XNAS:IPCM IPC The Hospitalist Company, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

 

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

For the quarterly period ended June 30, 2012.

OR

 

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

For the transition period from                    to

Commission file number: 001-33930

 

 

IPC THE HOSPITALIST COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4562058

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4605 Lankershim Boulevard, Suite 617

North Hollywood, California

  91602
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (888) 447-2362

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x      Accelerated filer   ¨
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

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

As of July 24, 2012, there were 16,643,597 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 


IPC The Hospitalist Company, Inc.

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

 

         Page  
  PART I   

Item 1

 

Consolidated Financial Statements (unaudited)

  
 

Consolidated Balance Sheets – June 30, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Income – Three and six months ended June 30, 2012 and 2011

     4   
 

Consolidated Statements of Cash Flows – Six months ended June 30, 2012 and 2011

     5   
 

Notes to Consolidated Financial Statements

     6   

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

     20   

Item 4

 

Controls and Procedures

     20   
  PART II   

Item 1

 

Legal Proceedings

     21   

Item 6

 

Exhibits

     21   

Signatures

     22   

Exhibit Index

     23   

Note: Items 1A, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

 

2


PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

IPC The Hospitalist Company, Inc.

Consolidated Balance Sheets

(dollars in thousands, except for share data)

 

     June 30,
2012
     December 31,
2011
 
     (Unaudited)         

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 8,743       $ 17,752   

Accounts receivable, net

     75,999         68,010   

Insurance receivable for malpractice claims - current portion

     9,498         8,693   

Prepaid expenses and other current assets

     10,757         13,139   
  

 

 

    

 

 

 

Total current assets

     104,997         107,594   

Property and equipment, net

     5,928         5,112   

Goodwill

     194,650         173,688   

Other intangible assets, net

     1,753         1,812   

Deferred tax assets, net

     1,522         1,522   

Insurance receivable for malpractice claims - less current portion

     16,641         15,186   
  

 

 

    

 

 

 

Total assets

   $ 325,491       $ 304,914   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable and accrued liabilities

   $ 3,135       $ 3,962   

Accrued compensation

     22,958         21,640   

Payables for practice acquisitions

     17,331         23,724   

Medical malpractice and self-insurance reserves, current portion

     10,159         9,383   

Deferred tax liabilities

     750         750   
  

 

 

    

 

 

 

Total current liabilities

     54,333         59,459   

Medical malpractice and self-insurance reserves, less current portion

     35,885         32,803   
  

 

 

    

 

 

 

Total liabilities

     90,218         92,262   

Stockholders’ equity:

     

Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued

     0         0   

Common stock, $0.001 par value, 50,000,000 shares authorized, 16,639,602 and 16,474,988 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     17         16   

Additional paid-in capital

     145,854         139,579   

Retained earnings

     89,402         73,057   
  

 

 

    

 

 

 

Total stockholders’ equity

     235,273         212,652   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 325,491       $ 304,914   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


IPC The Hospitalist Company, Inc.

Consolidated Statements of Income

(in thousands, except for per share data)

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Net revenue

   $ 128,472      $ 111,732      $ 258,265      $ 225,119   

Operating expenses:

        

Cost of services—physician practice salaries, benefits and other

     94,007        81,784        189,105        163,881   

General and administrative

     20,432        18,419        40,506        36,194   

Net change in fair value of contingent consideration

     430        188        514        480   

Depreciation and amortization

     973        795        1,821        1,550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     115,842        101,186        231,946        202,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     12,630        10,546        26,319        23,014   

Investment income

     4        4        8        9   

Interest expense

     (92     (22     (174     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12,542        10,528        26,153        22,979   

Income tax provision

     4,703        4,000        9,808        8,732   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,839      $ 6,528      $ 16,345      $ 14,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.47      $ 0.40      $ 0.99      $ 0.87   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.46      $ 0.39      $ 0.97      $ 0.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


IPC The Hospitalist Company, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

Operating activities

    

Net income

   $ 16,345      $ 14,247   

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

    

Depreciation and amortization

     1,821        1,550   

Stock-based compensation expense

     3,088        2,251   

Net change in fair value of contingent consideration

     514        480   

Changes in assets and liabilities:

    

Accounts receivable

     (7,989     (8,633

Prepaid expenses and other current assets

     2,382        1,470   

Accounts payable and accrued liabilities

     (845     (424

Accrued compensation

     1,318        (784

Medical malpractice and self-insurance reserves, net

     1,598        1,805   
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,232        11,962   
  

 

 

   

 

 

 

Investing activities

    

Acquisitions of physician practices

     (28,273     (7,748

Purchase of property and equipment

     (2,174     (1,460
  

 

 

   

 

 

 

Net cash used in investing activities

     (30,447     (9,208
  

 

 

   

 

 

 

Financing activities

    

Proceeds from long-term debt

     15,000        0   

Repayments of long-term debt

     (15,000     0   

Net proceeds from issuance of common stock

     2,521        1,991   

Excess tax benefits from stock-based compensation

     685        971   
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,206        2,962   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (9,009     5,716   

Cash and cash equivalents, beginning of period

     17,752        18,935   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,743      $ 24,651   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for:

    

Interest

   $ 173      $ 44   
  

 

 

   

 

 

 

