Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited
(Dollars in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Total revenue $ 1,470,920 $ 1,368,734 $ 2,909,966 $ 2,685,722
Expenses:
Salaries and benefits 624,058 598,291 1,245,567 1,190,359
Professional fees 271,903 234,720 536,597 468,571
Supplies 259,391 252,787 517,172 494,165
Rents and leases 24,986 25,407 49,841 48,724
Rents and leases, related party 36,965 36,364 74,164 72,501
Other operating expenses 115,319 108,830 237,151 217,384
Government stimulus income — ( 8,324 ) — ( 8,463 )
Interest expense 18,160 18,692 37,421 36,813
Depreciation and amortization 36,312 34,670 71,663 69,372
Loss on debt extinguishment 1,898 — 1,898 —
Other non-operating gains ( 255 ) ( 520 ) ( 255 ) ( 522 )
Total operating expenses 1,388,737 1,300,917 2,771,219 2,588,904
Income before income taxes 82,183 67,817 138,747 96,818
Income tax expense 15,222 12,111 25,935 17,330
Net income 66,961 55,706 112,812 79,488
Net income attributable to noncontrolling interests 24,191 22,630 42,995 42,269
Net income attributable to Ardent Health Partners, Inc. $ 42,770 $ 33,076 $ 69,817 $ 37,219
Net income per share:
Basic and diluted $ 0.34 $ 0.26 $ 0.55 $ 0.30
Weighted-average common shares outstanding:
Basic and diluted 126,115,301 126,115,301 126,115,301 126,115,301
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
Unaudited
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Net income $ 66,961 $ 55,706 $ 112,812 $ 79,488
Other comprehensive (loss) income
Change in fair value of interest rate swap ( 3,051 ) 6,209 ( 2,100 ) 33
Other comprehensive (loss) income before income taxes ( 3,051 ) 6,209 ( 2,100 ) 33
Income tax (benefit) expense related to other comprehensive (loss) income items ( 796 ) 1,620 ( 548 ) 8
Other comprehensive (loss) income, net of income taxes ( 2,255 ) 4,589 ( 1,552 ) 25
Comprehensive income 64,706 60,295 111,260 79,513
Net income attributable to noncontrolling interests 24,191 22,630 42,995 42,269
Comprehensive income attributable to Ardent Health Partners, Inc. $ 40,515 $ 37,665 $ 68,265 $ 37,244
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
June 30, 2024 (1)
December 31, 2023 (1)
Assets
Current assets:
Cash and cash equivalents $ 334,538 $ 437,577
Accounts receivable 720,989 775,452
Inventories 105,010 105,485
Prepaid expenses 135,545 77,281
Other current assets 205,223 222,290
Total current assets 1,501,305 1,618,085
Property and equipment, net 807,285 811,089
Operating lease right of use assets 256,648 260,003
Operating lease right of use assets, related party 935,298 941,150
Goodwill 852,001 844,704
Other intangible assets, net 76,930 76,930
Deferred income taxes 34,720 32,491
Other assets 144,504 147,106
Total assets $ 4,608,691 $ 4,731,558
Liabilities and Equity
Current liabilities:
Current installments of long-term debt $ 10,725 $ 18,605
Accounts payable 371,098 474,543
Accrued salaries and benefits 248,358 267,685
Other accrued expenses and liabilities 278,378 233,271
Total current liabilities 908,559 994,104
Long-term debt, less current installments 1,081,963 1,168,253
Long-term operating lease liability 230,047 235,241
Long-term operating lease liability, related party 925,916 932,090
Self-insured liabilities 240,618 243,552
Other long-term liabilities 58,931 76,002
Total liabilities 3,446,034 3,649,242
Commitment and contingencies (see Note 9)
Redeemable noncontrolling interests 3,668 7,302
Equity:
Common units (Unlimited units authorized; 485,909,683 and 484,922,828 units issued and outstanding as of June 30, 2024 and December 31, 2023, respectively)
497,620 496,882
Accumulated other comprehensive income 17,009 18,561
Retained earnings 225,270 155,453
Equity attributable to Ardent Health Partners, Inc. 739,899 670,896
Noncontrolling interests 419,090 404,118
Total equity 1,158,989 1,075,014
Total liabilities and equity $ 4,608,691 $ 4,731,558
(1) As of June 30, 2024 and December 31, 2023, the unaudited condensed consolidated balance sheet included total liabilities of consolidated variable interest entities of $ 317.1 million and $ 337.8 million, respectively. Refer to Note 2, Summary of Significant Accounting Policies, for further discussion.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(Dollars in thousands)
Six Months Ended June 30,
2024 2023
Cash flows from operating activities:
Net income $ 112,812 $ 79,488
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 71,663 69,372
Other non-operating gains — ( 45 )
Loss on debt extinguishment 1,898 —
Amortization of deferred financing costs and debt discounts 2,857 2,842
Deferred income taxes ( 923 ) 3,886
Unit-based compensation 738 542
Loss from non-consolidated affiliates 2,139 3,416
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable 62,021 ( 50,398 )
Inventories 540 ( 906 )
Prepaid expenses and other current assets ( 42,791 ) ( 1,394 )
Accounts payable and other accrued expenses and liabilities ( 85,810 ) ( 15,239 )
Accrued salaries and benefits ( 19,395 ) ( 26,018 )
Net cash provided by operating activities 105,749 65,546
Cash flows from investing activities:
Investment in acquisitions, net of cash acquired ( 7,800 ) —
Purchases of property and equipment ( 62,765 ) ( 54,950 )
Other 58 ( 1,554 )
Net cash used in investing activities ( 70,507 ) ( 56,504 )
Cash flows from financing activities:
Proceeds from insurance financing arrangements 6,026 19,368
Proceeds from long-term debt 1,798 1,225
Payments of principal on insurance financing arrangements ( 4,337 ) ( 9,527 )
Payments of principal on long-term debt ( 104,843 ) ( 8,296 )
Debt issuance costs ( 2,444 ) —
Payments of initial public offering costs ( 2,824 ) —
Distributions to noncontrolling interests ( 31,657 ) ( 31,809 )
Redemption of equity attributable to noncontrolling interests — ( 26,024 )
Other — ( 5,399 )
Net cash used in financing activities ( 138,281 ) ( 60,462 )
Net decrease in cash and cash equivalents ( 103,039 ) ( 51,420 )
Cash and cash equivalents at beginning of year 437,577 456,124
Cash and cash equivalents at end of year $ 334,538 $ 404,704
Supplemental Cash Flow Information:
Non-cash purchase of property and equipment $ 4,929 $ 9,009
Deferred offering costs not yet paid $ 4,825 —
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Unaudited
(Dollars in thousands, except for unit amounts)
Equity Attributable to
Ardent Health Partners, Inc.
