SEC Filings

10-Q
ENVISION HEALTHCARE CORP filed this Form 10-Q on 08/08/2017
Entire Document
 
Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the Quarterly Period Ended June 30, 2017
 
Envision Healthcare Corporation
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
001-37955
62-1493316
(State or Other Jurisdiction of Incorporation)
(Commission
 File Number)
(I.R.S. Employer
 Identification No.)
 
 
 
1A Burton Hills Boulevard
 
 
Nashville, Tennessee
 
37215
(Address of Principal
Executive Offices)
 
(Zip Code)
 
 
(615) 665-1283
(Registrant’s Telephone Number, Including Area Code)
 
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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [X] 
Accelerated filer                  [  ]
Non-accelerated filer   [  ]   
Smaller reporting company [  ]
(Do not check if a smaller reporting company)
Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

As of August 4, 2017 there were outstanding 120,826,594 shares of the registrant’s Common Stock, $0.01 par value.








i


Part I

Item 1. Financial Statements
Envision Healthcare Corporation
Consolidated Balance Sheets (unaudited)
(Dollars in millions, shares in thousands)
 
June 30,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
441.3

 
$
316.9

Insurance collateral
100.5

 
87.0

Accounts receivable, net of allowance of $2,336.9 and $584.0, respectively
1,353.2

 
1,297.8

Supplies inventory
23.1

 
23.4

Prepaid and other current assets
146.7

 
135.1

Current assets held for sale
3,005.6

 
551.1

Total current assets
5,070.4

 
2,411.3

Property and equipment, net
305.8

 
300.8

Investments in unconsolidated affiliates
131.4

 
114.7

Goodwill
8,179.0

 
7,584.0

Intangible assets, net
3,763.1

 
3,675.5

Other assets
138.7

 
134.2

Noncurrent assets held for sale

 
2,488.4

Total assets
$
17,588.4

 
$
16,708.9

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
53.0

 
$
46.6

Accounts payable
61.6

 
69.9

Accrued salaries and benefits
475.1

 
483.8

Accrued interest
51.1

 
51.4

Other accrued liabilities
416.1

 
253.2

Current liabilities held for sale
734.6

 
249.4

Total current liabilities
1,791.5

 
1,154.3

Long-term debt, net of deferred financing costs of $105.5 and $111.0, respectively
6,276.4

 
5,790.2

Deferred income taxes
1,835.6

 
1,343.7

Insurance reserves
314.3

 
278.9

Other long-term liabilities
148.4

 
102.4

Noncurrent liabilities held for sale

 
468.6

Commitments and contingencies

 

Noncontrolling interests – redeemable
186.7

 
182.9

Equity:
 
 
 
Preferred stock, $0.01 par value, 100,000 shares authorized, 1,206 and 1,725 shares issued and outstanding, respectively
0.1

 
0.1

Common stock, $0.01 par value, 1,000,000 shares authorized, 118,560 and 117,478 shares issued and outstanding, respectively
1.2

 
1.2

Additional paid-in capital
5,990.7

 
5,976.3

Retained earnings
360.3

 
753.7

Accumulated other comprehensive income (loss)
1.1

 
(0.2
)
Total Envision Healthcare Corporation equity
6,353.4

 
6,731.1

Noncontrolling interests – non-redeemable
682.1

 
656.8

Total equity
7,035.5

 
7,387.9

Total liabilities and equity
$
17,588.4

 
$
16,708.9


See accompanying notes to the unaudited consolidated financial statements.
1


Item 1. Financial Statements - (continued)

Envision Healthcare Corporation
Consolidated Statements of Operations (unaudited)
(Dollars in millions, except earnings per share)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
3,020.6

 
$
859.8

 
$
5,876.4

 
$
1,678.1

Provision for uncollectibles
(1,073.6
)
 
(101.3
)
 
(2,050.8
)
 
(194.9
)
Net revenue
1,947.0

 
758.5

 
3,825.6

 
1,483.2

Operating expenses:
 
 
 
 
 
 
 
Salaries and benefits
1,363.6

 
406.1

 
2,711.7

 
817.6

Supply cost
57.0

 
49.7

 
111.0

 
96.7

Insurance expense
42.6

 
19.1

 
91.4

 
36.8

Other operating expenses
189.4

 
90.0

 
373.3

 
178.4

Transaction and integration costs
27.4

 
5.1

 
48.9

 
6.5

Impairment charges

 

 
0.3

 

Depreciation and amortization
71.6

 
30.1

 
142.9

 
59.1

Total operating expenses
1,751.6

 
600.1

 
3,479.5

 
1,195.1

Net gain (loss) on disposals and deconsolidations
(5.8
)
 
2.6

 
(5.5
)
 
2.6

Equity in earnings of unconsolidated affiliates
5.7

 
7.4

 
10.6

 
14.0

Operating income
195.3

 
168.4

 
351.2

 
304.7

Interest expense, net
56.1

 
31.9

 
108.5

 
62.7

Other income, net
0.4

 

 
1.5

 

Earnings from continuing operations before income taxes
139.6


136.5

 
244.2

 
242.0

Income tax expense
35.6

 
33.4

 
53.1

 
54.2

Net earnings from continuing operations
104.0

 
103.1

 
191.1

 
187.8

Discontinued operations:
 
 
 
 
 
 
 
Earnings from discontinued operations
6.7

 

 
16.7

 

Income tax expense from discontinued operations
(2.8
)
 

 
(491.0
)
 

Net earnings (loss) from discontinued operations
3.9



 
(474.3
)
 

Net earnings (loss)
107.9

 
103.1

 
(283.2
)
 
187.8

Less net earnings attributable to noncontrolling interests
51.6

 
57.1

 
105.7

 
110.9

Net earnings (loss) attributable to Envision Healthcare Corporation stockholders
56.3

 
46.0

 
(388.9
)
 
76.9

Preferred stock dividends
(2.2
)
 
(2.2
)
 
(4.5
)
 
(4.5
)
Net earnings (loss) attributable to Envision Healthcare Corporation common stockholders
$
54.1

 
$
43.8

 
$
(393.4
)
 
$
72.4

 
 
 
 
 
 
 
 
Amounts attributable to Envision Healthcare Corporation common stockholders:
 
 
 
 
 
 
 
Earnings from continuing operations, net of income tax
$
50.2

 
$
43.8

 
$
80.9

 
$
72.4

Earnings (loss) from discontinued operations, net of income tax
3.9

 

 
(474.3
)
 

Net earnings (loss) attributable to Envision Healthcare Corporation common stockholders
$
54.1

 
$
43.8

 
$
(393.4
)
 
$
72.4

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.43

 
$
0.82

 
$
0.69

 
$
1.35

Net earnings (loss) from discontinued operations
0.03

 

 
(4.06
)
 

Net earnings (loss)
$
0.46

 
$
0.82

 
$
(3.37
)
 
$
1.35

Diluted earnings (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
0.42

 
$
0.80

 
$
0.68

 
$
1.34

Net earnings (loss) from discontinued operations
0.03

 

 
(4.06
)
 

Net earnings (loss)
$
0.45

 
$
0.80

 
$
(3.37
)
 
$
1.34

 
 
 
 
 
 
 
 
Weighted average number of shares and share equivalents outstanding:
 
 
 
 
 
 
 
Basic
116,852

 
53,739

 
116,708

 
53,702

Diluted
119,581

 
57,327

 
119,528

 
57,229


See accompanying notes to the unaudited consolidated financial statements.
2


Item 1. Financial Statements - (continued)

Envision Healthcare Corporation
Consolidated Statements of Comprehensive Income (unaudited)
(In millions)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings (loss)
$
107.9

 
$
103.1

 
$
(283.2
)
 
$
187.8

Other comprehensive income, net of income tax:
 