Income taxes

   $ 10,549      $ 9,951   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

June 30, 2012

Note 1. Operations and Significant Accounting Policies

Business

IPC The Hospitalist Company, Inc. and its wholly-owned subsidiaries (the “Company,” “IPC,” “we,” “us,” and “our”) is a national physician group practice company that operates and manages full-time hospitalist practices. Hospitalists focus on a patient’s care from the time of admission to discharge, working in close consultation with primary care physicians, other referring physicians and medical providers to coordinate the inpatient care delivery system and manage the entire inpatient episode of care. Our affiliated hospitalists practice in inpatient facilities, including acute care hospitals, long-term acute care facilities, specialty hospitals, psychiatric facilities and post-acute care facilities. The physicians are primarily full-time employees of our subsidiaries or consolidated professional medical corporations managed under long-term management agreements (Professional Medical Corporations), although part-time and temporary physicians are also employed or contracted on an as-needed basis. Also, unless otherwise expressly stated or the context otherwise requires, “our affiliated hospitalists” refer to physicians, nurse practitioners and physician assistants employed or contracted by either our wholly-owned subsidiaries or our Professional Medical Corporations. References to “practices” or “practice groups” refer to our Professional Medical Corporations and the wholly-owned subsidiaries of IPC that provide medical services, unless otherwise expressly stated or the context otherwise requires.

We prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on the same basis as our audited annual financial statements. In our opinion, these financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the following disclosures, when read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2011, are adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 23, 2012.

Principles of Consolidation

Our consolidated financial statements include the accounts of IPC The Hospitalist Company, Inc. and its wholly owned subsidiaries and consolidated Professional Medical Corporations managed under long-term management agreements. Some states have laws that prohibit business entities, such as IPC, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (collectively known as the “corporate practice of medicine”), or engaging in certain arrangements with physicians, such as fee-splitting. In states that have these restrictions, we operate by maintaining long-term management contracts with the Professional Medical Corporations, which are each owned and operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the management agreements, we provide and perform all non-medical management and administrative services, including financial management, information systems, marketing, risk management and administrative support. The management agreements have an initial term of 20 years and are automatically renewable for successive 10-year periods unless terminated by either party for cause. The management agreements are not terminable by the Professional Medical Corporations, except in the case of gross negligence, fraud, or other illegal acts by us, or bankruptcy of IPC.

Through the management agreements and our relationship with the stockholders of the Professional Medical Corporations, we have exclusive authority over all non-medical decision making related to the ongoing business operations of the Professional Medical Corporations. Further, our rights under the management agreements are unilaterally salable or transferable. Based on the provisions of the agreements, we have determined that the Professional Medical Corporations are variable interest entities (VIE’s), and that we are the primary beneficiary because we have controls over the operations of these VIE’s. Consequently, we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the agreements. All intercompany balances and transactions have been eliminated in consolidation.

 

6


Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions of the fair value of certain reported amounts of assets, liabilities, revenues and expenses at the date and for the periods that the financial statements are prepared. Significant estimates include the estimated net realizable value of accounts receivable, medical malpractice insurance receivable and payable for known claims, liabilities for claims incurred but not reported (IBNR) related to medical malpractice, fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment.

The process of estimating these assets and liabilities involves judgment decisions, which are subject to an inherent degree of uncertainty. Actual results could differ from those estimates. The results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2012.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The carry amount of our borrowings under our line of credit approximates fair value.

Accounts Receivable and Concentration of Credit Risk

For the six months ended June 30, 2012 and 2011, total patient volume consisted of the following percentage from Medicare and Medicaid programs:

 

     Six Months Ended June 30,  
     2012     2011  

Medicare and Medicaid patients

     52     51

Our accounts receivable are stated at the amounts expected to be collected. Except with respect to the Medicare and Medicaid programs, concentrations of credit risk, which consist primarily of accounts receivable, is limited due to the large number of payors that compose our diverse payor mix and patient base. Accounts receivable from Medicare and Medicaid made up the following percentage of total net accounts receivable:

 

     June 30,     December 31,  
     2012     2011  

Percentage of receivables from Medicare and Medicaid

     34     36

Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2012 are as follows (in thousands):

 

Goodwill - beginning balance at January 1, 2012

   $ 173,688   

Goodwill acquired during period

     20,962   
  

 

 

 

Goodwill - ending balance at June 30, 2012

   $ 194,650   
  

 

 

 

Medical Malpractice Liability Insurance

We maintain medical malpractice insurance coverage that indemnifies us and our employed health care professionals on a claims-made basis. Our claims-made coverage covers those claims reported during the policy period, which ends December 31 of each year, on a first dollar coverage up to our policy limits on new claims reported during the policy period. In December 2011, we renewed our annual professional liability insurance policy for 2012 effective January 1, 2012 under the same terms as our 2011 policy. We expect to be able to continue to obtain coverage in future years; however, there can be no assurance that we will obtain substantially similar coverage as is provided under the 2012 policy at acceptable costs and on favorable terms upon expiration.

 

7


We record our medical malpractice reserves, on an undiscounted basis, for self-insured deductibles, claims incurred and reported and claims incurred but not reported during the policy period, based on actuarial loss projections using historical loss patterns. For claims incurred and reported, an insurance receivable from our carrier has been recorded pursuant to GAAP.

