Significant Accounting Policies and Practices

3 Months Ended

Mar. 31, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Significant Accounting Policies and Practices, Note

Significant Accounting Policies and Practices

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, ("GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and accompanying footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of Accounting Standards Codification Topic 810, Consolidation. The variable interest entities are surgical facilities located in the states of Florida and New York. With regard to the New York facility, the Company is the primary beneficiary due to the power to direct the activities of the facility and the level of variability within the management service agreement as well as the obligation and likelihood of absorbing the majority of expected gains and losses. Regarding the Florida facility, the Company has the power to direct the activities of the facility and has fully guaranteed the facility's debt obligations. The debt obligations are subordinated to such a level that the Company absorbs the majority of the expected losses. The consolidated balance sheets of the Company at March 31, 2013 and December 31, 2012 include assets of $17.8 million and $17.7 million, respectively, and liabilities of $3.6 million and $3.7 million, respectively, related to the variable interest entities. All significant intercompany balances and transactions are eliminated in consolidation.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-02, which requires additional disclosures on the effect of significant reclassifications out of accumulated other comprehensive income. The ASU requires a company that reports other comprehensive income to present (either on the face of the statement where net income is presented or in the notes to the financial statements) the effects on the line items of net income the significant amounts reclassified out of accumulated other comprehensive income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, a company is required to cross-reference to other required disclosures that provide additional details about those amounts. This ASU is effective for fiscal years beginning after December 15, 2012, and was adopted by the Company on January 1, 2013. As it only requires additional disclosure, the adoption of this ASU had no impact on the Company's consolidated financial position, results of operations or cash flows.

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate their fair values because of their short-term nature.

The carrying amount and fair value of the Company's long term debt as of March 31, 2013 and December 31, 2012 follows (in thousands):



	Carrying Amount				Fair Value
	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012

Senior Secured Notes, net of debt issuance discount	$	337,378	$	337,132	$	355,512	$	348,088
PIK Exchangeable Notes	109,688		109,688		109,688		109,688
Toggle Notes	94,724		94,724		94,724		94,724

The fair values of the Senior Secured Notes and Toggle Notes were based on a Level 1 computation using quoted prices at March 31, 2013 and December 31, 2012, as applicable. The fair value of the PIK Exchangeable Notes was based on a Level 3 computation, using a Company-specific discounted cash flow analysis. The Company's long-term debt instruments are discussed further in Note 5.

The Company maintains a supplemental retirement savings plan (the "SERP"). The SERP provides supplemental retirement alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation. As of March 31, 2013 and December 31, 2012, the fair value of the assets in the SERP was $1.4 million and $1.3 million, respectively, which was included in other assets in the consolidated balance sheets. The Company had a liability of $1.4 million and $1.3 million for the SERP in other long-term liabilities as of March 31, 2013 and December 31, 2012, respectively.

Revenue Recognition and Accounts Receivable

The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which the Company estimates based on the historical trend of its surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.

Accounts receivable consist of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. The Company recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Also, the Company had third-party settlements payable of $11.3 million and $10.9 million as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, $7.0 million and $7.0 million related to the settlements was recorded in other accrued expenses, respectively, and $4.3 million and $3.9 million, respectively, was recorded in other long-term liabilities in the consolidated balance sheets. The Company does not require collateral for private pay patients.

The following table sets forth revenues by type of payor and the approximate percentage of total patient services revenues for the Company's consolidated surgical facilities for the periods indicated (dollars in thousands):



	Three Months Ended March 31,
	2013				2012
	Amount		%		Amount		%

Private insurance	$	77,353	59	%	$	73,337	64	%
Government	44,143		33	%	30,995		27	%
Self-pay	3,324		3	%	3,379		3	%
Other	6,583		5	%	6,926		6	%
Total patient services revenues	$	131,403	100	%	$	114,637	100	%

The Company's policy is to review the standard aging schedule, by surgical facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. If the Company's internal collection efforts are unsuccessful, the Company manually reviews the patient accounts. An account is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.

Changes in the allowance for doubtful accounts receivable for the three months ended March 31, 2013 follows (in thousands):



Balance at December 31, 2012	$	11,496
Provision for doubtful accounts	2,793
Accounts written off, net of recoveries	(455		)
Balance at March 31, 2013	$	13,834

Electronic Health Record Incentives

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act ("HITECH") in time to qualify for the maximum available incentive payments.

Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project. The Company currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected lifecycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income. During the three months ended March 31, 2013, the Company spent $1.5 million related to hardware, software and implementation costs, of which $1.2 million was capitalized. The Company expects to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements. The Company did not incur any costs in the three months ended March 31, 2012.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

Short-Term Investments

Short-term investments consist of certificates of deposit with maturities of twelve months or less at March 31, 2013. These investments were previously held as restricted invested assets at December 31, 2012.

Restricted Invested Assets

The Company is required to maintain $10.0 million in letters of credit as a requirement of the lease agreement related to its Idaho Falls, Idaho facility. At December 31, 2012, these letters of credit were secured by restricted cash of $5.0 million, in the form of certificates of deposit. In March 2013, the Company refinanced its debt at the Idaho Falls, Idaho facility with a new lender. As a result of this refinancing, the Company is no longer required to maintain this restricted cash balance. As of March 31, 2013, the Company reclassified $4.2 million of this balance from restricted invested assets to short-term investments, and the remaining $800,000 was reclassified to cash due to the maturity of a portion of the certificates of deposit during the three months ended March 31, 2013. There were no borrowings against the letters of credit as of March 31, 2013 and December 31, 2012. The remaining restricted invested assets balance at March 31, 2013 relates to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility.