 
 
 
 
 
 
Unrealized holding gain during the period, net of income tax
0.4

 

 
1.3

 

Comprehensive income (loss), net of income tax
108.3

 
103.1

 
(281.9
)
 
187.8

Less comprehensive income attributable to noncontrolling interests
51.6

 
57.1

 
105.7

 
110.9

Comprehensive income (loss) attributable to Envision Healthcare Corporation stockholders
$
56.7

 
$
46.0

 
$
(387.6
)
 
$
76.9



See accompanying notes to the unaudited consolidated financial statements.
3


Item 1. Financial Statements - (continued)

Envision Healthcare Corporation
Consolidated Statements of Changes in Equity (unaudited)
(Dollars in millions, shares in thousands)
 
Envision Healthcare Corporation Stockholders
 
 
 
 
 
Noncontrolling
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
Noncontrolling
 
 
 
Interests –
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Interests –
 
Total
 
Redeemable
 
Common Stock
 
Preferred Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Non-
 
Equity
 
(Temporary
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Redeemable
 
(Permanent)
 
Equity)
Balance at December 31, 2016
117,478

 
$
1.2

 
1,725

 
$
0.1

 
$
5,976.3

 
$
753.7

 
$
(0.2
)
 
$
656.8

 
$
7,387.9

 
$
182.9

Net earnings (loss)

 

 

 

 

 
(388.9
)
 

 
35.0

 
(353.9
)
 
70.7

Issuance of restricted stock
36

 

 

 

 

 

 

 

 

 

Conversion of preferred stock
941

 

 
(519
)
 

 

 

 

 

 

 

Stock options exercised
235

 

 

 

 
3.7

 

 

 

 
3.7

 

Stock repurchased
(130
)
 

 

 

 
(8.9
)
 

 

 

 
(8.9
)
 

Share-based compensation

 

 

 

 
29.3

 

 

 

 
29.3

 

Dividends paid on preferred stock

 

 

 

 

 
(4.5
)
 

 

 
(4.5
)
 

Acquisitions and other transactions impacting noncontrolling interests

 

 

 

 
0.6

 

 

 
39.1

 
39.7

 

Distributions to noncontrolling interests, net of capital contributions

 

 

 

 

 

 

 
(43.7
)
 
(43.7
)
 
(74.3
)
Disposals and other transactions impacting noncontrolling interests

 

 

 

 
(10.3
)
 

 

 
(5.1
)
 
(15.4
)
 
7.4

Unrealized holding gain on investments, net of income tax

 

 

 

 

 

 
1.3

 

 
1.3

 

Balance at June 30, 2017
118,560

 
$
1.2

 
1,206

 
$
0.1


$
5,990.7

 
$
360.3

 
$
1.1

 
$
682.1

 
$
7,035.5

 
$
186.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
54,294

 
$
1,345.4

 
1,725

 
$
166.6

 
$

 
$
781.4

 
$

 
$
471.3

 
$
2,764.7

 
$
175.7

Net earnings

 

 

 

 

 
76.9

 

 
36.1

 
113.0

 
74.8

Issuance of restricted stock
587

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock
(7
)
 

 

 

 

 

 

 

 

 

Stock options exercised
20

 
0.5

 

 

 

 

 

 

 
0.5

 

Stock repurchased
(78
)
 
(5.7
)
 

 

 

 

 

 

 
(5.7
)
 

Share-based compensation

 
15.1

 

 

 

 

 

 

 
15.1

 

Tax benefit related to exercise of share-based awards

 
3.7

 

 

 

 

 

 

 
3.7

 

Dividends paid on preferred stock

 

 

 

 

 
(4.5
)
 

 

 
(4.5
)
 

Acquisitions and other transactions impacting noncontrolling interests

 
0.7

 

 

 

 

 

 
13.6

 
14.3

 
4.0

Distributions to noncontrolling interests, net of capital contributions

 

 

 

 

 

 

 
(38.1
)
 
(38.1
)
 
(77.2
)
Disposals and other transactions impacting noncontrolling interests

 
(2.9
)
 

 

 

 

 

 

 
(2.9
)
 
0.5

Balance at June 30, 2016
54,816

 
$
1,356.8

 
1,725

 
$
166.6


$

 
$
853.8

 
$

 
$
482.9

 
$
2,860.1

 
$
177.8



See accompanying notes to the unaudited consolidated financial statements.
4


Item 1. Financial Statements - (continued)

Envision Healthcare Corporation
Consolidated Statements of Cash Flows (unaudited)
(In millions)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 
Net earnings (loss)
$
(283.2
)
 
$
187.8

Adjustments to reconcile net earnings (loss) to net cash flows provided by operating activities:
 
 
 
Depreciation and amortization
211.8

 
59.1

Amortization of deferred loan costs
8.4

 
4.2

Provision for uncollectibles
2,510.9

 
207.0

Net (gain) loss on disposals and deconsolidations
5.5

 
(2.6
)
Share-based compensation
29.3

 
15.1

Deferred income taxes
529.3

 
21.0

Equity in earnings of unconsolidated affiliates
(10.9
)
 
(14.0
)
Impairment charges
0.3

 

Net change in fair value of contingent consideration

 
(2.6
)
Other, net

 
(3.7
)
Increases (decreases) in cash and cash equivalents, net of acquisitions and dispositions:
 
 
 
Accounts receivable
(2,577.9
)
 
(228.3
)
Supplies inventory
(0.7
)
 
(0.4
)
Prepaid and other current assets
(5.1
)
 
(23.7
)
Accounts payable
(6.1
)
 
(3.3
)
Accrued expenses and other liabilities
(45.4
)
 
(28.2
)
Other, net
12.5

 
7.6

Net cash flows provided by operating activities
378.7

 
195.0

Cash flows from investing activities:
 
 
 
Acquisitions and related expenses, net of cash acquired
(485.7
)
 
(281.1
)
Acquisition of property and equipment
(90.7
)
 
(37.6
)
Purchases of marketable securities
(15.9
)
 
(0.5
)
Maturities of marketable securities
7.0

 
2.7

Other, net
(5.2
)
 
(8.7
)
Net cash flows used in investing activities
(590.5
)
 
(325.2
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
798.3

 
317.1

Repayment on long-term borrowings
(314.3
)
 
(98.8
)
Distributions to noncontrolling interests
(119.0
)
 
(115.6
)
Proceeds from issuance of common stock upon exercise of stock options
3.7

 
0.5

Repurchase of common stock
(8.9
)
 
(5.6
)
Financing costs incurred
(2.9
)
 

Other, net
(12.1
)
 

Net cash flows provided by financing activities
344.8

 
97.6

Net increase (decrease) in cash and cash equivalents
133.0

 
(32.6
)
Cash and cash equivalents, beginning of period
331.6

 
106.7

Less cash and cash equivalents of held for sale assets, end of period
23.3

 

Cash and cash equivalents, end of period
$
441.3

 
$
74.1


See accompanying notes to the unaudited consolidated financial statements.
5


Item 1. Financial Statements - (continued)

Envision Healthcare Corporation
Notes to the Unaudited Consolidated Financial Statements
 
(1) Description of Business and Basis of Presentation  
 
Description of Business

Envision Healthcare Corporation (the Company) was formed on June 10, 2016 for the purpose of effecting the merger (the Merger) of AmSurg Corp. (AmSurg) and Envision Healthcare Holdings, Inc. (EHH). Prior to the Merger, the Company did not conduct any activities other than those incidental to its formation and matters in connection with the consummation of the Merger. On December 1, 2016, AmSurg and EHH completed the Merger and the strategic combination of their respective businesses. In connection with the Merger, (i) AmSurg merged with and into the Company, a wholly owned subsidiary of AmSurg, with the Company as the surviving entity and (ii) EHH merged with and into the Company, with the Company as the surviving entity. AmSurg was the accounting acquirer in the Merger; therefore, the historical consolidated financial statements of AmSurg for periods prior to the Merger are considered to be the historical financial statements of the Company. The Company's unaudited consolidated financial statements reflect AmSurg's results for the three and six months ended June 30, 2016, and the Company’s results as of December 31, 2016 and for the three and six months ended June 30, 2017.