Total accrued medical malpractice reserves and related insurance receivables were as follows (in thousands):

 

     June 30, 2012      December 31, 2011  
     Assets      Liabilities      Assets      Liabilities  
     Insurance
Receivable
     Claims
Reserve
     IBNR
Reserve
     Total
Liabilities
     Insurance
Receivable
     Claims
Reserve
     IBNR
Reserve
     Total
Liabilities
 

Current Portion

   $ 9,498       $ 9,687         472         10,159       $ 8,693       $ 8,956         427         9,383   

Long-term Portion

     16,641         16,641         19,244         35,885         15,186         15,186         17,617         32,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,139       $ 26,328         19,716         46,044       $ 23,879       $ 24,142         18,044         42,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recently Adopted Accounting Principles

In September 2011, the Financial Accounting Standard Board (FASB) issued a GAAP update on goodwill to allow an entity the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the entity shall perform the quantitative two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. We adopted this revised GAAP effective on January 1, 2012. The adoption of this revised GAAP does not have a material effect on our financial position, results of operations or cash flows.

In July 2011, the FASB issued a GAAP update on revenue recognition for certain health care entities that recognize significant amounts of patient service revenue without assessing the patient’s ability to pay. This revised GAAP requires such health care entities to present the provision for bad debt related to patient service revenue as a deduction from patient service revenue (net of contractual allowance and discounts) on their statement of income. It also requires additional disclosures of patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. We adopted this revised GAAP effective on January 1, 2012. The adoption of this revised GAAP does not have a material effect on our financial position, results of operations or cash flows as we do not recognize a significant amount of revenue at the time services are rendered without assessing the patient’s ability to pay.

In May 2011, the FASB issued a GAAP update on fair value measurement, which eliminates certain differences between U.S. GAAP and International Financial Reporting Standards (IFRS), resulting in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. It also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. We adopted this revised GAAP effective on January 1, 2012. The adoption of this revised GAAP does not have a material effect on our financial position, results of operations or cash flows.

New Accounting Principles

None are applicable to our company.

Note 2. Acquisitions

We recognize all of the assets acquired, liabilities assumed and any contingent consideration at the acquisition-date fair value and expense all transaction related costs.

In connection with the acquisition of hospitalist physician practices, we generally record goodwill and other identifiable intangible assets consisting of physician and hospital agreements. The results of operations of the acquired practices are included in the consolidated financial statements from the date of acquisition. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements generally provide for future consideration to be paid based upon the achievement of certain operating results of the acquired practices as of specified measurement dates. These additional payments are not contingent upon the future employment of the sellers. The estimated fair value of additional future consideration is recognized at the acquisition-date. Subsequent changes, if any, to the acquisition-date fair value are recognized as part of on-going operations.

 

8


During the six months ended June 30, 2012, we completed the acquisition of assets of four hospitalist physician practices. In addition to the initial consideration paid at the close of these transactions, three of the asset purchase agreements provide for additional consideration to be paid based upon the future operating results of the acquired practices as of specified measurement dates. The contingent consideration for one acquisition was recorded on a provisional basis as of June 30, 2012, pending completion of the valuation study as of the acquisition date.

The following table summarizes the total amounts recorded during the six months ended June 30, 2012, related to the acquisition of hospitalist practices (in thousands):

 

Acquired assets – paid and accrued:

  

Goodwill

   $ 20,962   

Other intangible assets

     404   
  

 

 

 

Total acquired assets

     21,366   
  

 

 

 

Cash paid for acquisitions:

  

2012 transactions

     (12,700

Contingent consideration

     (15,565

Other - prior year transactions

     (8
  

 

 

 

Total cash paid for acquisitions

     (28,273
  

 

 

 

Decrease in payables for practice acquisitions

     (6,907

Net change in fair value of contingent consideration

     514   
  

 

 

 

Net change in payables for practice acquisitions

     (6,393

Payables for practice acquisitions, beginning of period

     23,724   
  

 

 

 

Payables for practice acquisitions, end of period

   $ 17,331   
  

 

 

 

Our payable for practice acquisitions balance of $17,331,000 at June 30, 2012 is composed of $17,191,000 of accrued contingent consideration measured at fair value and $140,000 of liabilities recorded at undiscounted carrying value which approximates fair value.

Note 3. Debt

Our secured revolving credit agreement (Credit Facility) provides a revolving line of credit of $75.0 million and contains an “accordion” feature that allows an increase of $25.0 million to the Credit Facility with lender approval. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. In March 2012, we borrowed $15.0 million under the Credit Facility bearing interest at 1.0% per annum, which was repaid during the second quarter 2012. As of June 30, 2012, we had no borrowings outstanding, a letter of credit of $0.1 million outstanding and $74.9 million available under the Credit Facility.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.25%, or the lender’s prime rate plus 0% to 0.25%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.

The Credit Facility is guaranteed by our subsidiaries and affiliated Professional Medical Corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of June 30, 2012, we were in compliance with such financial covenants and restrictions.

 

9


Note 4. Income Taxes

Following are the income tax provisions and effective tax rates for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Income tax provision

   $ 4,703      $ 4,000      $ 9,808      $ 8,732   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

     37.5     38.0     37.5     38.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The decrease in the effective tax rate during 2012 as compared to the same period of 2011 was due primarily to a decrease in our effective state tax rate. The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due primarily to state income taxes.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax expense. As of June 30, 2012, we did not have any estimated interest and penalties related to uncertain tax positions.