Noncontrolling Interests
Total Equity
Redeemable Noncontrolling Interests Common Units Accumulated Other Comprehensive Income Retained Earnings
Units (*)
Amount
Balance at December 31, 2022 $ 10,796 482,726,544 $ 510,968 $ 26,533 $ 101,549 $ 400,460 $ 1,039,510
Net income attributable to Ardent Health Partners, Inc. — — — — 4,143 — 4,143
Net income attributable to noncontrolling interests — — — — — 20,427 20,427
Net loss attributable to redeemable noncontrolling interests ( 788 ) — — — — — —
Other comprehensive loss — — — ( 4,564 ) — — ( 4,564 )
Distributions to noncontrolling interests — — — — — ( 12,555 ) ( 12,555 )
Vesting of Class C Units — 587,053 360 — — — 360
Balance at March 31, 2023 $ 10,008 483,313,597 $ 511,328 $ 21,969 $ 105,692 $ 408,332 $ 1,047,321
Net income attributable to Ardent Health Partners, Inc. — — — — 33,076 — 33,076
Net income attributable to noncontrolling interests — — — — — 23,600 23,600
Net loss attributable to redeemable noncontrolling interests ( 970 ) — — — — — —
Other comprehensive income — — — 4,589 — — 4,589
Distributions to noncontrolling interests — — — — — ( 19,254 ) ( 19,254 )
Redemption of equity attributable to noncontrolling interests — — ( 14,990 ) — — ( 11,034 ) ( 26,024 )
Vesting of Class C Units — 558,013 182 — — — 182
Balance at June 30, 2023 $ 9,038 483,871,610 $ 496,520 $ 26,558 $ 138,768 $ 401,644 $ 1,063,490
(*) See Note 1, Description of the Business and Basis of Presentation - Initial Public Offering and Corporate Conversion, for further discussion.
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Unaudited
(Dollars in thousands, except for unit amounts)
Equity Attributable to
Ardent Health Partners, Inc.
Noncontrolling Interests
Total Equity
Redeemable Noncontrolling Interests Common Units Accumulated Other Comprehensive Income Retained Earnings
Units (*)
Amount
Balance at December 31, 2023 $ 7,302 484,922,828 $ 496,882 $ 18,561 $ 155,453 $ 404,118 $ 1,075,014
Net income attributable to Ardent Health Partners, Inc. — — — — 27,047 — 27,047
Net income attributable to noncontrolling interests — — — — — 21,089 21,089
Net loss attributable to redeemable noncontrolling interests ( 2,285 ) — — — — — —
Other comprehensive income — — — 703 — — 703
Distributions to noncontrolling interests — — — — — ( 14,256 ) ( 14,256 )
Vesting of Class C Units — 464,853 512 — — — 512
Balance at March 31, 2024 $ 5,017 485,387,681 $ 497,394 $ 19,264 $ 182,500 $ 410,951 $ 1,110,109
Net income attributable to Ardent Health Partners, Inc. — — — — 42,770 — 42,770
Net income attributable to noncontrolling interests — — — — — 25,540 25,540
Net loss attributable to redeemable noncontrolling interests ( 1,349 ) — — — — — —
Other comprehensive loss — — — ( 2,255 ) — — ( 2,255 )
Distributions to noncontrolling interests — — — — — ( 17,401 ) ( 17,401 )
Vesting of Class C Units — 522,002 226 — — — 226
Balance at June 30, 2024 $ 3,668 485,909,683 $ 497,620 $ 17,009 $ 225,270 $ 419,090 $ 1,158,989
(*) See Note 1, Description of the Business and Basis of Presentation - Initial Public Offering and Corporate Conversion, for further discussion.
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ARDENT HEALTH PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
1. Description of the Business and Basis of Presentation
Reporting Entity
Ardent Health Partners, Inc. was initially formed in Delaware in 2015 as Ardent Health Partners, LLC. On July 17, 2024, Ardent Health Partners, LLC converted from a Delaware limited liability company into a Delaware corporation in connection with its initial public offering and changed its name to Ardent Health Partners, Inc. Ardent Health Partners, Inc. is a holding company that has affiliates that operate acute care hospitals and other healthcare facilities and employ physicians. The terms “Ardent,” the “Company,” “we,” “our” and “us,” as used in these notes to the unaudited condensed consolidated financial statements, refer to Ardent Health Partners, LLC and its affiliates and, subsequent to July 16, 2024, Ardent Health Partners, Inc. and its affiliates, unless stated otherwise or indicated by context. The term “affiliates” includes direct and indirect subsidiaries of Ardent and partnerships and joint ventures in which such subsidiaries are equity owners. At June 30, 2024, the Company operated 30 acute care hospitals in six states, including two rehabilitation hospitals and two surgical hospitals.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, which consist of normal recurring adjustments, and disclosures considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions.