Following the completion of the Merger, the Company had three reportable segments: physician services, medical transportation and ambulatory services. The physician services segment reflects the combination of AmSurg’s physician services segment and EHH’s physician services segment, while the ambulatory services segment reflects AmSurg's ambulatory services segment. On February 28, 2017, the Company announced it would explore strategic alternatives for the medical transportation business. During the six months ended June 30, 2017, the Company's board of directors (the Board) approved a plan to actively market and divest the medical transportation business. Accordingly, the results of the medical transportation business have been recorded in discontinued operations for the three and six months ended June 30, 2017 and assets and liabilities have been recorded as held for sale as of June 30, 2017 and December 31, 2016. The medical transportation business is no longer a separate reportable segment.

Basis of Presentation

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all normal recurring adjustments, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Restricted Cash and Marketable Securities

As of June 30, 2017 and December 31, 2016, the Company held restricted cash and cash equivalents of $45.3 million and $43.5 million, respectively, classified within insurance collateral in the accompanying consolidated balance sheets. The cash was restricted for the purpose of satisfying the obligations of the Company's wholly owned captive insurance companies.

Supplemental Cash Flow Data

The following presents supplemental cash flow statement disclosure (in millions):
 
Six Months Ended June 30,
 
2017
 
2016
Supplemental cash flow information:
 
 
 
Interest payments
$
146.2

 
$
58.8

Income tax paid, net of refunds
$
14.5

 
$
45.7



6


Item 1. Financial Statements - (continued)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts in the accompanying consolidated financial statements and these notes have been reclassified to reflect the impact of discontinued operations as further discussed in Note 5 and also to conform to current year classifications as a result of the Merger.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue from Contracts with Customers,” which will eliminate the transaction and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach using the following steps: identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date,” which granted a one-year deferral of this ASU. In 2016, the FASB issued the following ASUs to provide entities further clarity on the application of ASU 2014-09:

ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”
ASU 2016-10 “Identifying Performance Obligations and Licensing”
ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients”
ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”

The guidance in ASU 2014-09 and the subsequently related ASUs will now be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is continuing to assess the method of adoption it expects to utilize. The Company does not believe adoption of the standard will have a material impact on the results of operations or cash flows for the ambulatory services segment. The Company is continuing its evaluation of the impact on the physician services segment to determine the impact, if any, on the results of operations and cash flows. However, the Company does anticipate that, as a result of certain changes by ASU 2014-09 and the subsequently related ASUs, the majority of its provision for uncollectibles will be recognized as a direct reduction to revenues, instead of separately as a deduction to arrive at revenue.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which amends existing accounting standards for lease accounting, including requiring lessees to recognize most leases on the balance sheet and making changes to lessor accounting. The standard is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The new standard requires a modified retrospective application for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company will adopt the new standard effective January 1, 2019. The Company expects that nearly all leases currently classified as operating leases will be classified as operating leases under the new standard with a right-of-use asset and a corresponding obligation recognized on the balance sheet at the adoption date. The Company has not yet determined the impact this ASU will have on the Company's results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which changed how companies account for certain aspects of share-based payments to employees by requiring companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard effective January 1, 2017 and determined there were no unrecognized tax benefits which required reclassification from additional paid in capital to retained earnings. As a result of the adoption, the Company has recognized approximately $2.1 million of tax benefit associated with the awards that were either exercised or vested during the six months ended June 30, 2017.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force),” which requires entities to show the changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within those years and is to be adopted retrospectively. The Company has not yet determined the impact this ASU will have on the Company's cash flows.

7


Item 1. Financial Statements - (continued)

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business,” which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those years. The Company has not yet determined the impact this ASU will have on the Company's consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure an impairment charge. Instead, companies will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet determined the impact this ASU will have on the Company's consolidated financial position, results of operations or cash flows.

(2) Variable Interest Entities

GAAP requires variable interest entities (VIEs) to be consolidated if an entity’s interest in the VIE is a controlling financial interest. Under the variable interest model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb the losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company performs ongoing reassessments of (i) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain triggering events, and therefore would be subject to the VIE consolidation framework, and (ii) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation conclusion to change. The consolidation status of the VIEs with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively with assets and liabilities of a newly consolidated VIE initially recorded at fair value.

Physician Services Segment

The physician services segment structures its contractual arrangements for services in various ways. In most states, a wholly owned subsidiary contracts with hospitals to provide management services. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries along with the accounts of affiliated professional corporations (PCs) with which the Company has management arrangements. The Company's agreements with these PCs provide that the term of the arrangements is permanent, subject only to termination by the Company, except in the case of gross negligence, fraud or bankruptcy of the Company. The PC structure is necessary in states which prohibit the corporate practice of medicine but this structure is utilized by the Company in the majority of its physician practices regardless of the state where the PC operates. The arrangements are captive in nature as a majority of the outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed at the sole discretion of the Company. The nominee shareholder is a medical doctor who is generally a senior corporate employee of the Company. The Company has a contractual right to transfer the ownership of the PCs at any time to any person it designates as the nominee shareholder. The Company has the right to all assets and to receive income, both as ongoing fees and as proceeds from the sale of any interest in the PCs, in an amount that fluctuates based on the performance of the PCs and the change in the fair value of the interest in the PCs. The Company has exclusive responsibility for the provision of all non-medical services required for the day-to-day operation and management of the PCs and establishes the guidelines for the employment and compensation of the physicians and other employees of the PCs, which is consistent with the operation of the Company's wholly owned subsidiaries. Based on the provisions of these agreements, the Company has determined that the PCs are variable interest entities and that the Company is the primary beneficiary as defined in ASC 810 “Consolidations.”
 
The Company has a variable interest in the PCs through the management contracts and the PCs are considered VIEs due to its equity holder lacking the obligation to absorb expected losses or receive expected residual returns. The contractual arrangement to provide management services allows the Company to direct the economic activities considered most significant to the PC. Accordingly, the Company is the primary beneficiary of the PCs and consolidates the PCs under the variable interest model in ASC 810.

The physician services segment also has partnerships with health systems that are considered VIEs. The Company consolidates the majority of the partnerships with health systems as the Company is the primary beneficiary due to its ability to direct the majority of activities that most significantly impact the economic performance of the partnership which occurs generally through a management services agreement. Therefore, the results of consolidated partnerships are reflected as a component of the accompanying consolidated

8


Item 1. Financial Statements - (continued)

balance sheets, statements of operations and statements of cash flows.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs within the physician services segment, which are included in the accompanying consolidated balance sheets, as of
June 30, 2017 and December 31, 2016, were $1.52 billion and $1.31 billion, respectively, and the total liabilities of the consolidated VIEs were $1.15 billion and $1.10 billion, respectively. Included in total assets as of June 30, 2017 and December 31, 2016 were $240.5 million and $215.7 million, respectively, of assets which were restricted as to use due to the Company's ownership percentage in certain of the partnerships with health systems and could only be used to settle the obligations of the VIEs. The creditors of the consolidated VIEs within the physician services segment have no recourse to the Company.
Ambulatory Services Segment

The Company, through its wholly owned subsidiaries, owns interests, primarily 51%, in limited liability companies (LLCs) and limited partnerships (LPs) which own and operate ambulatory surgery centers (ASCs or surgery centers). The Company has variable interests in the LLCs and LPs through its equity ownership interests. Each LLC and LP is considered a VIE due to its structure as a limited partnership or functional equivalent under ASU No. 2015-02. For those LLCs and LPs which the Company consolidates, the Company is considered the primary beneficiary due to the partnership agreements allowing the Company to govern the day-to-day activities and thereby control the most significant economic activities.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs within the ambulatory services segment, which are included in the accompanying consolidated balance sheets, as of June 30, 2017 and December 31, 2016, were $373.5 million and $388.1 million, respectively, and the total liabilities of the consolidated VIEs were $119.4 million and $117.9 million, respectively. Included in total assets as of June 30, 2017 and December 31, 2016, were $177.4 million and $185.5 million of assets, respectively, which were restricted as to use due to the Company's ownership percentage in these entities from the ambulatory services segments and could only be used to settle the obligations of the VIEs. The creditors of the VIEs have no recourse to the Company, with the exception of $20.2 million and $14.7 million of debt guaranteed by the Company at June 30, 2017 and December 31, 2016, respectively.