The tax years 2007 to 2010 remain open to examination by the major taxing jurisdictions to which we are subject. The statute of limitations for tax years 1997 to 2006 has expired, except that the tax years 1997 to 2002 are subject to adjustment of net operating losses by the Internal Revenue Service. We are subject to taxation in the United States and various state jurisdictions. A state examination has been initiated for one of our subsidiaries. The outcome of such examination cannot be predicted with certainty; however, we believe that the ultimate resolution will not have a material effect on our financial position, results of operations or cash flows.

We make our best estimate of the tax rate expected to be applicable for the full fiscal year. The rate so determined is used to compute our income taxes expense for an interim period.

Note 5. Stock-Based Compensation

At June 30, 2012, we had a stock-based employee compensation program, for which we had reserved a total of 4,943,170 common shares for issuance under our 2007 and 2012 Equity Participation Plans (Equity Plan). Pursuant to our 2012 Equity Participation Plan, which was approved by our stockholders on June 7, 2012, a total of 1,422,130 shares of our common stock are available for issuance under such plan. Subsequent to the approval of our 2012 Equity Participation Plan, no new awards will be issued under the 2007 Equity Participation Plan. As of June 30, 2012, there were 1,423,379 shares of our common stock available for issuance under our Equity Plan, which included the canceled and forfeited shares issued prior to our 2012 Equity Participation Plan.

All option awards granted during the six months ended June 30, 2012 were issued with exercise prices equal to the closing price of our common stock on the NASDAQ Global Select Market on the dates of grant. The options under our Equity Plan generally vest over a four-year period from date of grant, and unrestricted options terminate on the 10th anniversary of the agreement date. Restricted stock awards generally vest over a four-year period from date of the award and performance stock awards generally vest over two to three years from date of the award.

Stock-based compensation expense is recognized over the period when the options, restricted stock awards, performance stock awards and our employee stock purchase plan shares vest, which is included in total general and administrative expenses as follows (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Stock-based compensation expense

   $ 1,624       $ 1,259       $ 3,088       $ 2,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


As of June 30, 2012, total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under our Equity Plan and the weighted-average period of years expected to recognize those costs are as follows (dollars in thousands).

 

     Total Unrecognized
Compensation Cost
     Weighted -average
Remaining Contractual
Term
 
            (Years)  

Stock option

   $ 9,562         7.40   
  

 

 

    

 

 

 

Restricted/Performance stock

   $ 3,167         3.24   
  

 

 

    

 

 

 

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

 

     Six months ended June 30,  
     2012     2011  

Risk-free interest rate

     1.21     2.42

Expected volatility

     39.86     39.44

Expected option life (in years)

     6.16        5.90   

Expected dividend yield

     0.00     0.00

The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues. The expected volatility is based on historical volatility levels of our public company peer group and the volatility of our stock price since our initial public offering in January 2008. The expected option life of each award granted was calculated using the “simplified method” in accordance with GAAP.

The grant date fair value of each restricted stock award or performance stock award is based on the closing stock price on the grant date of the award as reported by NASDAQ Global Select Market.

The following table summarizes the stock option activities in our Equity Plan during the six months ended June 30, 2012.

 

     Shares     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
     Weighted-
Average
Fair Value
 
                  (Years)      (in ‘000)         

Options outstanding as of December 31, 2011

     1,581,332      $ 25.92             $ 11.02   

Changes during period:

             

Granted

     216,800        37.29               14.96   

Exercised

     (109,971     16.20               6.67   

Cancelled/Forfeited

     (397     1.60               0.31   

Expired

     (852     0.77               0.14   
  

 

 

            

Options outstanding as of June 30, 2012

     1,686,912      $ 28.03         7.40       $ 29,382       $ 11.82   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable as of June 30, 2012

     1,001,675      $ 21.92         6.57       $ 23,520       $ 9.29   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

11


The following table summarizes the restricted stock award and performance stock award activities in our Equity Plan during the six months ended June 30, 2012.

 

     Shares     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
     Weighted-
Average
Fair Value
 
           (Years)      (in ‘000)         

Restricted/performance stock awards outstanding as of December 31, 2011

     31,496            $ 40.87   

Changes during period:

          

Granted

     80,535              36.57   

Released

     (7,604           33.96   
  

 

 

         

Restricted/performance stock awards outstanding as of June 30, 2012

     104,427        3.24       $ 4,733       $ 38.05   
  

 

 

   

 

 

    

 

 

    

 

 

 

Note 6. Earnings Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income for the period by the weighted average number of shares outstanding during the period plus the dilutive effect of our outstanding stock awards and shares issuable under our employee stock purchase plan using the treasury stock method.

The calculations of basic and diluted net income per share for the three and six months ended June 30, 2012 and 2011 are as follows (dollars in thousands, except for per share data):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Basic:

           

Net income

   $ 7,839       $ 6,528       $ 16,345       $ 14,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding

     16,545,600         16,382,869         16,525,324         16,346,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share

   $ 0.47       $ 0.40       $ 0.99       $ 0.87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income

   $ 7,839       $ 6,528       $ 16,345       $ 14,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding

     16,545,600         16,382,869         16,525,324         16,346,383   

Weighted average number of dilutive common shares equivalents

     385,498         477,334         364,019         439,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common shares and common share equivalents

     16,931,098         16,860,203         16,889,343         16,786,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.46       $ 0.39       $ 0.97       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding stock options with an exercise price above market are excluded from our diluted computation as their effect would be anti-dilutive. As of June 30, 2012, there were approximately 432,000 outstanding stock options with an exercise price above the average market price for the six months ended June 30, 2012.