Inventories

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Prepaid Expenses and Other Current Assets

A summary of prepaid expenses and other current assets follows (in thousands):



	March 31, 2013		December 31, 2012

Prepaid expenses	$	5,303	$	5,722
Other current assets	3,372		4,228
Total	$	8,675	$	9,950

Property and Equipment

Property and equipment are stated at cost, or if obtained through acquisition, at fair value determined on the date of acquisition and depreciated on a straight-line basis over the useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are charged to expenses as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

A summary of property and equipment follows (in thousands):



	March 31, 2013			December 31, 2012

Land	$	5,713		$	5,713
Buildings and improvements	104,106			103,924
Furniture and equipment	93,170			87,013
Computer and software	9,953			6,702
Construction in progress	867			4,931
Property and equipment, at cost	213,809			208,283
Less: Accumulated depreciation	(83,100		)	(78,177		)
Property and equipment, net	$	130,709		$	130,106

The Company is liable to various vendors for several equipment leases. The carrying value of the leased assets was $6.1 million and $5.3 million as of March 31, 2013 and December 31, 2012, respectively.

Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2013 follows (in thousands):



Balance at December 31, 2012	$	656,058
Purchase price adjustments	27
Balance at March 31, 2013	$	656,085

The Company has other intangible assets of $17.7 million related to the certificates of need for certain of its facilities. These indefinite-lived assets are not amortized, but are assessed for possible impairment under the Company's impairment policy. The Company also has intangible assets related to various non-compete agreements and a management rights agreement, which are amortized over the service life of the agreements.

Changes in the carrying amounts of other intangible assets for the three months ended March 31, 2013 follows (in thousands):



	Physician Guarantees			Management Rights			Non-Compete Assets			Certificates of Need		Total Intangible Assets

Balance at December 31, 2012	$	819		$	2,083		$	3,509		$	17,740	$	24,151
Purchase price adjustments	(112		)	—			—			—		(112		)
Amortization	(76		)	(39		)	(423		)	—		(538		)
Balance at March 31, 2013	$	631		$	2,044		$	3,086		$	17,740	$	23,501

Other Accrued Expenses

A summary of other accrued expenses follows (in thousands):



	March 31, 2013		December 31, 2012

Interest payable	$	11,659	$	5,265
Current taxes payable	2,703		2,235
Insurance liabilities	3,172		3,233
Third-party settlements	6,987		6,987
Accounts receivable credit balances	3,730		3,475
Other accrued expenses	7,631		7,826
Total	$	35,882	$	29,021

Other Liabilities

A summary of other liabilities follows (in thousands):



	March 31, 2013		December 31, 2012

Idaho Falls, Idaho facility lease obligation	$	48,295	$	48,352
Third-party settlements	4,304		3,914
Medical malpractice liability	3,765		3,765
Deferred rent	4,472		4,371
Other liabilities	2,660		2,400
Total	$	63,496	$	62,802

Total other liabilities includes an obligation which was assumed in connection with the Company's acquisition of the surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the hospital facility lessor for the land, building and improvements at the facility in Idaho Falls, Idaho. The total lease obligation was $48.5 million at each of March 31, 2013 and December 31, 2012. The current portion of the lease obligation was $163,000 and $117,000 at March 31, 2013 and December 31, 2012, respectively, and was included in accrued expenses in the consolidated balance sheets.

Noncontrolling Interests — Non-redeemable

The consolidated financial statements include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities in the consolidated statements of cash flows.

Noncontrolling Interests — Redeemable

Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement. In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility. This redeemable noncontrolling interest is reported outside of stockholders' equity.

A summary of activity of the noncontrolling interests—redeemable follows (in thousands):



	Noncontrolling Interests—Redeemable

Balance at December 31, 2011	$	33,378
Net income attributable to noncontrolling interests—redeemable	5,232
Acquisitions and disposal of shares of noncontrolling interests—redeemable	(292		)
Distributions to noncontrolling interests —redeemable holders	(3,817		)
Balance at March 31, 2012	$	34,501

Balance at December 31, 2012	$	33,634
Net income attributable to noncontrolling interests—redeemable	3,837
Acquisitions and disposal of shares of noncontrolling interests—redeemable	162
Distributions to noncontrolling interests —redeemable holders	(4,005		)
Balance at March 31, 2013	$	33,628

Income Taxes

During the three months ended March 31, 2013, the Company reduced its reserve for uncertain tax positions by approximately $5.6 million principally as a result of the Internal Revenue Service approval of accounting method changes received by the Company in February 2013. The changes relate to the Company's net operating loss and related interest expense deductions. Approximately $428,000 of the changes affected the effective tax rate during the three months ended March 31, 2013. The reserve is included in non-current income tax payable in the consolidated balance sheets. The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized was $384,000 as of March 31, 2013 and $634,000 as of December 31, 2012.

Reclassifications

Certain reclassifications have been made to the comparative period's financial statements to conform to the 2013 presentation. The reclassifications primarily related to the presentation of discontinued operations and noncontrolling interests and had no impact on the Company's financial position or results of operations.

SYMBION INC/TN 10-Q