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

Show all filings for USMD HOLDINGS, INC.

Form 10-Q for USMD HOLDINGS, INC.


14-Nov-2012

Quarterly Report


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

As used in this Quarterly Report on Form 10-Q, the terms "Holdings," the "Company," "we," "us" and "our" refer to USMD Holdings, Inc. and its consolidated subsidiaries (collectively, "Holdings").

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, and from time to time management may make, statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent management's current expectations regarding future events, many of which, by their nature, are inherently uncertain and outside its control. The forward-looking statements contained in this Quarterly Report are based on information as of the date of this Quarterly Report. Many of these forward-looking statements relate to future industry trends, actions, future performance or results of current and anticipated initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on Holdings' business, future operating results and liquidity. Whenever possible, Holdings identifies these statements by using words such as "anticipate," "believe," "estimate," "continue," "intend," "expect," "plan," "forecast," "project" and similar expressions, for future-tense or conditional constructions ("will," "may," "should," "could," etc.). Holdings cautions you that these statements are only predictions and are not guarantees of future performance. These forward-looking statements and Holdings actual results, developments and business are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated by these statements. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Holdings assumes no obligation to update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law. Many factors that could cause actual results to differ from those in the forward-looking statements including, among others, those discussed under "Risk Factors," in Holdings' Registration Statement on Form S-4 and those described elsewhere in this Quarterly Report on Form 10-Q and from time to time in Holdings' future reports filed with the Securities and Exchange Commission.

Executive Overview

Background

USMD Holdings, Inc., a Delaware corporation, was formed on May 7, 2010 to facilitate the business combination of USMD Inc., a Texas corporation ("USMD"), Urology Associates of North Texas, L.L.P., a Texas limited liability partnership ("UANT"), and UANT Ventures, L.L.P., a Texas limited liability partnership ("Ventures"). On August 19, 2010, Holdings, USMD, Ventures and UANT entered into a Contribution and Purchase Agreement (such agreement, the "Original Contribution Agreement") pursuant to which the entities would combine into a single integrated health services company (such transaction, the "Contribution"). Immediately prior to the Contribution, a subsidiary of Ventures would merge with and into UANT, resulting in UANT becoming a wholly-owned subsidiary of Ventures, and certain of the USMD shareholders would contribute all or a portion of their shares of USMD common stock to Ventures in exchange for partnership interests in Ventures. When the Contribution is consummated, Ventures would contribute its assets, which would include its equity interests in USMD and UANT, and the remaining USMD shareholders would contribute their USMD shares, to Holdings in exchange for shares of Holdings common stock. Holdings described the Contribution in its Registration Statement on Form S-4 filed with the Securities and Exchange Commission (the "SEC") on December 23, 2010 and declared effective by the SEC on July 25, 2011. On August 23, 2011, the shareholders of USMD and the partners of Ventures voted on and approved the Original Contribution Agreement.

Prior to the consummation of the Contribution, on December 1, 2011, Ventures and Holdings entered into a merger agreement with The Medical Clinic of North Texas, P.A., a Texas professional association ("MCNT"), and on December 15, 2011, Ventures and Holdings entered into a merger agreement with Impel Management Services, LLC, a Texas limited liability company ("Impel"). These merger agreements provide that subsidiaries of Ventures would merge with and into each of MCNT and Impel, resulting in these businesses becoming wholly-owned subsidiaries of Ventures prior to the closing of the Contribution. As a result of these merger agreements, on February 9, 2012, Holdings, USMD, UANT and Ventures executed an amendment to the Original Contribution Agreement (the "Amendment") to reflect, among other changes, that Ventures would contribute to Holdings, in addition to its equity interests in USMD and UANT, its equity interests in MCNT and Impel as part of the Contribution. Holdings described these transactions in a post-effective amendment to its Registration Statement on Form S-4 filed with the SEC on February 10, 2012, which was declared effective on April 30, 2012. On May 21, 2012, Ventures, Holdings, MCNT and Impel executed a corresponding amendment to the merger agreements. On May 29, 2012, USMD, Ventures, MCNT and Impel voted on and approved the Amendment. On August 31, 2012, Holdings and the other parties consummated the foregoing mergers and the Contribution.