 

12


Note 7. Commitments and Contingencies

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. The Company has produced responsive documents and will discuss with representatives of the government additional future productions to be made if requested. We have been informed by the DOJ that a qui tam whistleblower complaint related to this investigation naming the Company has been filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also have been informed that several state attorneys general are examining our Medicaid claims in coordination with the DOJ. It is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

Note 8. Fair Value Measurement

Some of our assets and liabilities are measured and recorded at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The established fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). This hierarchy is used to measure fair value as follows:

 

   

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for the asset or liability.

 

   

Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity.

The following table presents our liabilities measured at fair value on a recurring basis as of June 30, 2012 (in thousands):

 

    

Quoted Price In

Active Markets for

Identical Instruments

    

Significant Other

Observable

Inputs

    

Significant

Unobservable

Inputs

        
     (Level 1)      (Level 2)      (Level 3)      Total Balance  

Accrued contingent consideration for practice acquisitions (included in payables for practice acquisitions)

   $ 0       $ 0       $ 17,191       $ 17,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


The following table presents a rollforward of our liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the three and six months ended June 30, 2012 (in thousands):

 

     Three Months
Ended
June 30, 2012
    Six Months
Ended
June 30, 2012
 

Accrued contingent consideration for practice acquisitions

    

Beginning balance

   $ 16,465      $ 23,624   

Addition through acquisition transactions

     1,269        8,618   

Change in fair value realized

     430        514   

Payments

     (973     (15,565
  

 

 

   

 

 

 

Ending balance

   $ 17,191      $ 17,191   
  

 

 

   

 

 

 

Our payable for practice acquisitions totaling $17,331,000 at June 30, 2012, is composed of $17,191,000 of accrued contingent consideration measured at fair value and $140,000 of liabilities recorded at undiscounted carrying value which approximates fair value. The fair value of our accrued contingent consideration is determined using widely accepted valuation techniques, which include the income approach for estimating future consideration to be paid based on projected earnings of our acquired practices as of specified measurement dates. The income approach involves the use of a probability-weighted discounted cash flow model based on significant inputs not observable in the market. The significant inputs include a discount rate of 2.6%, and 100% probability of achieving the estimated projected earnings.

Because our accrued contingent consideration is generally based on a certain multiple of earnings of the acquired practices during a specified measurement period, a relatively small change in such projected earnings may result in a material change to the fair value of such contingent consideration liability with a corresponding adjustment to income from operations. We reassess our projected earnings and the related fair value of our accrued contingent consideration for practice acquisitions on a quarterly basis.

Note 9. Subsequent Events

Subsequent to June 30, 2012, we acquired the assets of one hospitalist physician practice.

 

14


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

The following management’s discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (SEC) on February 23, 2012.

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of IPC that are based on management’s current expectations, estimates, projections, and assumptions about our business. Words such as “may,” “will,” “could,” “should,” “target,” “potential,” “project,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in our most recent Annual Report on Form 10-K, including the section entitled “Risk Factors,” as well as those discussed from time to time in the Company’s other SEC filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Quarterly Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Overview and Recent Developments

We are a leading provider of hospitalist services in the United States. Hospitalist medicine is organized around inpatient care, primarily delivered in acute hospitals, but also in post-acute facilities, and is focused on providing, managing and coordinating the care of patients in facility based care settings. We believe we are the largest dedicated hospitalist company in the United States based on revenues, patient encounters and number of affiliated hospitalists. Our early entry into the emerging hospitalist industry has permitted us to establish a reputation and leadership position that we believe is closely identified with hospitalist medicine.

Acquisitions

During the six months ended June 30, 2012, we acquired the assets of four hospitalist physician practices for a total estimated purchase price of $21,366,000. In connection with these acquisitions, we recorded goodwill of $20,962,000 and identifiable intangible assets of $404,000. Total transaction costs of $137,000 for our acquisition activities during the six months ended June 30, 2012 were expensed as incurred.

In connection with these acquisitions, we recorded liabilities of $8,618,000 representing the fair value of future contingent considerations to be paid based upon the estimated achievement of certain operating results of the acquired practices as of certain measurement dates. The fair value of such contingent considerations is re-evaluated on a quarterly basis based on changes in our estimate of the operating results of future payments. The changes, if any, in fair value are recognized in our results of operations.

Subsequent to June 30, 2012, we acquired the assets of one hospitalist physician practice.

Rate Changes by Government Sponsored Programs

The Medicare program reimburses for our services based upon the rates in the Medicare Physician Fee Schedule, and each year the Medicare program updates the Physician Fee Schedule reimbursement rates based on a formula approved by Congress in the Balanced Budget Act of 1997. Many private payors use the Medicare fee schedule to determine their own reimbursement rates.

The Medicare law requires the Centers for Medicare and Medicaid Services (CMS) to adjust the Physician Fee Schedule payment rates annually based on an update formula which includes application of the Sustainable Growth Rate (SGR) that was adopted in the Balanced Budget Act of 1997. This formula has yielded negative updates every year beginning in 2002, and numerous subsequent administrative and legislative actions since then have either delayed, modified or overrode the SGR formula to prevent the reimbursement reductions each year through 2012. CMS has determined that, effective January 1, 2012,

 

15


the SGR formula results in a payment cut of approximately 27 percent. Congress, however, enacted the Temporary Payroll Tax Cut Continuation Act of 2011, which blocked this cut through the end of February 2012. In February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which blocks the cut through the end of 2012. While Congress has repeatedly intervened to mitigate the negative reimbursement impact associated with the SGR formula, there is no guarantee that Congress will continue to do so in the future. Moreover, the existing methodology may result in significant yearly fluctuations in the Physician Fee Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services. Unless Congress enacts a change in the SGR methodology, the uncertainty regarding reimbursement rates and fluctuation will continue to exist.

