and in our Annual Report on Form 10-K.

Corporate Business Strategy

SunLink's Board and management have determined to focus the Company's strategic investments on enhancing the existing hospital portfolio, including the selective disposal of underperforming and non-strategic subsidiary facilities.


Operations

Our operational strategy is focused on efforts to improve operations and generate internal growth. Our primary operational strategy for our community hospitals is to improve the operations and profitability of such hospitals by reducing out-migration of patients, recruiting physicians, improving quality and safety of services, expanding services and implementing and maintaining effective cost controls. Our operational strategy for our nursing homes and home health agency is similar to that for our community hospitals and is focused on quality patient care, expanding services and implementing and maintaining effective cost controls. Our operational strategy for our Specialty Pharmacy Segment is focused on increasing market share, expanding services, and implementing and maintaining effective cost controls.

Acquisitions and Dispositions Strategy

The Company continues to evaluate certain rural and exurban hospitals and healthcare businesses, which may be for sale, and monitor other selected rural and exurban healthcare acquisition targets which it believes might become available for sale or lease.

We believe there may be renewed opportunities for acquisitions or dispositions of individual hospitals in the future due to, among other things, continued negative trends in certain government reimbursement programs and other factors. We also believe there may be opportunities for the acquisition or disposition of individual or groups of hospitals in the future as other for-profit and not-for-profit hospital operators seek to re-align the focus of their portfolios.

We also consider the disposition of one or more of our healthcare facilities, Specialty Pharmacy Segment service lines or business segments, if we determine that the operating results or potential growth of such facility, service line or segment no longer meet our business objectives.

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

it requires assumptions to be made that were uncertain at the time the estimate was made; and

changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.

Our critical accounting estimates are more fully described in our 2012 Annual Report on Form 10-K and continue to include the following areas:

Receivables - net and provision for doubtful accounts;

Revenue recognition / Net Patient Service Revenues;

Valuation of goodwill, intangible and long-lived assets;

Professional and general liability claims; and

Accounting for income taxes; and

Electronic Health Record incentives.


Financial Summary

The results of continuing operations shown in the financial summary below are
for our two business segments, Healthcare Facilities and Specialty Pharmacy.



                                                               Three Months Ended September 30,
                                                           2012               2011           % Change
Net Revenues-Healthcare Facilities                      $    18,941         $  18,422              2.8 %
Net Revenues-Specialty Pharmacy                               6,749             7,755            -13.0 %

Total Net Revenues                                           25,690            26,177             -1.9 %
Costs and expenses                                          (27,392 )         (28,345 )           -3.4 %
Impairment of property, plant and equipment                    (789 )               0              N/A
Electronic health records incentives                              0               659           -100.0 %

Operating loss                                               (2,491 )          (1,509 )          -65.1 %
Interest expense                                               (559 )          (1,303 )          -57.1 %
Interest income                                                  -                  2           -100.0 %

Loss from continuing operations before income taxes     $    (3,050 )       $  (2,810 )           -8.5 %

Healthcare Facilities Segment:
Admissions                                                      879               924               -5 %
Equivalent admissions                                         3,158             3,231               -2 %
Surgeries                                                       469               496               -5 %
Revenue per equivalent admission                        $     5,987         $   5,699                5 %

Equivalent admissions - Equivalent admissions is used by management (and certain investors) as a general measure of combined inpatient and outpatient volume for our hospital operations. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues. The equivalent admissions computation is intended to relate outpatient revenues to the volume measure (admissions) used to measure inpatient volume to result in a general approximation of combined inpatient and outpatient volume (equivalent admissions).

Results of Operations

Our net revenues are from our two business segments, healthcare facilities and specialty pharmacy.

Healthcare Facilities Segment

Net revenues for the three months ended September 30, 2012 were $18,941 with a total of 3,158 equivalent admissions and revenue per equivalent admission of $5,987 compared to net revenues of $18,422 with a total of 3,231 equivalent admissions and revenue per equivalent admission of $5,699 for the quarter ended September 30, 2011.

The following table sets forth the percentage of patient revenues before bad debts from major payor sources for the Company's four hospitals (exclusive of the hospital operated by our Dexter Hospital, LLC subsidiary which is under contract to be sold) during the periods indicated:

                                                 Three Months Ended
                                                    September 30,
                                                 2012           2011
              Source:
              Medicare                              41.7 %        40.6 %
              Medicaid                              12.7 %        13.2 %
              Self-pay                              16.5 %        16.2 %
              Managed Care Insurance & Other        29.1 %        30.0 %