The financial statements include the unaudited condensed consolidated balance sheets, income statements, comprehensive income statements, statements of cash flows and statements of changes in equity of the Company and its affiliates, which are controlled by the Company through the Company’s direct or indirect ownership of a majority equity interest and rights granted to the Company through certain variable interests. All intercompany balances and transactions have been eliminated in consolidation.
Certain information and disclosures normally included in annual financial statements presented in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, these unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2023 included in the Company's final prospectus, dated July 17, 2024, filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 18, 2024 (the "Final Prospectus") in connection with the Company's initial public offering.
Initial Public Offering and Corporate Conversion
On July 19, 2024, the Company completed an initial public offering of 12,000,000 shares of its common stock at a public offering price of $ 16.00 per share (the "IPO") for aggregate gross proceeds of $ 192.0 million and net proceeds of approximately $ 181.4 million, after deducting underwriting discounts and commissions of approximately $ 10.6 million. The Company provided the underwriters with an option to purchase up to an additional 1,800,000 shares of common stock of the Company, which was fully exercised by the underwriters, and, on July 30, 2024, the Company issued 1,800,000 additional shares of common stock at $ 16.00 per share for additional net proceeds of approximately $ 27.2 million, after deducting
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underwriting discounts and commissions of approximately $ 1.6 million. The Company’s common stock is listed on the New York Stock Exchange under the symbol “ARDT”.
On July 17, 2024, in connection with the IPO and immediately prior to the effectiveness of the Company's IPO registration statement on Form S-1, the Company converted from a Delaware limited liability company into a Delaware corporation by means of a statutory conversion (the “Corporate Conversion”) and changed its name to Ardent Health Partners, Inc. As a result of the Corporate Conversion, the outstanding limited liability company membership units and vested profits interest units were converted into 120,937,099 shares of common stock and outstanding unvested profits interest units were converted into 2,848,027 shares of restricted common stock. Immediately following the Corporate Conversion, ALH Holdings, LLC, a subsidiary of Ventas, Inc. ("Ventas"), a common unit holder that beneficially owned a percentage of the Company’s outstanding membership interests and maintained a seat on the Company’s board of managers, making Ventas a related party, contributed all of its outstanding common stock in AHP Health Partners, Inc. ("AHP Health Partners"), a direct subsidiary of the Company, to Ardent Health Partners, Inc. in exchange for 5,178,202 shares of common stock of Ardent Health Partners, Inc. (the "ALH Contribution"). As a result of the ALH Contribution, AHP Health Partners is a wholly-owned subsidiary of Ardent Health Partners, Inc. The Corporate Conversion and the ALH Contribution have been retrospectively applied to prior periods herein for the purposes of calculating basic and diluted net income per share. The Company’s certificate of incorporation authorizes 750,000,000 shares of common stock and 50,000,000 shares of preferred stock, each with a $ 0.01 par value per share.
Cybersecurity Incident
In November 2023, the Company determined that a ransomware cybersecurity incident had impacted and disrupted a number of the Company’s operational and information technology systems (the “Cybersecurity Incident”). During this time, the Company’s hospitals remained operational and continued to deliver patient care utilizing established downtime procedures. The Company immediately suspended user access to impacted information technology applications, executed cybersecurity protection protocols, and took steps to restrict further unauthorized activity. Additionally, because of the time taken to contain and remediate the Cybersecurity Incident, online electronic billing systems were not functioning at their full capacities and certain billing, reimbursement and payment functions were delayed, which had an adverse impact on the Company’s results of operations and cash flows for 2023.
While the Company’s hospitals continued to deliver patient care at varying levels during the disruption and remediation periods and the Company’s business is no longer materially disrupted, the Company has incurred, and will continue to incur, certain expenses related to the Cybersecurity Incident, including expenses to respond to, remediate and investigate the Cybersecurity Incident. The full scope of the costs and related impacts of the Cybersecurity Incident, including any future impact on our financial condition and results of operations, as well as the extent to which these costs will be offset by our cybersecurity insurance, has not been determined.
Pure Health Equity Investment
On May 1, 2023, an affiliate of Pure Health Holding PJSC (“Pure Health”) purchased a minority interest in the Company from the unit holders at the time. In connection with Pure Health’s investment, unit holders were eligible to exercise tag-along rights to sell a proportionate share of their individual equity ownership interest in Ardent Health Partners, LLC and AHP Health Partners, the Company's direct subsidiary. Ventas, a common unit holder that beneficially owned a percentage of the Company's outstanding membership interests and maintained a seat on the Company's board of managers, making Ventas a related party, exercised its tag-along right to sell its proportionate share of ownership interest in both Ardent Health Partners, LLC and AHP Health Partners. To fulfill Ventas’ right to sell its proportionate share of noncontrolling ownership interest in AHP Health Partners, the Company exercised its right to repurchase those shares from Ventas for $ 26.0 million concurrent with Pure Health’s purchase of a minority interest in the Company. The carrying value of the noncontrolling interest was adjusted proportionate to the shares repurchased to reflect the change in ownership of AHP Health Partners, with the difference between the fair value of the consideration paid and the amount by which the noncontrolling interest was adjusted recognized in equity attributable to Ardent Health Partners, LLC. As of July 30, 2024, following the consummation of the IPO and the underwriters’ exercise of their option to purchase additional shares, Pure Health and Ventas beneficially owned approximately 21.2 % and 6.5 %, respectively, of the Company’s outstanding common stock.
