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SSY > SEC Filings for SSY > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for SUNLINK HEALTH SYSTEMS INC

Form 10-Q for SUNLINK HEALTH SYSTEMS INC


14-May-2014

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 cash or borrowings to fund working capital, renovations, replacements, expansions and capital improvements at existing healthcare and specialty pharmacy facilities and for acquisitions and replacement of such 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;

the ability or inability to obtain external financing for working capital included under lending agreements;

changes in interest rates under debt agreements

the ability or inability to refinance former or existing indebtedness and potential defaults under existing indebtedness;

restrictions imposed by existing or future 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;

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

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

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

the functionality 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;

Federal and state insurance exchanges and their rules on reimbursement terms;

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, EHR reimbursement and indigent care reimbursement;

changes in or failure to comply with Federal, state or local laws and regulations affecting our Healthcare Facilities and Specialty Pharmacy Segments; and,

the possible enactment of additional Federal healthcare reform laws or reform laws in states where our subsidiaries operate hospital and pharmacy facilities (including Medicaid waivers, bundled payments, accountable care and similar organizations, competitive bidding, and other reforms).

Dispositions, Acquisitions, and Renovation Related Matters

the ability to dispose of underperforming facilities;

the availability and terms of capital to fund acquisitions, improvements, renovations or replacement facilities; 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. Subject to an mandatory requirements of applicable law, 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.

Business Strategy: Operations, Dispositions and Acquisitions, and Going Private

SunLink's business strategy is to focus its efforts on improving internal operations of its existing healthcare facilities and its pharmacy business. We also consider from time to time potential healthcare acquisitions and dispositions, including but not limited to hospitals, physician clinics, ambulatory surgery centers, nursing and long-term care homes, medical office buildings and pharmacy businesses. We consider dispositions of facilities or operations based on a variety of factors including asset values, return on investments, competition from existing and potential competitors, capital improvement needs, corporate strategy and other corporate objectives.


Our efforts over the last two years have been more focused on the disposition of hospital facilities than on acquisitions due to our financial position and need to reduce our leverage and interest expense, the changing nature of certain of our subsidiary hospital markets resulting in, among other things, substantial additional competition, and pressure from Federal and state programs (e.g., Medicare and Medicaid) and private payors to reduce reimbursement for medical services. In July 2012, we sold our Adel, Georgia hospital and its related nursing home, and in December 2012, we sold our Dexter, Missouri hospital and its related home health agency. We currently have engaged advisors to advise us on and to assist us with the possible sale of three other hospital facilities.

Although the Company's situation could change, based on our current financial position as well as uncertainties in the healthcare industry, we are not actively seeking acquisitions for either our Healthcare Facilities Segment or our Specialty Pharmacy Segment. However, during the last fiscal year, we have evaluated certain rural and exurban hospitals and healthcare facilities and businesses which were for sale and monitored other selected healthcare acquisition targets which we believed might become available for sale. Although we have no current plans to do so, from time to time we may consider the acquisition of other complementary based healthcare businesses, outside of our existing business segments, which are or may become available for acquisition.

Going Private Strategy

On February 5, 2013, the Company announced the commencement of a tender offer to purchase at the price of $1.50 per share in cash all of its common shares held by holders of 99 or fewer shares ("odd lots") who owned such shares as of the close of business on February 1, 2013 ("Odd Lot Tender Offer"). In addition to the $1.50 per share price, the Company offered each eligible tendering holder a bonus of one hundred dollars ($100) upon completion of the Odd Lot Tender Offer for the tender of all shares beneficially owned by such holder which were received and not withdrawn prior to the date of expiration of the Odd Lot Tender offer, which was March 26, 2013. In accordance with the terms and conditions of the Offer, SunLink accepted for purchase a total of 2,631 common shares of SunLink tendered by 68 holders pursuant to the Offer. As a result of the completion of the Offer, immediately following payment for the tendered shares, the Company had approximately 9,443,000 common shares issued and outstanding and held by approximately 480 stockholders of record.