Another provision that affects physician payments is an adjustment under the Medicare statute to reflect the geographic variation in the cost of delivering physician services, by comparing those costs to the national average. This concerns the “work” component of the Geographic Practice Cost Indices (GPCI). If Congress does not block this adjustment, payments would be decreased to any geographic area with an index of less than 1.0. Congress, however, enacted the Temporary Payroll Tax Cut Continuation Act of 2011, which blocked this cut through the end of February 2012. In February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which blocks the cut through the end of 2012. Although Congress has extended the work GPCI floor several times, there is no guarantee that Congress will block the adjustment in the future, which could result in a decrease in payments we receive for physician services.

Congress has a strong interest in reducing the federal debt, which may lead to new proposals designed to achieve savings by altering payment policies. The Budget Control Act of 2011 (BCA) established a Joint Select Committee on Deficit Reduction, which was tasked with achieving a reduction in the federal debt level of at least $1.2 trillion. That Committee did not draft a proposal by the BCA’s deadline. As a result, automatic cuts in various federal programs will take place, beginning in January 2013. Although the Medicare program’s eligibility and scope of benefits are generally exempt from these cuts, Medicare payments to providers are not exempt. The BCA does, however, provide that the Medicare cuts to providers may not exceed two percent. At this time it is unclear how this automatic reduction may be applied to various Medicare healthcare programs, including physician reimbursement. Therefore it is not possible at this time to estimate what impact, if any, the BCA will have on our business or results of operations. However, under our provider compensation plan, any decrease in reimbursement rates also reduces our physician incentive payments such that, for example, a 2% net reduction in Medicare reimbursement rates for the codes applicable to the services performed by our affiliated hospitalists could reduce our net income by approximately 0.2%.

Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (collectively the “Healthcare Reform Act”) were enacted. The Healthcare Reform Act includes a number of provisions that may affect our Company, although the impact of many of the changes will be unknown until they are implemented, which in some cases will not occur for a couple of years. The impact of some of these provisions may be positive, such as the expansion in the number of individuals with health insurance, the 10% Medicare bonus payment for primary care services (including outpatient and nursing home visits) from 2011 through 2015 to primary care practitioners for whom primary care services represented a minimum of 60% of Medicare allowed charges in a prior period, and the increase in Medicaid rates in 2013 and 2014 for primary care services. The impact of other provisions is unknown at this time, such as the establishment of an Independent Medicare Advisory Board that could recommend changes in payment for physicians under certain circumstances not earlier than January 15, 2014, which the Secretary of Health and Human Services generally would be required to implement unless Congress enacts superseding legislation. Fraud and abuse penalty increases and the expansion in the scope of the reach of the Federal Civil False Claims Act and government enforcement tools may adversely impact entities in the healthcare industry, including our Company.

The impact of certain provisions will depend upon the ultimate method of implementation. For example, PPACA requires the Secretary of Health and Human Services to develop a budget neutral value-based payment modifier that provides for differential payment under the physician fee schedule for physicians or groups of physicians that is linked to quality of care furnished compared to cost. The Secretary of Health and Human Services must begin implementing the modifier through the physician fee schedule rulemaking in 2013, specify an initial performance period, and apply the modifier for certain physicians and groups of physicians beginning January 1, 2015 and all physicians and groups of physicians starting not later than January 1, 2017. The impact of this payment modifier cannot be determined at this time.

In addition, certain provisions of PPACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care beginning no later than 2013. In addition, beginning no later than January 1, 2012, PPACA allows providers organized as Accountable Care Organizations that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program. The impact of these projects on our Company cannot be determined at this time.

 

16


Seasonality and Quarterly Fluctuations

We have historically experienced and expect to continue to experience quarterly fluctuations in net revenue and income from operations. Absent the impact and timing of acquisitions, our net revenue has historically been higher in the first and fourth quarters of the year primarily due to the following factors:

 

   

the number of physicians we have on staff during the quarter, which may fluctuate based upon the timing of hires due to the end of the academic year for graduating resident physicians, the schedule of the Internal Medicine Board exams and terminations in our existing practices; and

 

   

fluctuations in patient encounters, which are impacted by hospital census, which can be volatile, and physician productivity and often reflect seasonality due to the higher occurrence of illnesses such as flu and pneumonia in patient populations in the first quarter.

We have significant fixed operating costs, including physician practice salaries and benefits and, as a result, are highly dependent on patient encounters and the productivity of our affiliated hospitalists to sustain profitability. Additionally, quarterly results may be affected by the timing of practice acquisitions and the hiring and termination of our affiliated hospitalists.