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General and Administrative Costs
The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative by the Company would include its corporate office costs, which were $ 29.1 million and $ 26.7 million for the three months June 30, 2024 and 2023, respectively, and $ 62.0 million and $ 53.2 million for the six months ended June 30, 2024 and 2023, respectively.
2. Summary of Significant Accounting Policies
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of Coronavirus Disease 2019 (“COVID-19”), a disease caused by a novel strain of coronavirus, a global pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted by the federal government. Among other provisions, the CARES Act authorized relief funding to healthcare providers through the Public Health and Social Services Emergency Fund (“Provider Relief Fund”). The CARES Act also expanded the Medicare Accelerated and Advance Payment Program through which eligible providers could request accelerated Medicare payments to be repaid through withholdings against future Medicare fee-for-service payments. Distributions from the Provider Relief Fund were intended to reimburse healthcare providers for lost revenue and increased expenses related to the pandemic and were not subject to repayment, provided recipients attested to and complied with applicable terms and conditions set forth by legislation. Distributions provided by the Provider Relief Fund were accounted for as government grants and were recognized in the unaudited condensed consolidated income statements once the grant was received and there was reasonable assurance that the applicable terms and conditions required to retain the distributions were met.
During the three and six months ended June 30, 2024, the Company received and recognized no cash distributions from the Provider Relief Fund and other state and local programs. During the three and six months ended June 30, 2023, the Company received $ 8.3 million and $ 8.5 million, respectively, in cash distributions from the Provider Relief Fund and other state and local programs and recognized the distributions as government stimulus income, a reduction of operating expenses, on its unaudited condensed consolidated income statements. Issuance of new guidance, as well as government compliance audits, may result in changes to management’s estimate of government stimulus income and, in certain cases, may result in derecognition of amounts previously recognized and repayment of such amounts. Since 2020, the Company has received and recognized $ 366.4 million of government stimulus income. Pursuant to Accounting Standards Update (“ASU”) 2021-10, Disclosures by Business Entities about Government Assistance , as an accounting policy election, the Company has utilized International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, by analogy to recognize funds received under the CARES Act from the Provider Relief Fund as revenue, given no direct authoritative guidance is available to for-profit organizations to recognize revenue for government contributions and grants. CARES Act revenue may be subject to future adjustments based on future changes to statutes.
Adoption of Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and applies only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2024. Entities may adopt ASU 2020-04 as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company adopted the standard as of January 1, 2023. The adoption of this standard had no material impact on the Company’s unaudited condensed consolidated financial statements and notes.
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Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which expands disclosures about reportable segments and provides requirements for more detailed reporting of a segment’s expenses that are regularly provided to the Chief Operating Decision Maker ("CODM") and included within each reported measure of a segment’s profit or loss. Additionally, ASU 2023-07 requires all segment profit or loss and assets disclosures to be provided on an annual and interim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning one year later. Early adoption is permitted, and amendments must be applied retrospectively to all prior periods presented. The adoption of this guidance will not impact the Company’s consolidated results of operations, financial position or cash flows. The Company is currently evaluating the standard to determine its impact on the Company’s disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"), which requires a public business entity to disclose specific categories in its annual effective tax rate reconciliation and provide disaggregated information about significant reconciling items by jurisdiction and by nature. ASU 2023-09 also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions and includes several other changes to income tax disclosure requirements. This standard is effective for annual periods beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively. The adoption of this guidance will not affect the Company’s consolidated results of operations, financial position or cash flows. The Company is currently evaluating the standard to determine its impact on the Company’s disclosures.
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 in accordance with ASC 810, Consolidation . 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 impact the VIE’s economic performance and (ii) the obligation to absorb the losses, or the right to receive benefits, from the VIE that could potentially be significant to the VIE.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE could 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.
The Company, through its wholly-owned subsidiaries, owns majority interests in certain limited liability companies (“LLCs”), with each LLC owning and operating one or more hospitals. The noncontrolling interest is typically owned by a not-for-profit medical system, university, academic medical center or foundation or combination thereof (individually or collectively referred to as “minority member”). The employees that work for the LLC and the related hospital(s) are employees of the Company, and the Company manages the day-to-day operations of the LLC and the hospital(s) pursuant to a management services agreement (“MSA”).
The LLCs are VIEs due to their structure as LLCs and the control that resides with the Company through the MSA. The Company consolidates each of these LLCs as it is considered the primary beneficiary due to the MSA providing the Company the right to direct the day-to-day operating and capital activities of the LLC and the respective hospital(s) that most significantly impact the LLC’s economic performance. Additionally, the Company would absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of its majority ownership, contractual or other financial interests in the entity. The MSAs are subject to termination only by mutual agreement of the Company and minority member, except in the case of gross negligence, fraud or bankruptcy of the Company, in which case the minority member can force termination of the MSA.
The governance rights of the minority members are restricted to those that protect their financial interests and do not preclude consolidation of the LLCs. The rights of minority members generally are limited to the right to approve the issuance of new ownership interests, calls for additional cash contributions, the acquisition or divestiture of significant assets and the incurrence of debt in excess of levels not expected to be incurred in the normal course of business.
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All of the Company’s VIEs meet the definition of a business, and the Company holds a majority of their issued voting equity interest. Their assets are not required to be used only for the settlement of VIE obligations as the Company has the ability to direct the use of the VIE assets through its joint venture and cash management agreements.