Unconsolidated Variable Interest Entities

The Company also has certain equity interests in unconsolidated affiliates which meet the definition of a VIE. The Company has a variable interest in 27 LLCs and LPs through its equity interests; however, the Company is not the primary beneficiary of these entities as it does not have the power to direct the activities that most significantly impact the entities' economic performance as a result of the Company's shared or lack of control. In each of the investments, the Company is not obligated to contribute any additional capital beyond its initial contribution and its maximum exposure to loss is limited to the initial capital contribution. As a result, the Company has accounted for these investments under the equity method of accounting and net earnings or loss from these investments is included in equity in earnings of unconsolidated affiliates in the accompanying consolidated statements of operations. See Note 7 for further information.

The Company recognized management and billing fees associated with these investments totaling $1.3 million and $5.5 million during the three months ended June 30, 2017 and 2016, respectively, and $3.0 million and $11.8 million for the six months ended June 30, 2017 and 2016, which are included in net revenue in the accompanying consolidated statements of operations. The Company has also recorded receivables from these entities in the amount of $5.6 million and $6.1 million as of June 30, 2017 and December 31, 2016, respectively. These receivables are included in the other current assets in the accompanying consolidated balance sheets.

(3) Revenue Recognition and Accounts Receivable

Revenue Recognition

Net revenue primarily consists of fee for service revenue and is derived principally from the provision of physician services to patients of the healthcare facilities and communities served and from facility fees for the procedures performed at surgery centers. Contract revenue and other revenue primarily represents income earned from hospital customers to supplement payments from third-party payors, contract staffing assignments and subscription fees.

Patients are billed for services provided, and the Company receives payments for these services from patients or their third-party payors. Payments for services provided are generally less than billed charges. The Company recognizes fee for service revenue, net of contractual adjustments and provision for uncollectibles, at the time services are provided by healthcare providers. Services provided but not yet billed are estimated and recognized in the period services are provided. Revenue is recognized for services provided during the period but not yet billed based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided

9


Item 1. Financial Statements - (continued)

for under each patients’ healthcare plan, mandated payment rates under the Medicare and Medicaid programs, and historical cash collections. The Company records net revenue from uninsured patients at an estimated realizable value, which includes a provision for uncollectible balances, based on historical cash collections (net of recoveries). The Company records revenue net of an allowance for contractual adjustments, which represents the net revenue expected to collect from third-party payors (including managed care, commercial and governmental payors such as Medicare and Medicaid) and patients insured by these payors. These expected collections are based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient's healthcare plans, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries). The provision for uncollectibles includes an estimate of uncollectible balances due from uninsured patients, uncollectible co-pay and deductible balances due from insured patients and special charges, if any, for uncollectible balances due from managed care, commercial and governmental payors.

In certain circumstances, federal law requires providers to render emergency medical services to any patient who requires care regardless of their ability to pay. Services to these patients are not considered to be charity care and provisions for uncompensated care for these services are estimated accordingly. Although the Company does provide a level of charity care, it is not significant to the Company's net revenues.

Estimating net revenue is a complex process, largely due to the volume of transactions, the number and complexity of contracts with payors, the limited availability, at times, of certain patient and payor information at the time services are provided, and the length of time it takes for collections to fully mature. In the period services are provided, the Company estimates gross charges based on billed services plus an estimate for unbilled services based on pending case data collected, estimates contractual allowances based on contracted rates and historical or actual cash collections (net of recoveries), when available, and estimates the provision for uncollectibles based on historical cash collections (net of recoveries) from uninsured patients. The relationship between gross charges and the allowances for both contractual adjustments and provision for uncollectibles is significantly influenced by payor mix, as collections on gross charges may vary significantly depending on whether and with whom the patients the Company provides services to in the period are insured and the Company's contractual relationships with those payors. Payor mix is subject to change as additional patient and payor information is obtained after the period services are provided. The Company periodically assesses the estimates of unbilled revenue, contractual adjustments, provision for uncollectibles and payor mix for a period of at least one year following the date of service by analyzing actual results, including cash collections, against estimates. Changes in these estimates are charged or credited to the consolidated statement of operations in the period that the assessment is made. Significant changes in payor mix, contractual arrangements with payors, specialty mix, acuity, business office operations, general economic conditions and health care coverage provided by federal or state governments or private insurers may have a significant impact on estimates and significantly affect the results of operations and cash flows. Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

The Company's billing and accounting systems provide historical trends of cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly as revenues are recognized. These estimates are not, however, established from billing system generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter. The principal exposure for uncollectible fee for service visits is from self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance.

Net revenue for the Company consists of the following major payors (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016(1)
 
2017
 
2016(1)
Medicare
$
489.3

 
25
 %
 
$
157.7

 
21
 %
 
$
952.6

 
25
 %
 
$
308.6

 
21
 %
Medicaid
166.4

 
9

 
33.9

 
4

 
322.1

 
8

 
67.8

 
4

Commercial and managed care
1,231.3

 
63

 
554.0

 
73

 
2,437.2

 
64

 
1,086.1

 
73

Self-pay
882.4

 
45

 
75.8

 
10

 
1,695.7

 
44

 
141.5

 
10

Net fee for service revenue
2,769.4

 
142

 
821.4

 
108

 
5,407.6

 
141

 
1,604.0

 
108

Contract and other revenue
251.2

 
13

 
38.4

 
5

 
468.8

 
13

 
74.1

 
5

Provision for uncollectibles
(1,073.6
)
 
(55
)
 
(101.3
)
 
(13
)
 
(2,050.8
)
 
(54
)
 
(194.9
)
 
(13
)
Net revenue
$
1,947.0

 
100
 %
 
$
758.5

 
100
 %
 
$
3,825.6

 
100
 %
 
$
1,483.2

 
100
 %
 
(1)
On December 1, 2016, the Company completed the Merger. Accordingly, historical amounts from EHH for periods prior to that date are not included.


10


Item 1. Financial Statements - (continued)

During the six months ended June 30, 2017, the Company's net fee for service revenue associated with self-pay, prior to the provision for uncollectibles, has significantly increased primarily due to the payor mix of EHH, which has a higher percentage of self-pay patients from the concentration of emergency medicine services.

Due to the nature of the Company's operations, it is required to separate the presentation of its bad debt expense on the consolidated statements of operations. The Company records the portion of its bad debts associated with its physician services segment as a component of net revenue in the accompanying consolidated statements of operations, and the remaining portion, which is associated with its ambulatory services segment, is recorded as a component of other operating expenses in the accompanying consolidated statements of operations. The bifurcation is a result of the Company's ability to assess the ultimate collection of the patient service revenue associated with its ambulatory services segment before services are provided as those services are pre-scheduled and non-emergent. Bad debt expense for ambulatory services is included in other operating expenses and was $5.4 million and $6.3 million for the three months ended June 30, 2017 and 2016, respectively, and $12.3 million and $12.1 million for the six months ended June 30, 2017 and 2016, respectively.