The primary purpose of the Odd Lot Tender Offer was to reduce the number of holders of record of the Company's common shares in order to permit the Company to deregister the common shares with the SEC. The Board and management each continues to believe that deregistering the Company's common shares would result in significant cost savings. Since the Odd Lot Tender Offer did not result in the Company's qualifying to deregister with the SEC, the Board may in the future consider other alternatives to achieve that result, including a further tender offer, a reverse stock split or cash out merger (in which a new corporation is formed to merge with the Company and holders of Company shares are cashed out), so long as the Board continues to believe that deregistration remains in the Company's best interests. For an extended discussion of the purposes and reasons for going private, see Section 2 of the Company's Offer to Purchase filed as Exhibit 99.A.1.A to the Company's Schedule 13E-3 filed with the SEC on February 5, 2013.

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 2013 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;

Goodwill, intangible assets and accounting for business combinations;



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                            Nine Months Ended
                                                  March 31,                                    March 31,
                                     2014           2013         % Change         2014           2013         % Change
Net Revenues - Healthcare
Facilities                         $  17,370      $  18,860           -7.9 %    $  53,657      $  56,372           -4.8 %
Net Revenues - Specialty
Pharmacy                              10,217         10,416           -1.9 %       26,385         26,405           -0.1 %
Other Revenues                           131            (36 )          n/a            318              3        10500.0 %

Total Net Revenues                    27,718         29,240           -5.2 %       80,360         82,780           -2.9 %
Costs and expenses                   (28,759 )      (29,415 )         -2.2 %      (83,751 )      (86,655 )         -3.4 %
Electronic Health Records
incentives                                43            (93 )       -146.2 %        1,341            931           44.0 %
Impairment of property, plant
and equipment                              0              0            n/a              0           (789 )          n/a

Operating loss                          (998 )         (268 )       -272.4 %       (2,050 )       (3,733 )         45.1 %
Interest expense - net                  (303 )         (300 )          1.0 %         (922 )       (1,506 )        -38.8 %
Gain on sale of assets                    18              0            n/a             18              0            n/a

Loss from continuing operations
before income taxes                $  (1,283 )    $    (568 )       -125.9 %    $  (2,954 )    $  (5,239 )         43.6 %

Healthcare Facilities Segment:
Admissions                               763            934            -18 %        2,285          2,560            -11 %
Equivalent admissions                  2,383          2,988            -20 %        7,330          8,759            -16 %
Surgeries                                515            389             32 %        1,477          1,377              7 %
Revenue per equivalent admission   $   7,289      $   6,292             16 %    $   7,320      $   6,415             14 %

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

Healthcare Facilities Segment Net Revenues

The following table sets forth the percentage of net patient revenues from major
payors for the Healthcare Facilities Segment for the periods indicated:



                                       Three Months Ended           Nine Months Ended
                                            March 31,                   March 31,
                                       2014           2013          2014          2013
    Source:
    Medicare                              43.3 %        43.1 %         41.9 %       39.7 %
    Medicaid                              20.2 %        19.3 %         20.0 %       19.7 %
    Managed Care Insurance & Other        23.3 %        23.5 %         24.3 %       26.4 %
    Self-pay                              13.2 %        14.1 %         13.8 %       14.2 %

                                         100.0 %       100.0 %        100.0 %      100.0 %

Medicare as a percentage of net patient revenue increased in the three months ended March 31, 2014 due to a shift in payor mix, however, Medicare net revenues of $8,572 for the three months ended March 31, 2014 decreased $653 from $9,225 for the three months ended March 31, 2013. Self-pay as a percentage of net patient revenue decreased in the three months ended March 31, 2014 due to decreased self-pay volume as compared to the prior year period. Additionally, Managed Care Insurance and Other as a percentage of total net revenues decreased in the three months ended March 31, 2014 compared to the comparable prior year periods due to decreased revenue as a result of declining volumes. Managed Care Insurance and Other net revenue decreased 7.8% from $5,014 for the three months ending March 31, 2013 to $4,623 for the three months ended March 31, 2014. Self-pay net revenues decreased 13.6% from $3,014 for the three months ended March 31, 2013 to $2,606 for the three months ended March 31, 2014.