As of June 30, 2024 and December 31, 2023, nine of the Company’s hospitals were owned and operated through LLCs that have been determined to be VIEs and were consolidated by the Company. Consolidated assets at June 30, 2024 and December 31, 2023 included total assets of VIEs equal to $ 1.2 billion. The Company’s VIEs do not have creditors that have recourse to the Company. As the structure and nature of business are very similar for each of the LLCs, they are discussed and presented herein on a combined basis.
The total liabilities of VIEs included in the Company’s unaudited condensed consolidated balance sheets are shown below (in thousands):
June 30, 2024 December 31, 2023
Current liabilities
Current installments of long-term debt $ 2,328 $ 2,386
Accounts payable 80,319 103,274
Accrued salaries and benefits 36,828 34,730
Other accrued expenses and liabilities 61,233 53,684
Total current liabilities 180,708 194,074
Long-term debt, less current installments 6,842 8,044
Long-term operating lease liability 114,021 120,056
Long-term operating lease liability, related party 9,473 9,520
Self-insured liabilities 659 651
Other long-term liabilities 5,359 5,437
Total liabilities $ 317,062 $ 337,782
Income from operations before income taxes attributable to VIEs was $ 76.7 million and $ 72.2 million for the three months ended June 30, 2024 and 2023, respectively. Income from operations before income taxes attributable to VIEs was $ 138.4 million and $ 138.1 million for the six months ended June 30, 2024 and 2023, respectively.
Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Deferred Offering Costs
Deferred offering costs consist primarily of legal and accounting fees, which are direct and incremental fees related to the IPO. The deferred offering costs will be offset against the IPO proceeds, which will be recorded in the third quarter of 2024. As of June 30, 2024, the Company had incurred approximately $ 7.6 million in deferred offering costs related to the IPO. Due to the Company’s closure of the IPO on July 19, 2024, the deferred offering costs were reclassified from other assets to other current assets on the condensed consolidated balance sheet.
Revenue Recognition
The Company’s revenue generally relates to contracts with patients in which its performance obligations are to provide healthcare services to the patients. Revenue is recorded during the period the Company’s obligations to provide healthcare
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services are satisfied. Revenue for performance obligations satisfied over time is recognized based on charges incurred in relation to total expected charges. The Company’s performance obligations for inpatient services are generally satisfied over periods that average approximately five days. The Company’s performance obligations for outpatient services are generally satisfied over a period of less than one day. As the Company’s performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption under ASC Topic 606, Revenue from Contracts with Customers , and, therefore, is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize revenue. Additionally, the Company is not required to adjust the consideration for the existence of a significant financing component when the period between the transfer of the services and the payment for such services is one year or less.
Contractual relationships with patients, in most cases, involve a third-party payor (Medicare, Medicaid and managed care health plans) and the transaction prices for services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans) the third-party payors. The payment arrangements with third-party payors for the services provided to the related patients typically specify payments at amounts less than the Company’s standard charges.
The Company’s revenue is based upon the estimated amounts the Company expects to be entitled to receive from patients and third-party payors. Estimates of contractual adjustments under managed care insurance plans are based upon the payment terms specified in the related contractual agreements. Revenue related to uninsured patients and copayment and deductible amounts for patients who have healthcare coverage may have discounts applied (uninsured discounts and other discounts). The Company also records estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenue at the estimated amounts expected to be collected.
Medicare and Medicaid regulations and various managed care contracts, under which the discounts from the Company’s standard charges must be calculated, are complex and are subject to interpretation and adjustment. The Company estimates contractual adjustments on a payor-specific basis based on its interpretation of the applicable regulations or contract terms. However, the necessity of the services authorized and provided, and resulting reimbursements, are often subject to interpretation. These interpretations may result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimates by management.
Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process). Settlements under reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare, Medicaid and other third-party payor programs often occurs in subsequent years because of audits by the programs, rights of appeal, and the application of technical provisions. Settlements are considered in the recognition of net patient service revenue on an estimated basis in the period the related services are rendered, and such amounts are subsequently adjusted in future periods as adjustments become known or as years are no longer subject to such audits and reviews. Differences between original estimates and subsequent revisions, including final settlements, are included in the results of operations of the period in which the revisions are made. These adjustments resulted in changes to net patient service revenue of a decrease of $ 0.5 million and an increase of $ 2.2 million for the three months ended June 30, 2024 and 2023, respectively, and an increase to net patient service revenue of $ 0.0 million and $ 5.1 million for the six months ended June 30, 2024 and 2023, respectively.
At June 30, 2024 and December 31, 2023, the Company’s settlements under reimbursement agreements with third-party payors were a net payable of $ 14.4 million and $ 10.3 million, respectively, of which a receivable of $ 31.6 million and $ 34.4 million, respectively, was included in other current assets and a payable of $ 46.0 million and $ 44.7 million, respectively, was included in other accrued expenses and liabilities in the unaudited condensed consolidated balance sheets.
Final determination of amounts earned under prospective payment and other reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of the Company’s management, adequate provision has been made for any adjustments that may result from such reviews.
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Subsequent adjustments that are determined to be the result of an adverse change in the patient’s or the payor’s ability to pay are recognized as bad debt expense. Bad debt expense for the three and six months ended June 30, 2024 and 2023 was not material to the Company.
Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the Center for Medicare & Medicaid Services (“CMS”) and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, the Company recognizes revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in total revenue. Taxes or other program-related costs are reflected in other operating expenses.