For accounting purposes, the Contribution qualifies as a business combination and was accounted for as a reverse acquisition by USMD into Holdings, a business combination related shell company. Under reverse acquisition accounting, the financial statements are issued in the name of the legal parent (Holdings), but represent a continuation of the accounting acquirer's (USMD) financial statements, with an adjustment to retroactively restate USMD's legal capital to reflect the legal capital of Holdings. The assets and liabilities of USMD continue at their pre-combination carrying values. The assets and liabilities of Holdings are recorded at fair value


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at the acquisition date, which, for Holdings, equals their carrying values. The assets acquired and liabilities assumed from Ventures, UANT, MCNT and Impel (collectively, the "acquired entities") are recorded at their respective fair values at the acquisition date. Holdings' results of operations and cash flows for the nine months ended September 30, 2012 include eight months of results and cash flows of USMD and one month of results and cash flows of post-combination Holdings. Holdings' statements of operations and cash flows for the nine months ended September 30, 2011 include the historical results and cash flows of USMD for that period.

The Business of Holdings

As of September 1, 2012, Holdings, a physician-led integrated health system, by and through its subsidiaries, provided health care services to patients in physician clinics, hospitals, medical clinics and other health care facilities, including cancer treatment centers and anatomical pathology and clinical laboratories. In addition, we provide management and operational services to hospitals, physician practices, cancer treatment centers and lithotripsy (kidney stone treatment) service providers.

A wholly-owned subsidiary of Holdings is the sole member of a Texas Certified non-Profit Healthcare Organization that owns and operates a multi-specialty physician group practice (the "TX CNHO") in the Dallas-Fort Worth, Texas metropolitan area. Through other wholly owned subsidiaries, we provide management and operational services to two acute care hospitals in the Dallas-Fort Worth, Texas metropolitan area and provide management and/or operational services to ten cancer treatment centers in four states and 24 lithotripsy service providers primarily located in the South Central United States. We have ownership interests in two hospitals and 22 lithotripsy service providers and also wholly own and operate two clinical labs in the Dallas-Fort Worth, Texas metropolitan area and one anatomical pathology lab in Florida. At September 30, 2012, we employ over 240 physicians and associate practitioners with 18 different specialties.

The Contribution created an innovative physician-led integrated health system committed to maintaining the vital doctor-patient relationship that results in higher quality and more affordable patient care. Holdings' focus and the focus of the healthcare providers of Holdings is to deliver higher quality, more convenient, cost effective health care to our patients. Our model brings primary care and specialist physicians together and places them in their proper role as leaders of healthcare delivery. This important shift brings quality and patient satisfaction back to the forefront where it belongs by making our providers responsible for patient outcomes and the overall clinical experience.

The growth and success of Holdings in the near term largely depends on our ability to successfully organize and integrate components of the businesses acquired into the new physician-led integrated health system organization, to maintain productive relationships with physicians, hospital partners and managed care payers and to effectively identify and optimize revenue and cost synergies within our physician-led integrated health system. In addition, our current and future success is dependent upon our ability to:

deliver a physician-led, patient-centered integrated health system experience focused on continuous improvement;

optimize clinical operations and exceed industry standard clinical and patient satisfaction criteria;

retain and recruit primary care physicians and specialists in our areas of focus and areas that expand our integrated health system offerings;

establish high physician satisfaction with a physician leadership structure;

expand service offerings and integrate those services within the physician-led integrated health system;

increase the number of patients served and patient encounters of Holdings and its managed entities;

pursue and execute targeted acquisitions of, investments in, or affiliations with complementary healthcare service providers; and

successfully open new facilities or expand existing facilities.