Medicare as a percentage of net patient revenue increased in the nine months ended March 31, 2014 due to increased Medicare volume as compared to prior year, particularly in the geriatric psychiatric units ("GPUs"). Medicare patient days for the three GPUs increased from 32.3% of total patient days at March 31, 2013 to 48.7% of total patient days at March 31, 2014. Medicare net patient revenues increased $101 compared to the comparable prior year period. Managed Care Insurance and Other and Self-pay as a percentage of total net revenues decreased in the nine months ended March 31, 2014 compared to the comparable prior year periods due to decreased revenue as a result of declining volumes. Managed Care Insurance and Other net revenue decreased 12.7% from $17,077 for the nine months ended March 31, 2013 to $14,916 for the nine months ended March 31, 2014. Self-pay net revenues decreased 7.5% from $9,207 for the nine months ended March 31, 2013 to $8,517 for the nine months ended March 31, 2014.

Specialty Pharmacy Segment Net Revenues

Specialty Pharmacy net revenues for the three months ended March 31, 2014 were $10,217, a decrease of $199, or 1.9%, from $10,416 for the three months ended March 31, 2013. Specialty Pharmacy net revenues for the nine months ended March 31, 2014 were $26,385, a decrease of $20, or 0.1%, from $26,405 for the three months ended March 31, 2013.


Healthcare Facilities Segment Cost and Expenses

Costs and expenses for our Healthcare Facilities Segment, including depreciation
and amortization, were $17,611 and $18,035 for the three months ended March 31,
2014 and 2013, respectively. Costs and expenses for our Healthcare Facilities
Segment, including depreciation and amortization, were $52,855 and $55,584 for
the nine months ended March 31, 2014 and 2013, respectively.



                                                          Cost and Expenses
                                                       as a % of Net Revenues
                                           Three Months Ended           Nine Months Ended
                                                March 31,                   March 31,
                                           2014            2013         2014           2013
 Salaries, wages and benefits                 59.7 %        58.0 %         59.4 %       58.4 %
 Supplies                                     11.7 %        11.5 %         11.9 %       12.0 %
 Purchased services                           10.9 %         7.6 %         10.8 %        8.2 %
 EHR incentive payments                       -0.2 %         1.8 %         -2.5 %       -1.7 %
 Other operating expenses                     16.6 %        13.9 %         16.2 %       16.7 %
 Rent and lease expense                        2.5 %         2.3 %          2.5 %        2.3 %
 Depreciation and amortization expense         3.0 %         3.5 %          2.9 %        3.6 %

Salaries, wages and benefits increased as a percentage of net revenue in the three and nine months ended March 31, 2014 due to increased employee medical claims incurred as compared to the three and nine months ended March 31, 2013.

Purchased services increased as a percentage of net revenues for the three and nine months ended March 31, 2014 compared to the comparable prior year periods due to increased costs associated with certain outside services provided to the hospital facilities and information technology services.

EHR incentive payments as a percentage of net revenue resulted in negative costs of 0.2% and 2.5% of net revenue, respectively, for the three and nine months ended March 31, 2014 due to $1,298 of EHR incentive payments recognized compared to $1,024 recognized in the three and nine months ended March 31, 2013. The increase resulted from positive prior year cost report settlements for electronic health records in the amount of $705 recorded in the three and nine months ended March 31, 2014 as compared to negative prior year cost report adjustments in the amount of $140 in the comparable prior year periods partially offset by a decrease in the amounts of Medicaid EHR incentive payments recognized in the three and nine months ended March 31, 2014.