Accounts Receivable

The Company manages accounts receivable by regularly reviewing its accounts and contracts and by providing appropriate allowances for contractual adjustments and uncollectible amounts. Some of the factors considered by management in determining the amount of such allowances are the historical trends of cash collections, contractual and bad debt write-offs, accounts receivable agings, established fee schedules, contracts with payors, changes in payor mix and procedure statistics. Actual collections of accounts receivable in subsequent periods may require changes in the estimated contractual allowances and provision for uncollectibles.

The Company tests its analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by the Company’s billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectability of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. The Company also supplements its allowance for doubtful accounts analysis for its physician services segment quarterly using a hindsight calculation that utilizes write-off data for all payor classes during the previous twelve month period to estimate the allowance for doubtful accounts at a point in time. Changes in these estimates, if any, are charged or credited to the consolidated statements of operations in the period of change. Material changes in estimates may result from unforeseen write-offs of patient or third-party accounts receivable, unsuccessful disputes with managed care payors, adverse macro-economic conditions which limit patients’ ability to meet their financial obligations for the care provided by physicians, or broad changes to government regulations that adversely impact reimbursement rates for services provided by the Company. Significant changes in payor mix, changes in contractual arrangements with payors, business office operations, general economic conditions and health care coverage provided by federal or state governments or private insurers may have a significant impact on the Company’s estimates and significantly affect its results of operations and cash flows. Concentration of credit risk is limited by the diversity and number of facilities, patients, payors and by the geographic dispersion of the Company’s operations.

At June 30, 2017 and December 31, 2016, the allowance for doubtful accounts was $2.34 billion and $584.0 million, respectively. The increase in the allowance for doubtful accounts from December 31, 2016 to June 30, 2017 is attributable to the growth of the allowance from the accounts receivable acquired in the Merger, which represents $1.65 billion, and from recent acquisitions that were recorded at net realizable value. Additionally, the allowance at December 31, 2016 has been reduced by $68.2 million related to the amount reclassified as part of the medical transportation business held for sale.

(4Acquisitions and Disposals

The Company accounts for its business combinations under the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any noncontrolling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.


11


Item 1. Financial Statements - (continued)

EHH Merger

On December 1, 2016, AmSurg and EHH completed the Merger and the strategic combination of their respective businesses. We believe the Merger combined two industry leaders to create a premier healthcare services provider offering clinical solutions on a national scale, enabling the Company to create value for health systems, payors, providers and patients. Based on an evaluation of the provisions of ASC Topic 805, Business Combinations, AmSurg was determined to be the acquirer for accounting purposes. Under the terms of the Merger, each share of AmSurg common stock was converted into one share of Company common stock, each share of AmSurg 5.25% mandatory convertible preferred stock, Series A-1 (AmSurg Preferred Stock) was converted into one share of Company 5.25% mandatory convertible preferred stock, Series A-1 (Company Preferred Stock), and each share of EHH common stock was converted into 0.334 shares of Company common stock. Pursuant to the Merger, the Company issued 62,582,161 shares of common stock to former EHH stockholders, which were valued at approximately $4.26 billion based on the closing price of AmSurg's common stock on November 30, 2016. In addition, the Company issued replacement equity awards, which were valued at $180.3 million.

Concurrently with the Merger, on December 1, 2016, the Company entered into a new senior secured credit facility, incurring a new $3.50 billion term loan and an $850.0 million ABL revolving credit facility. At the closing of the Merger, the Company also completed a private offering of $550.0 million aggregate principal amount of 6.25% senior unsecured notes due 2024 to provide incremental financing to the Company, adjust scheduled maturities and reallocate between variable and fixed rate debt.

Fees and expenses associated with the Merger, which includes fees incurred related to the Company's equity issuances and debt financings, was approximately $199.0 million during the year ended December 31, 2016. Approximately $94.9 million was capitalized as deferred financing costs, $73.8 million was expensed as transaction and integration costs, and $30.3 million was recorded as debt extinguishment costs during the year ended December 31, 2016.

Physician Services Activity

The Company, through wholly owned subsidiaries, completed the acquisition of nine physician practices in the six months ended June 30, 2017 and six physician practices in the six months ended June 30, 2016. The aggregate amount paid for the physician practices and for settlement of purchase price payable obligations during the six months ended June 30, 2017 and 2016 was approximately $440.8 million and $255.4 million, respectively, and was paid in cash and funded by either operating cash flow or borrowings under the Company's existing or prior credit agreement or a combination thereof. In addition to the cash paid, approximately $110.0 million of consideration was deferred and paid in July 2017.

Ambulatory Services Activity

During each of the six months ended June 30, 2017 and 2016, the Company, through wholly-owned subsidiaries, acquired a controlling interest in four surgery centers. The aggregate amount paid for the centers during the six months ended June 30, 2017 and 2016 was approximately $33.3 million and $25.7 million, respectively, and was paid in cash and funded by either operating cash flow or borrowings under the Company's existing or prior credit agreement or a combination thereof. In addition to the cash paid, approximately $13.5 million of consideration was deferred and paid in July 2017. During the six months ended June 30, 2017 and 2016, the Company disposed of three surgery centers and two surgery centers, respectively, and recognized a net loss from the disposals of $3.9 million in the six months ended June 30, 2017 and a net gain of $3.3 million in the six months ended June 30, 2016.

Purchase Price Allocations

Acquired assets and assumed liabilities include, but are not limited to, accounts receivable, fixed assets, intangible assets, deferred income taxes and insurance liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. The preliminary estimated fair value assigned to goodwill is primarily attributable to synergies expected to arise after the Merger by enhancing the growth profile and diversity of the Company across the healthcare continuum. The Merger did not result in additional tax deductible goodwill. A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized. The amount allocated to the deferred income tax liability is subject to change as a result of the final allocation of purchase price to amortizable intangibles. The accounting for the Merger is currently preliminary. The Company continues to obtain information relative to the fair values of assets acquired, liabilities assumed and any noncontrolling interests in the transaction which could result in material changes to the amounts allocated below. The Company expects to finalize the purchase price allocation for EHH as soon as practical.

12


Item 1. Financial Statements - (continued)

During the six months ended June 30, 2017, adjustments were recorded to the purchase price allocation related to EHH as part of the Company’s continuing evaluation of the assets and liabilities existing at the date of acquisition. This resulted in a net increase to goodwill of approximately $122.1 million and corresponding changes to certain account classes from the preliminary allocation recorded at December 31, 2016 that are reflected in the table below. The Company is still in the process of reviewing all major classes of consideration and expects to use the full measurement period from the Merger date to complete the evaluation. The acquisition date fair value of the total consideration transferred and acquisition date fair value of each major class of consideration for the acquisition of EHH are as follows (in millions): 
Cash and cash equivalents
$
165.8

Insurance collateral
59.9

Accounts receivable
1,155.6

Supplies inventory
38.7

Prepaid and other current assets
119.3

Property and equipment
376.0

Goodwill
4,642.9

Intangible assets
3,070.8

Other long-term assets
103.1

Accounts payable
(63.6
)
Accrued salaries and benefits
(338.0
)
Accrued interest
(17.3
)
Other accrued liabilities
(333.0
)
Deferred income taxes
(966.2
)
Long term insurance reserves
(314.1
)
Other long-term liabilities
(62.8
)
Long-term debt
(3,063.1
)
Total fair value
4,574.0

Less: Fair value attributable to noncontrolling interests
130.6

Acquisition date fair value of total consideration transferred
$
4,443.4



13


Item 1. Financial Statements - (continued)

The acquisition date fair value of the total consideration transferred and acquisition date fair value of each major financial class for individual acquisitions in both the ambulatory services and physician services segments completed in the six months ended June 30, 2017, including post acquisition date adjustments, are as follows (in millions):
Accounts receivable
$
62.1

Supplies inventory
0.3

Prepaid and other current assets
4.4

Property and equipment
5.3

Goodwill
496.4

Intangible assets
236.0

Other long-term assets
1.0

Accounts payable
(6.6
)
Accrued salaries and benefits
(23.5
)
Other accrued liabilities
(48.3
)
Deferred income taxes
(60.2
)
Other long-term liabilities
(37.7
)
Long-term debt
(0.5
)
Total fair value
628.7

Less: Fair value attributable to noncontrolling interests
31.1

Acquisition date fair value of total consideration transferred
$
597.6


Represents the preliminary allocation of fair value of acquired assets and liabilities associated with these acquisitions at June 30, 2017.