We intend to expand our business in the North Texas service area by developing or acquiring complementary physician group practices and building or acquiring ancillary healthcare service providers. In addition, we intend to expand our business in other strategic service areas by developing strategic alliances with large integrated practices. We believe that the opportunities to execute our physician-led integrated health system model and to develop or acquire targeted physician group practices and ancillary healthcare service providers will place Holdings in a position to achieve its goal of becoming a national integrated health services company.

The state of Texas has adopted a legal doctrine known as the "corporate practice of medicine," which generally prohibits licensed physicians from entering into partnerships, employee relationships, fee-splitting, or other relationships with non-physicians where the physician's practice of medicine is in any way directed by, or fees shared with, a non-physician. Under the Texas corporate practice of medicine doctrine, it is unlawful for any for-profit corporation to employ physicians that provide professional medical


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services. In accordance with the laws of the state of Texas, a subsidiary of Holdings has a long-term management contract to manage the TX CNHO, which employs or contracts with physicians to provide professional medical services to the public. Under this arrangement, our physician practice management entity performs only non-medical management, operational and administrative services, and is prohibited from offering medical services or exercising influence or control over the practice of medicine by the physicians employed by the TX CNHO. We believe that we are in compliance with applicable state laws in relation to the corporate practice of medicine and fee splitting. However, regulatory authorities or other parties, including our affiliated physicians, may assert that, despite these arrangements, we or our physician practice management subsidiary is engaged in the corporate practice of medicine or that the contractual arrangements with the TX CNHO constitute unlawful fee splitting. If we were to be found to be engaged in the corporate practice of medicine, we could be subject to penalties, the contracts could be found legally invalid and unenforceable, in whole or in part, or we could be required to restructure our contractual arrangements with our TX CNHO or its physicians.

Industry Trends

Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Healthcare Reform Law") was enacted. The Healthcare Reform Law is intended to expand health insurance coverage to uninsured individuals and reform the healthcare delivery system with the objectives of improving quality and lowering the overall cost of providing healthcare. Many provisions within the Healthcare Reform Law could impact us in the future, resulting in potential variances in third-party reimbursement rates, payer mix and patient encounter volumes. Although certain provisions of the Healthcare Reform Law are currently in effect, the most impactful provisions will be implemented in future years and the details of those provisions will be shaped significantly by future interpretations of the provisions and execution of those interpretations. Moreover, the Healthcare Reform Law remains the subject of significant legislative debate, including possible amendment, modification or repeal. As a result, we cannot predict with any assurance the ultimate effect of the Healthcare Reform Law and related regulations and interpretive legislation on Holdings, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

Electronic Health Records

The American Recovery and Reinvestment Act of 2009 ("ARRA") provides for incentive payments under the Medicare and Medicaid programs for certain hospitals and physicians that demonstrate meaningful use of certified electronic health record ("EHR") technology. Physicians and other professionals may be eligible for either Medicare or Medicaid incentive payments, but not both. During the nine months ended September 30, 2012 and 2011, we did not recognize any EHR incentive income. Holdings anticipates that nearly all of its physicians will meet the criteria required to demonstrate meaningful use during the various measurement periods in 2012. In connection with the Contribution, Holdings recorded a $1.0 million other current asset for meaningful use incentive payments accrued by the acquired entities under a private company optional accounting policy. Holdings will only recognize 2012 EHR incentive income when participating physicians have met all criteria required to demonstrate meaningful use of EHR technology, which we anticipate to be December 31, 2012. We anticipate that nearly all of our physicians will participate in the meaningful use program in 2013. We have incurred and will continue to incur both capital expenditures and operating expenses in order to implement EHR technology and meet the meaningful use requirements; the timing of recognition of EHR incentive income does not correlate with those expenditures and expenses. We believe that the operational benefits of EHR technology, including anticipated improved clinical outcomes and increased operational and administrative efficiencies, will contribute to our long-term ability to grow our business and meet targeted quality objectives.