Other operating expenses increased as a percentage of net revenues for the three months ended March 31, 2014 compared to the comparable prior year period as a result of a lower professional and general liability adjustment required during the current year quarter due to fewer claims outstanding as of March 31, 2014. Other operating expenses decreased as a percentage of net revenues for the nine months ended March 31, 2014 compared to the comparable prior year period due to decreased insurance expense as a result of nonrecurrence of large insurance claim settlements recorded in the nine months ended March 31, 2013 partially offset by a lower professional and general liability adjustment required during the current year period resulting from fewer claims outstanding as of March 31, 2014.

Depreciation and amortization expense for the three months ended March 31, 2014 and 2013 was $515 and $496, respectively. For the nine months ended March 31, 2014 and 2013, depreciation and amortization expense was $1,552 and $1,856, respectively. The decrease in the three and nine months ended March 31, 2014 compared to the comparable prior year periods was due to assets being fully depreciated in the current year periods as compared to the prior year periods.


Specialty Pharmacy Segment Cost and Expenses

Cost and expenses for our Specialty Pharmacy Segment, including depreciation and
amortization, were $9,710 and $10,010 for the three months ended March 31, 2014
and 2013, respectively. Cost and expenses for our Specialty Pharmacy Segment,
including depreciation and amortization, were $25,726 and $26,133 for the nine
months ended March 31, 2014 and 2013, respectively.



                                                          Cost and Expenses
                                                       as a % of Net Revenues
                                           Three Months Ended           Nine Months Ended
                                                March 31,                   March 31,
                                           2014            2013         2014           2013
 Cost of goods sold                           69.3 %        70.3 %         67.6 %       68.5 %
 Salaries, wages and benefits                 16.4 %        16.5 %         19.3 %       19.2 %
 Provision for bad debts                       0.7 %         0.5 %          0.6 %        1.2 %
 Supplies                                      0.3 %         0.5 %          0.5 %        0.6 %
 Purchased services                            3.3 %         3.2 %          3.7 %        3.7 %
 Other operating expenses                      2.7 %         2.7 %          3.1 %        3.1 %
 Rent and lease expense                        0.7 %         0.7 %          0.8 %        0.8 %
 Depreciation and amortization expense         1.8 %         1.8 %          2.0 %        2.0 %

Cost of goods sold as a percent of net revenues decreased in the three and nine month periods ended March 31, 2014 as compared to the comparable periods of the prior year due to the current period sales product mix and improved purchasing contracts in the current year periods as compared to the comparable prior year periods.

Provision for bad debts as a percent of net revenues decreased in the three and nine month periods ended March 31, 2014 as compared to the comparable periods of the prior year due primarily to the implementation of additional business office and intake policies and procedures, offset somewhat by the continued decline of economic conditions in the region.

Impairment of Long-Lived Assets

Central Alabama Medical Associates, LLC ("CAMA"), an indirect subsidiary of the Company owns a hospital facility (currently closed) and related equipment in Clanton, Alabama, which it formerly leased to a third party hospital operator. The net realizable value of the hospital 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 during the first quarter of fiscal 2013. The Company's future plans for the property include repurposing it as a multi-tenant medical park.

Corporate Overhead Costs and Expenses

Cost and expenses for Corporate Overhead including depreciation and amortization, was $1,395 and $1,463 for the three months ended March 31, 2014 and 2013, respectively. Cost and expenses for Corporate Overhead including depreciation and amortization, was $3,829 and $4,007 for the nine months ended March 31, 2014 and 2013, respectively.

Operating Loss

SunLink had an operating loss of $998 and $268 for the three months ended March 31, 2014 and 2013, respectively. The increased operating loss for the three months ended March 31, 2014 compared to the prior year period resulted from decreases healthcare facilities net revenues due to lower volumes than in the prior year period and an increase in other operating expense in the three months ended March 31, 2014 compared to the comparable prior year period. . . .

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