During the six months ended June 30, 2017, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2016. For the six months ended June 30, 2017 and 2016 approximately $236.4 million and $100.9 million, respectively, of goodwill recorded was deductible for tax purposes.

The total fair value of acquisitions completed by the Company include amounts allocated to goodwill, which result from the acquisitions' favorable reputations in their markets, their market positions and their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model. Fair value attributable to noncontrolling interests is based on significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of noncontrolling interests primarily from acquisitions of centers. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. The fair value of noncontrolling interests for acquisitions where the purchase price allocation is not finalized may be subject to adjustment as the Company completes its initial accounting for acquired intangible assets. Additionally, the Company continues to obtain information relative to the fair values of assets acquired, liabilities assumed and any noncontrolling interests associated with acquisitions completed in the last 12 months. Acquired assets and assumed liabilities include, but are not limited to, fixed assets, licenses, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques used to determine the fair value of the assets acquired or liabilities assumed. A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the amortizable intangible assets recognized. The amount allocated to the deferred income tax liability is subject to change as a result of the final allocation of purchase price to amortizable intangibles. The Company expects to finalize the purchase price allocation for its most recent acquisitions as soon as practical.

During the three and six months ended June 30, 2017, the Company incurred approximately $27.4 million and $48.9 million of transaction and integration costs, respectively, and during the three and six months ended June 30, 2016 the Company incurred approximately $5.1 million and $6.5 million, respectively. The costs incurred during the three and six months ended June 30, 2017 were primarily a result of the Merger and from recent acquisitions.
 

14


Item 1. Financial Statements - (continued)

Net revenue and net earnings associated with completed acquisitions during the six months ended June 30, 2017 and 2016 are as follows (in millions):
 
Six Months Ended June 30,
 
2017
 
2016
Net revenue
$
88.6

 
$
12.7

 
 
 
 
Net earnings
$
5.6

 
$
2.2

Less: Net earnings attributable to noncontrolling interests
0.7

 
0.6

Net earnings attributable to Envision Healthcare Corporation stockholders
$
4.9

 
$
1.6


The unaudited consolidated pro forma results for the six months ended June 30, 2017 and 2016, assuming all 2017 acquisitions had been consummated on January 1, 2016, and the Merger and all 2016 acquisitions had been consummated on January 1, 2015 are as follows (in millions):
 
Six Months Ended June 30,
 
2017
 
2016
Net revenue
$
4,017.1

 
$
3,995.0

Net earnings from continuing operations attributable to Envision Healthcare Corporation stockholders
155.6

 
143.5


The unaudited pro forma results for the six months ended June 30, 2017 were adjusted to exclude $48.9 million of transaction costs, which is reflected in the unaudited pro forma results for 2016. The unaudited pro forma results for the six months ended June 30, 2017 and 2016 were adjusted to exclude the results from the medical transportation business, including $29.6 million of pre-tax corporate overhead expenses allocated to continuing operations during the six months ended June 30, 2017. In addition, the unaudited pro forma results assumes proceeds from the sale of the medical transportation business would be used to repay outstanding debt obligations. Certain other adjustments, including those related to conforming accounting policies, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts.

(5Discontinued Operations
 
During the six months ended June 30, 2017, the Company initiated a strategic review of each of the Company's lines of business. As a result of that review, management and the Board determined that the Company will focus on physician centric services, including facility based physician services, post-acute services and ambulatory services, which partners with community based physicians across the country. Accordingly, the Board approved a plan to market and divest the medical transportation business, representing the historical medical transportation reportable segment. The Company determined that the planned divestiture of the medical transportation business meets the criteria for classification as discontinued operations. All historical operating results for the medical transportation business are reflected within discontinued operations in the consolidated statements of operations. Furthermore, all assets and liabilities associated with the medical transportation business were classified as assets and liabilities held for sale in our consolidated balance sheets for all periods presented and are preliminary due to the purchase price allocation from the Merger. See Note 17 for more information regarding the divestiture of the medical transportation business.

In accordance with ASC 740, Income Taxes, a tax liability should be recognized for the excess of the financial reporting basis over the tax basis (or the tax benefit when the tax basis exceeds the financial reporting basis) of an investment in a subsidiary (outside basis difference) when it is apparent that the temporary differences will reverse in the foreseeable future. In connection with presenting the medical transportation business as a discontinued operation as of June 30, 2017, the Company was required to re-evaluate its position related to the recognition of a deferred tax asset or liability for the outside basis differences of the entities being held for sale. Previously, deferred taxes for such outside basis differences had not been recognized as the Company applied one of the exceptions provided in ASC 740. However, the outside basis differences are now expected to reverse in the foreseeable future and therefore, these exceptions no longer applied at June 30, 2017. As a result, the Company recorded deferred tax expense and associated deferred tax liability in the amount of $484.0 million, which is a component of income tax expense of discontinued operations, as of June 30, 2017, and will be the obligation of the Company upon the completion of the divestiture of the medical transportation business.


15


Item 1. Financial Statements - (continued)

The following table is a reconciliation of the major classes of assets and liabilities classified as held for sale in the accompanying consolidated balance sheets representing the medical transportation business as of June 30, 2017 and December 31, 2016 (in millions):
 
June 30,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23.3

 
$
14.7

Insurance collateral (1)
1.5

 

Accounts receivable, net
414.8

 
457.2

Supplies inventory
38.2

 
37.8

Prepaid and other current assets
43.0

 
41.4

Property and equipment, net
292.0

 
294.4

Investments in unconsolidated affiliates
0.2

 
2.2

Goodwill
1,244.8

 
1,235.0

Intangible assets, net
913.4

 
929.4

Other assets
34.4

 
27.4

Total assets held for sale
$
3,005.6

 
$
3,039.5

Liabilities
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
0.5

 
$
0.4

Accounts payable
31.3

 
31.4

Accrued salaries and benefits
75.6

 
77.4

Other accrued liabilities
139.0

 
140.2

Long-term debt
1.1

 
1.4

Deferred income taxes
361.4

 
337.0

Insurance reserves
89.0

 
91.6

Other long-term liabilities
36.7

 
38.6

Total liabilities held for sale
$
734.6

 
$
718.0

 
(1)
Insurance collateral for claims related to the medical transportation business are generally held within a captive insurance company. Such balances are available to settle the insurance claims of the medical transportation business but are not recorded into assets held for sale as the captive insurance company is a subsidiary of the Company, not the medical transportation business.