Economic Uncertainties

The United States continues to be affected by economic uncertainty resulting in unfavorable economic conditions. As a result, the number of unemployed, underemployed and uninsured workers remains significant and exposed to fluctuation. A shift in payer mix to a higher percentage of self-pay and/or government-sponsored programs would have an unfavorable impact on our net patient service revenue and net income.


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Sources of Revenue

Net Patient Service Revenue

We generate net patient service revenue through the provision of healthcare services to patients and are paid for our services by managed care providers and commercial insurers, governmental agencies, such as Medicare and Medicaid, and the patients we serve. We have entered into agreements with the third-party payers under which we are paid based upon contractually defined criteria that generally result in reimbursement amounts that are less than our established billing rates; patient service revenue is recorded net of these contractual allowances and discounts. To provide for patients' accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, net patient service revenue is reported at the net amount expected to be received.

Net patient service revenue is primarily affected by payer mix, patient encounter volume, the mix of services provided to the patients and estimated collections.

Prior to the Contribution, neither Holdings nor USMD, the historical accounting entity, had patient services revenue. Holdings' patient service revenue before the provision for doubtful accounts by payer is summarized in the table that follows.

                                                               Three and Nine Months
                                                             Ended September 30, 2012
                                                                                Ratio of
                                                                                 Patient
                                                                                 Service
                                                            Amount               Revenue
Medicare                                                 $      4,052                 29.8 %
Medicaid                                                           92                  0.7
Managed care and commerical payers                              9,367                 68.9
Self-pay                                                          343                  2.5

Patient service revenue before provision for
doubtful accounts                                              13,854                102.0
Patient service revenue provision for doubtful
accounts                                                         (268 )               (2.0 )

Net patient service revenue                              $     13,586                100.0 %

Management Services Revenue

We primarily generate management services revenue through services provided to USMD at Arlington and USMD at Fort Worth Management fees are based on a percentage of each hospital's adjusted net patient service revenues, as contractually defined. Hospital net patient service revenue depends on a variety of factors, such as surgical case volume, the case mix or intensity of utilization of services and the mix of third-party payer sources. We also earn management services revenue through the provision of broad-based management and clinical services to cancer treatment centers and lithotripsy service providers. Management fees are based on defined criteria, generally a percentage of collections, and revenue is recognized as services are provided.

We provide managed entities with management, information technology, operations and revenue cycle staff, or a subset of those services, and the entities pay us for the labor costs associated with staffing these functions.

Lithotripsy Services Revenue

We recognize lithotripsy services revenue through the provision of lithotripsy services to hospitals and other healthcare entities by the lithotripsy entities Holdings consolidates. We serve as the general partner or managing member and also have an ownership interest in these consolidated entities. We typically provide these lithotripsy services to our hospital, ambulatory surgery center and physician office clients based on contracted fee-for-service arrangements.


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Key Developments

On June 19, 2012, USMD pursuant to a private placement memorandum offered to certain qualified investors shares of common stock of USMD. Prior to the closing of the Contribution, USMD completed the offering and issued shares of common stock in exchange for aggregate investment, proceeds of $980,000 received from investors. The proceeds of the offering provided additional working capital for the Company and increased the number of record holders of common stock of USMD.

On August 31, 2012, in connection with the Contribution, Holdings and all of its wholly-owned subsidiaries entered into agreements with a consortium of lenders for a six month revolving credit facility of up to $10 million and term loan facilities of $21 million. On the same day, the term loan proceeds were used to pay off long-term debt and capital leases of the acquired entities and pay down a portion of USMD related party debt.

On August 31, 2012, in connection with the Contribution, the former owners of MCNT and UANT, all of whom are physicians entered into ten year employment agreements with the TX CNHO.

On August 31, 2012, Holdings became listed on the NASDAQ securities exchange under the ticker symbol "USMD."

On August 31, 2012, all conditions precedent to the closing of the Contribution were met and the initial closing of the Contribution occurred.