The Company’s total revenue is presented in the following table (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue
Medicare
$ 578,163 39.3 % $ 533,805 39.0 % $ 1,147,646 39.4 % $ 1,070,157 39.8 %
Medicaid
155,334 10.6 % 153,691 11.2 % 311,612 10.7 % 307,843 11.5 %
Other managed care
634,476 43.1 % 582,169 42.5 % 1,247,593 42.9 % 1,126,162 41.9 %
Self-pay and other
77,914 5.3 % 74,017 5.5 % 155,132 5.4 % 134,577 5.1 %
Net patient service revenue
$ 1,445,887 98.3 % $ 1,343,682 98.2 % $ 2,861,983 98.4 % $ 2,638,739 98.3 %
Other revenue
25,033 1.7 % 25,052 1.8 % 47,983 1.6 % 46,983 1.7 %
Total revenue
$ 1,470,920 100.0 % $ 1,368,734 100.0 % $ 2,909,966 100.0 % $ 2,685,722 100.0 %
The Company provides care without charge to certain patients who qualify under the local charity care policy of the hospital where the patient receives services. The Company estimates that its costs of care provided under its charity care programs approximated $ 13.8 million and $ 13.0 million for the three months ended June 30, 2024 and 2023, respectively. The Company estimates that its costs of care provided under its charity care programs approximated $ 33.6 million and $ 25.6 million for the six months ended June 30, 2024 and 2023, respectively. The Company does not report a charity care patient’s charges in revenue as it is the Company’s policy not to pursue collection of amounts related to these patients, and therefore contracts with these patients do not exist.
The Company’s management estimates its costs of care provided under its charity care programs utilizing a calculated ratio of costs to gross charges multiplied by the Company’s gross charity care charges provided. The Company’s gross charity care charges include only services provided to patients who are unable to pay and qualify under the Company’s local charity care policies. To the extent the Company receives reimbursement through the various governmental assistance programs in which it participates to subsidize its care of indigent patients, the Company does not include these patients’ charges in its cost of care provided under its charity care program.
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Market Risks
The Company’s revenue is subject to potential regulatory and economic changes in certain states where the Company generates significant revenue. The following is an analysis by state of revenue as a percentage of the Company’s total revenue for those states in which the Company generates significant revenue:
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Oklahoma
25.4 % 24.2 % 24.8 % 24.1 %
New Mexico
14.7 % 16.2 % 15.1 % 15.9 %
Texas
35.5 % 35.1 % 36.0 % 35.2 %
New Jersey
10.1 % 10.5 % 10.2 % 10.6 %
Other
14.3 % 14.0 % 13.9 % 14.2 %
Total
100.0 % 100.0 % 100.0 % 100.0 %
Texas Waiver Program
Certain of the Company’s facilities receive supplemental Medicaid reimbursement, including reimbursement from programs supported by broad-based provider taxes to fund the non-federal share of Medicaid programs or fund indigent care within a state. The State of Texas operates the Texas Health Care Transformation and Quality Improvement Program pursuant to a Medicaid waiver, the Texas Waiver Program (the “Program”), granted by Section 1115 of the Social Security Act. The Program expands managed care programs in the state, provides funding for uncompensated care and supports various delivery system reform initiatives. On March 25, 2022, the Program was extended through September 2030; however, certain delivery system reform initiatives within the Program operate under separate approval periods.
The timing, determination and basis of funding is specific to the Program’s various components. For example, reimbursements associated with the Program’s uncompensated care component are determined based on a participating provider’s costs incurred with providing unreimbursed care to Medicaid and uninsured patients. The Company accrues for estimated payments associated with the Program’s uncompensated care component to be received in the period in which the associated unreimbursed care is provided constrained to an amount such that a significant reversal of cumulative revenue is not probable in the future. Payments associated with certain directed payment programs are contingent on a provider reporting and meeting certain pre-determined metrics and clinical outcomes and contributing to the non-federal share of the Program component via provider assessments. The Company accrues directed payment program funding in the period in which metrics are expected to be achieved and collection is reasonably assured. Management routinely monitors communications regarding the Program from the State of Texas and CMS to ensure there is no uncertainty about entitlement or collectability, such as disruption in state and federal funding.
Payments from the Program are received at different points of time during a funding year. Differences between original estimates and subsequent revisions to the payments, including final settlements, represent changes in the estimate and are recognized in the period in which the revisions are made. Subsequent adjustments to the payments received and the Company’s related estimates have historically been insignificant. The Company recognized revenue of $ 58.2 million and $ 37.2 million for the three months ended June 30, 2024 and 2023, respectively, and $ 111.9 million and $ 78.7 million for the six months ended June 30, 2024 and 2023, respectively. Additionally, the Company incurred costs related to provider assessments for the Program in the amounts of $ 20.8 million and $ 14.7 million for the three months ended June 30, 2024 and 2023, respectively, and $ 41.7 million and $ 30.1 million for the six months ended June 30, 2024 and 2023, respectively, which were included in other operating expenses on the unaudited condensed consolidated income statements.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventories, prepaid expenses, other current assets, accounts payable, accrued salaries and benefits, accrued interest and other accrued expenses and current liabilities (other than those pertaining to lease liabilities) are reflected in the accompanying unaudited condensed consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s revolving
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credit facility also approximates its carrying value as it bears interest at current market rates. Refer to Note 5, Interest Rate Swap Agreements, for discussion of the fair value measurement of the Company’s derivative instruments.
The carrying amounts and fair values of the Company’s senior secured term loan facility and its 5.75 % Senior Notes due 2029 (the “ 5.75 % Senior Notes”) were as follows (in thousands):
Carrying Amount Fair Value
June 30, 2024 December 31, 2023 June 30, 2024 December 31, 2023
Senior Secured Term Loan Facility
$ 773,168 $ 874,262 $ 774,135 $ 876,448
5.75 % Senior Notes
$ 299,551 $ 299,506 $ 283,076 $ 259,822
The estimated fair values of the Company’s senior secured term loan facility and the 5.75 % Senior Notes were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.