16


Item 1. Financial Statements - (continued)

The following table summarizes the results of discontinued operations for the three and six months ended June 30, 2017 (in millions):  
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Net revenues
$
588.8

 
$
1,182.3

Operating expenses:
 
 
 
Salaries and benefits
336.0

 
673.9

Supply cost
13.9

 
27.8

Insurance expense
22.3

 
41.0

Other operating expenses
151.2

 
303.5

Transaction and integration costs
1.7

 
6.0

Depreciation and amortization
34.7

 
68.9

Total operating expenses
559.8

 
1,121.1

Equity in earnings of unconsolidated affiliates
0.1

 
0.3

Operating income
29.1

 
61.5

Interest expense, net
22.4

 
44.8

Earnings before income taxes
$
6.7

 
$
16.7


 
 
 
Results of discontinued operations:
 
 
 
Earnings from discontinued operations
$
6.7

 
$
16.7

Income tax expense of discontinued operations
(2.8
)
 
(491.0
)
Net earnings (loss) from discontinued operations
$
3.9

 
$
(474.3
)

In accordance with ASC 205, "Presentation of Financial Statements", for purposes of discontinued operations presentation, general corporate expenses are not permitted to be allocated to the operations of a business to be disposed. Accordingly, for the three and six months ended June 30, 2017 and on a before tax basis, approximately $15.1 million and $29.6 million, respectively, of general corporate expenses, including allocations for corporate salaries and stock-based compensation, general and administrative costs and depreciation, were removed from the medical transportation business and reallocated to the Company's remaining segments. In addition, ASC 205 requires interest associated with debt that is required to be repaid as a result of the disposal transaction to be allocated to discontinued operations. Accordingly, during the three and six months ended June 30, 2017, the Company allocated $21.8 million and $43.6 million, respectively, in interest expense to the medical transportation business, which is reflected in the loss from discontinued operations. The Company estimated the interest allocation by applying the effective interest rate of the Company's term loan B due 2023 by the estimated proceeds, less taxes and professional fees, from the potential divestiture of the medical transportation business.

For the six months ended June 30, 2017, the net cash flows provided by operating activities attributable to discontinued operations were $100.7 million and the net cash flows used in investing activities were $61.4 million, including $11.6 million for an acquisition. As the Medical Transportation business was acquired on December 1, 2016, there were no cash flows attributable to discontinued operations for the six months ended June 30, 2016.

(6) Fair Value Measurements

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 inputs used by the Company to measure fair value are classified into the following hierarchy:
 
Level 1: Quoted prices in active markets for identical assets or liabilities.
 
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
 
Level 3: Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.


17


Item 1. Financial Statements - (continued)

In determining the fair value of assets and liabilities that are measured on a recurring basis at June 30, 2017 and December 31, 2016, with the exception of contingent purchase price payables, the Company utilized Level 1 and 2 inputs to perform such measurements methods, which were commensurate with the market approach. The Company utilizes Level 3 inputs to measure the fair value of the contingent consideration. There were no transfers to or from Levels 1 and 2 during the three and six months ended June 30, 2017. The Company's non-patient receivables and accounts payable are reflected in the financial statements at cost, which approximates fair value.

The following table summarizes the valuation of the Company’s financial instruments by the above fair value hierarchy levels as of June 30, 2017 and December 31, 2016 (in millions):
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
U.S. Treasuries
$
0.4

 
$
1.2

 
$

 
$
1.6

Corporate bonds/Fixed income
30.5

 
9.1

 

 
39.6

Corporate equity
13.9

 
0.1

 

 
14.0

Liabilities:
 
 
 
 
 
 
 
Contingent consideration

 

 
5.7

 
5.7

 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
U.S. Treasuries
$
0.4

 
$
0.6

 
$

 
$
1.0

Corporate bonds/Fixed income
22.8

 
5.5

 

 
28.3

Corporate equity
14.2

 

 

 
14.2

Liabilities:
 
 
 
 
 
 
 
Contingent consideration

 

 
1.0

 
1.0


The following table summarizes the change in financial instruments classified as Level 3 in the fair value hierarchy as of June 30, 2017 (in millions):
Balance at December 31, 2016
$
1.0

Increase due to current period acquisitions
4.7

Balance at June 30, 2017
$
5.7


Insurance Collateral

Insurance collateral is comprised of investments in U.S. Treasuries and marketable equity and debt securities held by the Company’s wholly owned captive insurance subsidiaries that support the Company’s insurance programs and reserves, as well as cash deposits with third parties. Certain of these investments, if sold or otherwise liquidated, would have to be replaced by other suitable financial assurances and are, therefore, considered restricted. These investments are designated as available-for-sale and reported at fair value with the related temporary unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss), net of deferred income tax. Declines in the fair value of a marketable investment security which are determined to be other-than-temporary are recognized in the statements of operations, thus establishing a new cost basis for such investment. Investment income earned on these investments is reported as a component of other income, net in the accompanying statements of operations. Realized gains and losses are determined based on an average cost basis.

Investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.


18


Item 1. Financial Statements - (continued)

Insurance collateral consisted of the following as of June 30, 2017 and December 31, 2016 (in millions):
 
June 30, 2017
 
December 31, 2016
Available-for-sale securities:
 
 
 
U.S. Treasuries
$
1.6

 
$
1.0

Corporate bonds/Fixed income
39.6

 
28.3

Corporate equity
14.0

 
14.2

Total available-for-sale securities
55.2

 
43.5

Cash deposits and other
45.3

 
43.5

Insurance collateral
$
100.5

 
$
87.0


Amortized cost basis and aggregate fair value of the Company's available-for-sale securities as of June 30, 2017 and December 31, 2016 were as follows (in millions):
 
June 30, 2017
 
 
 
Gross
 
Gross
 
 
 
Cost
 
Unrealized
 
Unrealized
 
Fair
 
Basis
 
Gains
 
Losses
 
Value
Description:
 
 
 
 
 
 
 
U.S. Treasuries
$
1.6

 
$

 
$

 
$
1.6

Corporate bonds/Fixed income
39.4

 
0.2

 

 
39.6

Corporate equity
12.9

 
1.2

 
(0.1
)
 
14.0

Total available-for-sale securities
$
53.9

 
$
1.4

 
$
(0.1
)
 
$
55.2

 
December 31, 2016
 
 
 
Gross
 
Gross
 
 
 
Cost
 
Unrealized
 
Unrealized
 
Fair
 
Basis
 
Gains
 
Losses
 
Value
Description:
 
 
 
 
 
 
 
U.S. Treasuries
$
1.0

 
$

 
$

 
$
1.0

Corporate bonds/Fixed income
28.3

 

 

 
28.3

Corporate equity
14.4

 
0.1

 
(0.3
)
 
14.2

Total available-for-sale securities
$
43.7

 
$
0.1

 
$
(0.3
)
 
$
43.5


As of June 30, 2017, available-for-sale securities included U.S. Treasuries, corporate bonds and fixed income securities of $3.6 million with contractual maturities within one year and $36.1 million with contractual maturities extending longer than one year through five years and $1.5 million with contractual maturities extending longer than five years. Actual maturities may differ from contractual maturities as a result of the Company's ability to sell these securities prior to maturity.

The Company's available-for-sale investment securities that were temporarily impaired as of June 30, 2017 and December 31, 2016 consisted of corporate equity securities that had a fair value of $2.9 million and $7.6 million with a cumulative unrealized loss position of less than $0.1 million and $0.3 million for less than twelve months, respectively. There were no available-for-sale investment securities that were other-than-temporarily impaired as of June 30, 2017.

The Company evaluates the investment securities available-for-sale on a quarterly basis to determine whether declines in the fair value of these securities are other-than-temporary. The evaluation consists of reviewing the fair value of the security compared to the carrying amount, the historical volatility of the price of each security, and any industry and company specific factors related to each security.