Results of Operations and Operating Data

The following table sets forth operating data and selected consolidated statements of income information stated as a percentage of net revenue:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Operating data – patient encounters

     1,345,000        1,159,000        2,700,000        2,345,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     100.0     100.0     100.0     100.0

Operating expenses:

        

Cost of services—physician practice salaries, benefits and other

     73.2     73.2     73.2     72.8

General and administrative

     15.9     16.5     15.7     16.1

Net change in fair value of contingent consideration

     0.3     0.2     0.2     0.2

Depreciation and amortization

     0.8     0.7     0.7     0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     90.2     90.6     89.8     89.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     9.8     9.4     10.2     10.2

Investment income

     0.0     0.0     0.0     0.0

Interest expense

     0.0     0.0     (0.1 )%      0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9.8     9.4     10.1     10.2

Income tax provision

     3.7     3.6     3.8     3.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6.1     5.8     6.3     6.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2012 compared to three months ended June 30, 2011

Our patient encounters for the three months ended June 30, 2012 increased by 186,000 encounters or 16.0% to 1,345,000, compared to 1,159,000 for the same period in the prior year. Net revenue for the three months ended June 30, 2012 was $128.5 million, an increase of $16.8 million, or 15.0%, from $111.7 million for the three months ended June 30, 2011. Of this $16.8 million increase, 66% was attributable to same-market area growth and 34% was attributable to revenue generated

 

17


from operations in five new markets. Of these new markets, three were entered through acquisitions in 2011, one was from a new hospital contract established in 2011 and one was from a new hospital contract established in 2012. Same-market revenue increased 10.0%, same-market encounters increased 12.4% and same market patient revenue per encounter decreased 2.6%. The 2.6% decrease was principally due to a shift in service mix. Same-market areas are those geographic areas in which we have had operations for the entire current period and the entire comparable prior period. Because in-market area acquisitions are often small practice groups which become subsumed within our existing practice groups and are managed by our existing regional management staff, we consider these as part of our same-market area growth.

Physician practice salaries, benefits and other expenses for the three months ended June 30, 2012 were $94.0 million or 73.2% of net revenue compared to $81.8 million or 73.2% of net revenue for the three months ended June 30, 2011. These costs increased by $12.2 million or 14.9%. The increase in practice costs is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period and to continued investment in physician leadership initiatives. Same-market area physician costs increased a total of $8.0 million, which was primarily the result of increased costs related to our new hires or acquired physician practices. In addition, $4.2 million of the $12.2 million overall cost increase is attributable to physician costs associated with our entrance into five new markets.

General and administrative expenses include all salaries, benefits and operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collections functions, our regional and market-area administrative offices and our corporate management and overhead. General and administrative expenses increased $2.0 million, or 10.9%, to $20.4 million, or 15.9% of net revenue, for the three months ended June 30, 2012, as compared to $18.4 million, or 16.5% of net revenue, for the three months ended June 30, 2011. The increase in expense was primarily the result of increased costs to support the continuing growth of our operations and acquisitions, including new regional office costs and other expenses. General and administrative expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue base. Excluding stock based compensation, which increased primarily as a result of the increase in our stock price at the date of various grants, general and administrative expenses decreased by 80 basis points to 14.6% of revenue for the three months ended June 30, 2012, compared to 15.4% of revenue for the same period of 2011.

Income from operations increased $2.1 million, or 19.8%, to $12.6 million from $10.5 million for the same period in the prior year. Our operating margin increased to 9.8% for the three months ended June 30, 2012, compared to 9.4% for the three months ended June 30, 2011.

Our effective tax rate for the three months ended June 30, 2012 was 37.5% compared to 38.0% for the three months ended June 30, 2011. The decrease in the effective tax rate is due primarily to a decrease in our effective state tax rate. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income for the three months ended June 30, 2012 increased to $7.8 million from $6.5 million for the three months ended June 30, 2011, and our net income margin was 6.1% for the three months ended June 30, 2012, as compared to 5.8% for the same period in the prior year.

Six months ended June, 2012 compared to six months ended June 30, 2011

Our patient encounters for the six months ended June 30, 2012 increased by 355,000 encounters or 15.1% to 2,700,000, compared to 2,345,000 for the same period in the prior year. Net revenue for the six months ended June 30, 2012 was $258.3 million, an increase of $33.2 million, or 14.7%, from $225.1 million for the six months ended June 30, 2011. Of this $33.2 million increase, 70% was attributable to same-market area growth and 30% was attributable to revenue generated from operations in five new markets. Of these new markets, three were entered through acquisitions in 2011, one was from a new hospital contract established in 2011 and one was from a new hospital contract established in 2012. Same-market revenue increased 10.4%, same-market encounters increased 11.8% and same market patient revenue per encounter decreased 2.1%. The 2.1% decrease was principally due to a shift in service mix.

Physician practice salaries, benefits and other expenses for the six months ended June 30, 2012 were $189.1 million or 73.2% of net revenue compared to $163.9 million or 72.8% of net revenue for the six months ended June 30, 2011. These costs increased by $25.2 million or 15.4%. The increase in practice costs is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period and to continued investment in physician leadership initiatives. Same-market area physician costs increased a total of $17.8 million, which was primarily the result of increased costs related to our new hires or acquired physician practices. In addition, $7.4 million of the $25.2 million overall cost increase is attributable to physician costs associated with our entrance into five new markets. As a percentage of revenue, physician costs increased by 40 basis points for the six months ended June 30, 2012, compared to the same period of 2011. The increase in physician costs as a percentage of revenues was primarily related to certain hospital contracts in transition.