Noncontrolling Interests
The financial statements include the financial position and results of operations of hospital and healthcare operations in which the Company owned less than 100% of the equity interests, but maintained a controlling interest during the presented periods. Earnings or losses attributable to the noncontrolling interests are presented separately in the consolidated income statements.
In accordance with ASC 810, Consolidation , holders of noncontrolling interests are considered to be equity holders in the consolidated company, pursuant to which noncontrolling interests are classified as part of equity, unless the noncontrolling interests are redeemable. Certain redemptive features associated with the noncontrolling interests for The University of Kansas Health System – St. Francis Campus (“St. Francis”) could require the Company to deliver cash if the redemptive features are exercised. These redemptive features could be exercised upon, among other things, the Company’s exclusion or suspension from participation in any federal or state government healthcare payor program. Therefore, the noncontrolling interests balance for St. Francis is classified outside the permanent equity section of the Company’s unaudited condensed consolidated balance sheets.
The redeemable noncontrolling interests related to St. Francis at June 30, 2024 and December 31, 2023 have not been subsequently measured at fair value since the acquisition date. The noncontrolling interests are not currently redeemable and it is not probable that the noncontrolling interests will become redeemable as the possibility of the Company being excluded or suspended from participation in any federal or state government healthcare payor program is remote.
Earnings Per Share
Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted net income per share takes into account the potential dilution that could occur if securities or other contracts to issue shares, such as stock options and unvested restricted stock units, were exercised and converted into shares. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted-average common shares outstanding during the period, increased by the number of additional shares that would have been outstanding if the potential shares had been issued and were dilutive.
Segment Reporting
The Company has one reportable segment: healthcare services. The healthcare services segment provides healthcare services primarily through its ownership and operation of hospitals, certain of which provide related healthcare services through physician practices, outpatient centers, and post-acute facilities. The CODM is its President and Chief Executive Officer, who regularly reviews financial operating results on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company’s CODM manages the operations on a consolidated basis to make decisions about overall company resource allocation and to assess overall company performance.
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As of June 30, 2024 and December 31, 2023, all of the Company’s long-lived assets were located in the United States, and for the three and six months ended June 30, 2024 and 2023, all revenue was earned in the United States.
3. Related Party Transactions
Effective August 4, 2015, Ventas acquired ownership of the Company’s real estate in exchange for a $ 1.4 billion payment from Ventas and the Company’s agreement to lease the acquired real estate back from Ventas (the “Ventas Master Lease”). The Ventas Master Lease is a 20-year master lease agreement (with a renewal option for an additional 10 years) with certain subsidiaries of Ventas, pursuant to which the Company currently leases 10 of the Company’s hospitals. The Ventas Master Lease includes an annual rent escalator equal to the lesser of four times the Consumer Price Index or 2.5 %. In accordance with ASC 842, Leases (“ASC 842”), variable lease payments are excluded from the Company’s minimum rental payments used to determine the right-of-use assets and lease obligations and are recognized as expense when incurred. The Ventas Master Lease includes a number of operating and financial restrictions on the Company. Management believes it was in compliance with all financial covenants as of June 30, 2024 and December 31, 2023.
The Company recorded rent expense related to the Ventas Master Lease and other lease agreements with Ventas for certain medical office buildings of $ 37.0 million and $ 36.4 million for the three months ended June 30, 2024 and 2023, respectively, and $ 74.2 million and $ 72.5 million for the six months ended June 30, 2024 and 2023, respectively.
4. Long-Term Debt and Financing Matters
Long-term debt consists of the following (in thousands):
June 30, 2024 December 31, 2023
Senior secured term loan facility
$ 773,168 $ 874,262
5.75 % Senior Notes
299,551 299,506
Finance leases
21,497 21,706
Other debt
15,442 12,322
Deferred financing costs
( 16,970 ) ( 20,938 )
Total debt
1,092,688 1,186,858
Less current maturities
( 10,725 ) ( 18,605 )
Long-term debt, less current maturities
$ 1,081,963 $ 1,168,253
As of June 30, 2024 and December 31, 2023, the senior secured term loan facility reflected an original issue discount (“OID”) of $ 4.3 million and $ 5.5 million, respectively. As of June 30, 2024 and December 31, 2023, the 5.75 % Senior Notes balance reflected an OID of $ 0.4 million and $ 0.5 million, respectively.
Senior Secured Credit Facilities
On August 24, 2021, the Company entered into a credit agreement for its senior secured term loan facility (the "Term Loan B Facility"), which provides funding up to a principal amount of $ 900.0 million. The Term Loan B Facility has a seven year maturity with principal due in consecutive equal quarterly installments of 0.25 % of the initial $ 900.0 million principal amount (subject to certain reductions from time to time as a result of the application of prepayments), with the remaining balance due upon maturity of the Term Loan B Facility. The proceeds from the Term Loan B Facility were used to prepay in full the Company's $ 825.0 million senior secured term loan facility (the "2018 Term Loan B Facility"), including any accrued and unpaid interest, fees and other expenses related to the transaction. Except as described herein, the terms of the Term Loan B Facility are substantially consistent with those of the 2018 Term Loan B Facility. On June 8, 2023, the Company further amended and restated the Term Loan B Facility credit agreement to replace LIBOR with Term Secured Overnight Financing Rate ("SOFR") and Daily Simple SOFR (each as defined in the amended Term Loan B Facility credit agreement) as the reference interest rate effective June 30, 2023. On June 26, 2024, the Company used cash on hand to prepay $ 100.0 million of the $ 877.5 million outstanding principal on the Term Loan B Facility; no modification was made to the Term Loan B Facility credit agreement as a result of this prepayment.