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Results of Operations

Effects of Reverse Acquisition

As a result of the August 31, 2012 Contribution, which was accounted for as a reverse acquisition by USMD into Holdings, results of operations and cash flows have limited comparability to prior periods. Holdings' results of operations and cash flows for the nine months ended September 30, 2012 include eight months of results of operations and cash flows of USMD and one month of results of operations and cash flows of post-combination Holdings. Holdings' statements of operations and cash flows for the nine months ended September 30, 2011 include the historical results and cash flows of USMD for that period.

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

The following table summarizes Holdings' results of operations for the periods
indicated and is used in the discussions that follow (in thousands):



                                               Three Months Ended September 30,                Three Months Variance
                                               2012                       2011                     2012 vs. 2011
                                        Amount        Ratio        Amount        Ratio         Amount           Ratio
Revenues:
Net patient service revenue            $ 13,586         53.1 %    $     -           0.0 %    $   13,586           100.0 %
Management services revenue               6,138         24.0 %       5,890         37.9 %           248             4.2 %
Lithotripsy revenue                       5,869         22.9 %       5,948         38.3 %           (79 )          -1.3 %
Other operating revenue                      -           0.0 %       3,690         23.8 %        (3,690 )        -100.0 %

Net operating revenue                    25,593        100.0 %      15,528        100.0 %        10,065            64.8 %

Operating expenses:
Salaries, wages and employee
benefits                                 14,922         58.3 %       5,454         35.1 %         9,468           173.6 %
Medical supplies and services
expense                                   1,785          7.0 %          90          0.6 %         1,695          1883.3 %
Provision for doubtful accounts              16          0.1 %          (1 )        0.0 %            17         -1700.0 %
Other operating expenses                  5,997         23.4 %       1,903         12.3 %         4,094           215.1 %
Depreciation and amortization               797          3.1 %         205          1.3 %           592           288.8 %

                                         23,517         91.9 %       7,651         49.3 %        15,866           207.4 %

Income from operations                    2,076          8.1 %       7,877         50.7 %        (5,801 )         -73.6 %
Other income (expense), net                 602          2.4 %         200          1.3 %           402           201.0 %

Income before (provision) benefit
for income taxes                          2,678         10.5 %       8,077         52.0 %        (5,399 )         -66.8 %
(Provision) benefit for income taxes        145          0.6 %      (1,587 )      -10.2 %         1,732          -109.1 %

Net income                                2,823         11.0 %       6,490         41.8 %        (3,667 )         -56.5 %
Less: net income attributable to
noncontrolling interests                 (3,183 )      -12.4 %      (3,716 )      -23.9 %           533           -14.3 %

Net income (loss) attributable to
USMD                                   $   (360 )       -1.4 %    $  2,774         17.9 %    $   (3,134 )        -113.0 %

Revenues

Net operating revenue increased 64.8% to $25.6 million for the three months ended September 30, 2012, from $15.5 million for the same period in 2011, due primarily to increases in net patient services revenue related to the Contribution offset by a $3.7 million decline in other operating revenue.

Management services revenue includes revenue earned through the provision of management and staffing services to USMD's managed entities and increased 4.2% to $6.1 million for the three months ended September 30, 2012 from $5.9 million for the same period in 2011. The Contribution resulted in a $0.7 million increase while USMD Hospital Division management services revenue increased $0.1 million as a result of inflation adjustments to the reimbursable management costs associated with the two managed hospitals. The USMD CTC Division management services revenue decreased $0.5 million. The decrease in the USMD CTC Division coincides with a 21.6% decline in treatments for the three months ended September 30, 2012 compared to the same period in 2011.

Other operating revenue for the three months ended September 30, 2011 includes a $3.7 million gain on early termination of USMD CTC Division's management contract by Willowbrook Cancer Treatment Center, LLC ("Willowbrook").


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Operating Expenses

Salaries, wages and employee benefits increased 173.6% to $14.9 million for the . . .

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