The Company is not aware of any specific factors indicating that the underlying issuers of the corporate bonds/fixed income securities would not be able to pay interest as it becomes due or repay the principal amount at maturity. Therefore, the Company believes that the changes in the estimated fair values of these debt securities are related to temporary market fluctuations and the Company does not

19


Item 1. Financial Statements - (continued)

intend to dispose of these investments. Additionally, the Company is not aware of any specific factors which indicate the unrealized losses on the investments in corporate equity securities are due to anything other than temporary market fluctuations.
 
The Company received proceeds of $6.5 million and $7.0 million on the sale and maturities of available-for-sale securities for the three and six months ended June 30, 2017, respectively. For the three and six months ended June 30, 2017, a gain of less than $0.1 million was reclassified from accumulated other comprehensive income to other income, net in the accompanying consolidated statements of operations. For the three and six months ended June 30, 2017, unrealized gains on available-for-sale securities of $0.4 million and $1.3 million, respectively, were recorded in accumulated other comprehensive income. The Company did not receive any proceeds from the maturity or sale of available-for-sale securities for the three and six months ended June 30, 2016.

(7) Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost, unless such investments are a result of the Company entering into a transaction whereby the Company loses control of a previously controlled entity but retains a noncontrolling interest. Such transactions, which result in the deconsolidation of a previously consolidated entity, are measured at fair value. The fair value measurement utilizes Level 3 inputs, which include unobservable data, to measure the fair value of the retained noncontrolling interest. The fair value determination is generally based on a combination of multiple valuation methods, which can include discounted cash flow, income approach, or market value approach, which incorporates estimates of future earnings and market valuation multiples for certain guideline companies. These investments are included as investments in unconsolidated affiliates in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in equity in earnings of unconsolidated affiliates in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

As of June 30, 2017 and December 31, 2016, the Company recorded in the accompanying consolidated balance sheets its investments in unconsolidated affiliates of $131.4 million and $114.7 million, respectively. The Company's net earnings from these investments during the three months ended June 30, 2017 and 2016 were approximately $5.7 million and $7.4 million, respectively, and $10.6 million and $14.0 million, respectively, for the six months ended June 30, 2017 and 2016.

During the six months ended June 30, 2017, the Company entered into two equity method investments. As a result of these investments, the Company contributed its controlling interest in two centers in exchange for a noncontrolling interest in the new investments and net cash consideration of $1.2 million. These investments are jointly owned by health systems and the Company. The newly formed investments (including the contributed centers) are controlled by the health systems. Also, as part of these transactions, the Company obtained a non-controlling interest in two additional centers which were contributed by the health systems. During the six months ended June 30, 2016, the Company's ambulatory services segment sold a portion of its interest in one surgery center, which resulted in the surgery center being deconsolidated and subsequently accounted for as an equity method investment.

As a result of these transactions, the Company recorded in the accompanying consolidated balance sheet, as a component of investments in unconsolidated affiliates, the fair value of the Company's investment in these entities of approximately $15.4 million and $1.8 million during the six months ended June 30, 2017 and 2016, respectively.

In each of these transactions, the gain or loss on deconsolidation, which is primarily non-cash in nature, was determined based on the difference between the fair value of the Company’s interest, which was based on estimates of the expected future earnings, in the new entity and the carrying value of both the tangible and intangible assets of the contributed center immediately prior to the transaction. In certain cases, the Company evaluated likely scenarios which were weighted by a range of expected probabilities of 10% to 50% which were primarily based on third-party valuations received by the Company. Accordingly, the Company recognized a net gain on deconsolidation which is included in net gain on disposals and deconsolidations in the accompanying consolidated statements of operations of approximately $7.4 million during the six months ended June 30, 2017. There was no deconsolidation activity during the three months ended June 30, 2017. During both the three and six months ended June 30, 2016, the Company recognized a net loss on deconsolidation in the accompanying consolidated statements of operations of approximately $0.7 million

20


Item 1. Financial Statements - (continued)

(8Goodwill and Intangible Assets

Goodwill 

The changes in the carrying amount of goodwill for the six months ended June 30, 2017 are as follows (in millions):
 
Physician Services
 
Ambulatory Services
 
Total
Balance at December 31, 2016
$
5,509.7

 
$
2,074.3

 
$
7,584.0

Goodwill acquired, including post acquisition adjustments
534.1

 
75.0

 
609.1

Goodwill disposed, including impact of deconsolidation transactions

 
(14.1
)
 
(14.1
)
Balance at June 30, 2017
$
6,043.8

 
$
2,135.2

 
$
8,179.0


During the six months ended June 30, 2017, goodwill was recorded in the Company's physician services segment due to the acquisition of nine physician practices. In the Company's ambulatory services segment, goodwill increased due to the acquisition of four surgery centers and was offset by $14.1 million of goodwill from the disposal of three surgery centers within the ambulatory services segment.

Intangible Assets
Amortizable Intangible Assets
 
Estimated Useful Life
 
Weighted Average Amortization Period
Customer relationships
 
17 to 20 years
 
18.6
Capitalized software
 
3 to 5 years
 
4.4
Trade names
 
1 year
 
0.4
Agreements, contracts and other
 
3 to 10 years
 
3.6

Intangible assets at June 30, 2017 and December 31, 2016 consisted of the following (in millions):
 
June 30, 2017
 
December 31, 2016
 
Gross
 
 
 
 
 
Gross
 
 
 
 
 
Carrying
 
Accumulated
 
 
 
Carrying
 
Accumulated
 
 
 
Amount
 
Amortization
 
Net 
 
Amount
 
Amortization
 
Net 
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
3,422.9

 
$
(236.1
)
 
$
3,186.8

 
$
3,235.0

 
$
(154.6
)
 
$
3,080.4

Capitalized software
148.0

 
(58.0
)
 
90.0

 
136.5

 
(41.8
)
 
94.7

Trade names
25.0

 
(14.6
)
 
10.4

 
25.0

 
(2.1
)
 
22.9

Agreements, contracts and other
13.7

 
(5.8
)
 
7.9

 
13.2

 
(4.7
)
 
8.5

Total amortizable intangible assets
3,609.6

 
(314.5
)
 
3,295.1

 
3,409.7

 
(203.2
)
 
3,206.5

Non-amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
460.0

 

 
460.0

 
460.0

 

 
460.0

Restrictive covenant arrangements
8.0

 

 
8.0

 
9.0

 

 
9.0

Total non-amortizable intangible assets
468.0

 

 
468.0

 
469.0

 

 
469.0

Total intangible assets
$
4,077.6

 
$
(314.5
)
 
$
3,763.1

 
$
3,878.7

 
$
(203.2
)
 
$
3,675.5


Amortization of intangible assets for the three months ended June 30, 2017 and 2016 was $55.5 million and $21.1 million, respectively, and $111.6 million and $41.5 million for the six months ended June 30, 2017 and 2016, respectively. Estimated amortization of intangible assets for the remainder of 2017 and each of the following five years and thereafter is $113.4 million, $202.1 million, $193.7 million, $186.9 million, $180.0 million, $174.8 million and $2.24 billion, respectively. The Company expects to recognize amortization of all intangible assets over a weighted average period of 18.2 years with no expected residual values.

21


Item 1. Financial Statements - (continued)

(9) Other Accrued Liabilities

The following table presents a summary of items comprising other accrued liabilities in the accompanying consolidated balance sheets as of June 30, 2017 and December 31, 2016 (in millions):
 
June 30,
 
December 31,
 
2017
 
2016
Insurance reserves
$
76.1

 
$
78.2

Refunds payable
34.3

 
33.6

Deferred revenue
12.8

 
9.4

Other
292.9

 
132.0

Total other accrued liabilities
$
416.1

 
$
253.2


(10) Long-term Debt

Long-term debt at June 30, 2017 and December 31, 2016 consisted of the following (in millions):
 
June 30,
 
December 31,