 

18


General and administrative expenses increased $4.3 million, or 11.9%, to $40.5 million, or 15.7% of net revenue, for the six months ended June 30, 2012, as compared to $36.2 million, or 16.1% of net revenue, for the six months ended June 30, 2011. The increase in expense was primarily the result of increased costs to support the continuing growth of our operations and acquisitions, including new regional office costs and other expenses. General and administrative expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue base. Excluding stock based compensation, which increased primarily as a result of the increase in our stock price at the date of various grants, general and administrative expenses decreased by 60 basis points to 14.5% of revenue for the six months ended June 30, 2012, compared to 15.1% of revenue for the same period of 2011.

Income from operations increased $3.3 million, or 14.4%, to $26.3 million from $23.0 million for the same period in the prior year. Our operating margin was 10.2% for the six months ended June 30, 2012 and 2011.

Our effective tax rate for the six months ended June 30, 2012 was 37.5% compared to 38.0% for the six months ended June 30, 2011. The decrease in the effective tax rate is due primarily to a decrease in our effective state tax rate. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income for the six months ended June 30, 2012 increased to $16.3 million from $14.2 million for the six months ended June 30, 2011, and our net income margin was 6.3% for the six months ended June 30, 2012 and 2011.

Liquidity and Capital Resources

As of June 30, 2012, we had no debt outstanding and approximately $83.6 million in liquidity, which is composed of $8.7 million in cash and cash equivalents and an available line of credit of $74.9 million.

Net cash provided by operating activities for the six months ended June 30, 2012 was $18.2 million compared to $12.0 million for the same period of 2011. The primary changes in working capital during the six months ended June 30, 2012 was composed of (i) an increase in accounts receivable of $8.0 million, (ii) a decrease of prepaid expenses and other current assets of $2.4 million, (iii) an increase in accrued compensation of $1.3 million primarily related to timing of payrolls and physician bonus payments, and (iv) an increase in medical malpractice and self-insurance reserves of $1.6 million.

Our days sales outstanding (DSO), which we use to measure the effectiveness of our collections, was 52 DSO as of June 30, 2012 as compared to 51 DSO as of December 31, 2011. We calculate our DSO using a three-month rolling average of net revenues.

Net cash used in investing activities was $30.4 million for the six months ended June 30, 2012, compared to $9.2 million for the same period in 2011. Cash of $28.3 million was used in the six months ended June 30, 2012 for physician practice acquisitions and earn-out payments on prior acquisitions, compared to $7.7 million in the same period of the prior year. The remainder of cash used in investing activities was for purchases of computer hardware and software, and office furnishings.

For the six months ended June 30, 2012, net cash provided by financing activities was $3.2 million, compared to $3.0 million provided by financing activities for the same period in 2011.

Credit Facility and Liquidity

Our secured revolving credit agreement (Credit Facility) provides a revolving line of credit of $75.0 million and contains an “accordion” feature that allows an increase of $25.0 million to the Credit Facility with lender approval. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. In March 2012, we borrowed $15.0 million under our Credit Facility bearing interest at 1.0% per annum, which was repaid during the second quarter 2012. As of June 30, 2012, we had no borrowings outstanding, a letter of credit of $0.1 million outstanding and $74.9 million available under the Credit Facility.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.25%, or the lender’s prime rate plus 0% to 0.25%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.

The Credit Facility is guaranteed by our subsidiaries and affiliated Professional Medical Corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of June 30, 2012, we were in compliance with such financial covenants and restrictions.

 

19


We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Credit Facility will be sufficient to finance our working capital requirements and fund anticipated acquisitions, contingent acquisition consideration and capital expenditures.

Off Balance Sheet Arrangements

As of June 30, 2012, we had no off-balance sheet arrangements.

Recently Adopted and New Accounting Principles

See Note 1 to the Consolidated Financial Statements for information regarding recently adopted and new accounting principles.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no outstanding borrowings under our Credit Facility at June 30, 2012.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities with shorter maturities may produce less income if interest rates fall. As of June 30, 2012, all of our short-term investments were invested in money market funds with less than 90-day maturities and are classified as cash equivalents.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated physicians. We may also become subject to other lawsuits, which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. The Company has produced responsive documents and will discuss with representatives of the government additional future productions to be made if requested. We have been informed by the DOJ that a qui tam whistleblower complaint related to this investigation naming the Company has been filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also have been informed that several state attorneys general are examining our Medicaid claims in coordination with the DOJ. It is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

ITEMS 1A, 2, 3, 4 AND 5 ARE NOT APPLICABLE

 

ITEM 6. EXHIBITS

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 23 of this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 31st day of July, 2012.

 

IPC THE HOSPITALIST COMPANY, INC.
By:  

/S/    ADAM D. SINGER, M.D.

 

Adam D. Singer, M.D.

Chief Executive Officer

By:  

/S/    RICK KLINE

 

Rick Kline

Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description of Document

  10.1†    IPC The Hospitalist Company, Inc. 2012 Equity Participation Plan (Incorporated by reference herein from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 12, 2012.)
  10.2†    First Amendment to the IPC The Hospitalist Company, Inc. 2012 Equity Participation Plan (Incorporated by reference herein from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 12, 2012.)
  10.3†    IPC The Hospitalist Company, Inc. Incentive Plan (Incorporated by reference herein from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 12, 2012.)
  31.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
  31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
  32.1    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
  32.2    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

Management contracts or compensation plans, contracts or arrangements
* Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

23

XNAS:IPCM IPC The Hospitalist Company, Inc. Quarterly Report 10-Q Filling

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