                                                   100.0 %       100.0 %


As a percentage of net revenue, Medicare increased in the three months ended September 30, 2012 compared to the prior year period as a result of increased Medicare admissions and the opening of two Geriatric Psychiatry Units ("GPUs") in July 2012. These two new GPUs had net Medicare revenue of $814 for the three months ended September 30, 2012. Medicare net revenue increased to $9,375 for the three months ended September 30, 2012 from $8,817 for the three months ended September 30, 2011. Medicaid as a percentage of net revenue decreased slightly due to decreased nursing home reimbursement. Medicaid revenue decreased from $2,863 for the three months end September 30, 2011 to $2,839 for the three months ended September 30, 2012. Managed care and other revenue decreased from $6,513 for the three months ended September 30, 2011 to $6,495 for the three months ended September 30, 2012. Self-pay revenue as a percentage of net patient revenue increased slightly for the three months ended September 30, 2012 due to an increase in emergency room visits compared to the prior year period. Self-pay revenue increased from $3,497 in the three months ended September 30, 2011 to $3,667 for the three months ended September 30, 2012.

Specialty Pharmacy Segment

Specialty Pharmacy net revenues for the three months ended September 30, 2012 was $6,749, a decrease of $1,006, or 12.9%, from $7,775 for the three months ended September 30, 2011. The decrease was largely due to the loss of certain institutional direct-servicing and management contracts, a decrease in the sale of a seasonal infusion therapy drug and reduced reimbursement resulting from the implementation of Louisiana Medicaid managed care.

Healthcare Facilities Segment Cost and Expenses

Costs and expenses for our Healthcare Facilities, including depreciation and
amortization, were $19,492 and $18,423 for the three months ended September 30,
2012 and 2011, respectively.



                                                      Cost and Expenses
                                                   as a % of Net Revenues
                                                     Three Months Ended
                                                        September 30,
                                                   2012               2011
        Salaries, wages and benefits                  57.8 %             57.7 %
        Supplies                                      11.7 %             11.6 %
        Purchased services                             8.7 %              9.4 %
        EHR incentive payments                         0.0 %             -2.6 %
        Other operating expenses                      18.7 %             18.2 %
        Rent and lease expense                         2.3 %              2.6 %
        Depreciation and amortization expense          3.6 %              3.9 %

Purchased services as a percentage of net revenue decreased from the comparable prior year period due to previously outsourced services being performed by employees.

EHR incentive payments as a percent of net revenue is a negative 2.6% for the three months ended September 30, 2011. This is related to the $659 of Medicaid EHR incentive payments recognized in the three months ended September 30, 2011. There were no Medicaid EHR incentive payments recognized in the three months ended September 30, 2012.

Other operating expenses as a percentage of net revenue increased from the comparable prior period due to an increase in insurance expense resulting from professional and general liability claims incurred in the three months ended September 30, 2012.


Specialty Pharmacy Segment Cost and Expenses

Cost and expenses for our Specialty Pharmacy Segment, including depreciation and
amortization, were $6,849 and $8,031 for the three months ended September 30,
2012 and 2011, respectively.



                                                      Cost and Expenses
                                                   as a % of Net Revenues
                                                     Three Months Ended
                                                        September 30,
                                                   2012               2011
        Cost of goods sold                            62.8 %             63.6 %
        Salaries, wages and benefits                  24.4 %             22.9 %
        Provision for bad debts                        1.2 %              3.5 %
        Supplies                                       0.7 %              0.7 %
        Purchased services                             4.7 %              4.2 %
        Other operating expenses                       4.0 %              4.6 %
        Rent and lease expense                         1.1 %              1.0 %
        Depreciation and amortization expense          2.4 %              2.9 %

Cost of goods sold as a percent of net revenues decreased in the three months ended September 30, 2012 as compared to the comparable period of the prior year due the current period's decreases in sales of certain infusion therapy products, which have a higher cost of sales as a percentage of net revenues, favorable purchasing contracts negotiations, and improved margins for the institutional pharmacy business.

Salaries, wages and benefits decreased in total in the three months ended September 30, 2012 as compared to the comparable period of the prior year due to cost-cutting measures. However, salaries, wages and benefits as a percent of net revenues increased in the three months ended September 30, 2012 as compared to the comparable period of the prior year due to decreased net revenues in the current period.

Provision for bad debts as a percent of net revenues decreased in the three months ended September 30, 2012 as compared to the comparable period of the prior year due primarily to the implementation of additional business office and intake policies and procedures.

Purchased services decreased in total in the three months ended September 30, 2012 as compared to the comparable period of the prior year due to cost-cutting measures. However, purchased services as a percent of net revenues increased in the three months ended September 30, 2012 as compared to the comparable period of the prior year due to decreased net revenues in the current period.

Other operating expenses as a percent of net revenues decreased in the three months ended September 30, 2012 as compared to the comparable period of the prior year due to a favorable insurance trend and cost-cutting measures.

Impairment of Long-Lived Assets

Central Alabama Medical Associates, LLC ("CAMA"), an indirect subsidiary of the Company owns a hospital facility and related equipment in Clanton, Alabama, which it leases to a third party hospital operator. The lessee/operator holds the Certificate of Need and other required hospital operating licenses. On October 29, 2012, the Alabama Department of Public Health issued an emergency order to suspend operating license of the lease/operator and for the cessation of all operations in an orderly manner due to the lease/operator's inability to meet its financial obligations and failure to have an effective governing authority. The lease/operator's license will remain effective, although suspended, until December 21, 2012 to allow another person or entity to submit an application for licensure to operate the hospital. CAMA is evaluating its legal alternatives under the hospital facility lease and related documents and marketing the facility to other potential operators.

Due to the changes in circumstances regarding CAMA's owned hospital and equipment in Clanton, Alabama, the carrying amount of these assets may not be fully recoverable. The net realizable value of the hospital facility and equipment was evaluated and it was determined that an impairment of the net value of the leased property, plant and equipment had occurred. An impairment charge of $789 was recognized for the Healthcare Facilities Segment in the three months ended September 30, 2012.


Corporate Overhead Costs and Expenses

Cost and expenses for Corporate Overhead including depreciation and amortization, was $1,051 and $1,232 for the three months ended September 30, 2012 and 2011, respectively. Corporate Overhead decreased in the three months ending September 30, 2012 due to decreased legal and consulting expenses in the three months ended September 30, 2012.

Operating Loss

SunLink had an operating loss of $2,491 for the three months ended September 30, 2012 and $1,509 for the three months ended September 30, 2011. The increase in operating loss for the three months ended September 30, 2012 compared to the comparable period in 2011 resulted from the fact that the three months ended September 30, 2011 were favorably affected by the recognition of $659 of EHR incentive payments which were not recurring in the three months ended September 30, 2012 and the impairment charge of $789 related to the Healthcare Facilities Segment for the three months ended September 30, 2012. This increase in operating loss was partially offset by the overall decrease in operating expenses.

Interest Expense

Interest expense was $559 and $1,303 for the three months ended September 30, 2012 and 2011, respectively. Interest expense for the three months ended September 30, 2012 decreased from the same period last year due to lower outstanding debt and a decrease in interest rates. The decrease also resulted from decreased waiver fees partially offset by an increase in non-cash amortization of costs and fees in the current year periods. Non-cash amortization expense of costs and fees were $84 and $42 for the three months ended September 30, 2012 and 2011, respectively. Waiver fees and costs were $0 and $131 for the three months ended September 30, 2012 and 2011, respectively.

Income Taxes

Income tax benefit of $1,428 ($1,559 federal tax benefit and $131 state tax expense) and $1,067 ($960 federal tax benefit and $107 state tax benefit) was recorded for the three months ended September 30, 2012 and 2011, respectively.

SunLink had an estimated consolidated net operating loss carry-forward for federal income tax purposes of approximately $5,900 at September 30, 2012. Use of this net operating loss carry-forward is subject to the limitations of the provisions of Internal Revenue Code Section 382. As a result, not all of the net operating loss carry-forward is available to offset federal taxable income in the current year. At September 30, 2012, we have provided a partial valuation allowance against the deferred tax asset so that the net tax asset was $11,149. Based upon management's assessment that it was more likely than not that a portion of its deferred tax asset (primarily its net operating losses subject to limitation) would not be recovered, the Company established a valuation allowance for the portion of the tax asset which management estimates will not be utilized.

Loss After Taxes

Loss from continuing operations was $1,622 ($0.17 loss per fully diluted share) for the quarter ended September 30, 2012 compared to $1,743 ($0.20 loss per fully diluted share) for the quarter ended September 30, 2011. The decreased loss for the three months ended September 30, 2012 resulted from decreased interest expense partially offset by increased operating loss as compared to the comparable prior year period.

Earnings from discontinued operations of $198 for the three months ended September 30, 2012 resulted from the Dexter Hospital, LLC ("Dexter") pre-tax earnings from operation of $432, Memorial Hospital of Adel and Memorial Convalescent Center (collectively "Memorial") pre-tax losses from operations of $21 and a gain from the sale of Memorial of $1,191. The earnings from discontinued operations for the three months ended September 30, 2012 also was partially offset by $34 of losses resulting from pension items relating to discontinued operations. Tax expense for discontinued operations for the three months ended September 30, 2023 was $1,370. Our effective tax rate for discontinued operations during the three months ended September 30, 2012 was 104.1%, which is primarily due to the non-deductibility of approximately $1,600 of the recorded value of the intangible assets sold in the sale of Memorial.


Net loss for the quarter ended September 30, 2012 was $1,424 ($0.15 loss per fully diluted share) compared to net loss of $1,555 ($0.18 loss per fully diluted share) for the quarter ended September 30, 2011.

Adjusted earnings before income taxes, interest, depreciation and amortization

. . .

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