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Effective July 8, 2021, the Company entered into an amended and restated senior credit agreement for its $ 225.0 million senior secured asset based revolving credit facility (the “ABL Credit Agreement”). The ABL Credit Agreement consisted of a $ 225.0 million senior secured asset-based revolving credit facility with a five-year maturity. On April 21, 2023, the Company further amended and restated the ABL Credit Agreement to replace LIBOR with the Term SOFR and Daily Simple SOFR (each, as defined in the amended ABL Credit Agreement) as the reference interest rate. On June 26, 2024, the Company further amended the ABL Credit Agreement to increase the revolving commitment to $ 325.0 million and extend its maturity date to June 26, 2029.
The ABL Credit Agreement contains a number of customary affirmative and negative covenants that limit or restrict the ability of the Company and its subsidiaries to (subject, in each case, to a number of important exceptions, thresholds and qualifications as set forth in the ABL Credit Agreement):
• incur additional indebtedness (including guarantee obligations);
• incur liens;
• make certain investments;
• make certain dispositions and engage in certain sale / leaseback transactions;
• make certain payments or other distributions; and
• engage in certain transactions with affiliates.
In addition, the ABL Credit Agreement contains a springing financial covenant that requires the maintenance, after failure to maintain a specified minimum amount of availability to borrow under the senior secured asset-based revolving credit facility, of a minimum fixed charge coverage ratio of 1.00 to 1.00, as determined at the end of each fiscal quarter. Management believes that, as of June 30, 2024 and December 31, 2023, the Company maintained the minimum amount of availability under the senior secured asset-based revolving credit facility and, therefore, the minimum fixed charge ratio described herein was not applicable.
5. Interest Rate Swap Agreements
Market risks relating to the Company’s operations result primarily from changes in interest rates. The Company’s exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of an overall risk management program, the Company evaluates and manages exposure to changes in interest rates on an ongoing basis. The Company has no intention of entering into financial derivative contracts, other than to hedge a specific financial risk. To mitigate the Company’s exposure to fluctuations in interest rates, the Company uses pay-fixed interest rate swaps, generally designated as cash flow hedges of interest payments on floating rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. Unrealized gains or losses from the designated cash flow hedges are deferred in accumulated other comprehensive income (“AOCI”) and recognized as interest expense as the interest payments occur. Hedges and derivative financial instruments may continue to be used in the future in order to manage interest rate exposure.
The Company has entered into interest rate swap agreements to manage its exposure to fluctuations in interest rates. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company has determined the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy.
On August 26, 2021, the Company amended its existing interest rate swap agreements with Barclays Bank PLC and Bank of America, N.A. as counterparties, with original notional amounts totaling $ 558.0 million and expiring August 31, 2023. Under the amended agreements, the Company was required to make monthly fixed rate payments at annual rates ranging from 2.50 % to 2.51 %, and the counterparties were obligated to make monthly floating rate payments to the Company based on one-month LIBOR, each subject to a floor of 0.50 %.
On October 8, 2021, the Company executed new interest rate swap agreements (the “October 2021 Agreements”) with Barclays Bank PLC and Bank of America, N.A. as counterparties, with notional amounts totaling $ 529.0 million and an effective date of August 31, 2023 and expiring June 30, 2026. Under the October 2021 Agreements, the Company was required to make monthly fixed rate payments at annual rates ranging from 1.53 % to 1.55 %, and the counterparties were
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obligated to make monthly floating rate payments to the Company based on one-month LIBOR, each subject to a floor of 0.50 %. Effective August 31, 2023, the Company amended the October 2021 Agreements to adjust the fixed rates and replace the LIBOR floating interest rate options with Term SOFR floating rate options. Under the amended October 2021 Agreements, the Company is required to make monthly fixed rate payments at annual rates ranging from 1.47 % to 1.48 %, and the counterparties are obligated to make monthly floating rate payments to the Company based on one-month Term SOFR, each subject to a floor of 0.39 %.
The Company accounts for its interest rate swap agreements in accordance with ASC 815, Derivatives and Hedging . Because the interest rate swap agreements amended on August 26, 2021 did not meet the definition of derivatives in their entirety due to the financing element of the agreements, the Company accounted for these as hybrid instruments that consisted of a debt instrument (debt host) and an embedded at-market derivative. At August 26, 2021, the debt portion of the hybrid instruments was equal to the fair value of the existing interest rate swap agreements, and the balance within AOCI associated with the debt portion was amortized on a straight-line basis to interest expense over the remaining effective period of the amended agreements, which expired August 31, 2023. The at-market derivative portion of each hybrid instrument was designated as a cash flow hedge with changes in fair value included in AOCI as a component of equity. Amounts were subsequently reclassified from AOCI into interest expense in the same periods during which the hedged transactions affected earnings. Cash interest payments associated with the at-market derivative portion of the hybrid instruments were classified as operating activities in the Company’s unaudited condensed consolidated statements of cash flows; whereas, cash interest payments for the debt portion of the hybrid instruments were classified as financing activities.
The Company performs assessments of effectiveness for its cash flow hedges on a quarterly basis to confirm that the hedges continue to meet the highly effective criteria required to continue applying cash flow hedge accounting. During the six months ended June 30, 2024 and the year ended December 31, 2023, these hedges were highly effective. Accordingly, no unrealized gain or loss related to these hedges was reflected in the accompanying unaudited condensed consolidated income statements, and the change in fair value was included in AOCI as a component of equity. Realized gains and losses during the period have been reclassified from AOCI to interest expense.
The following table presents the effects of derivatives in cash flow hedging relationships on the Company’s AOCI and earnings (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Classification 2024 2023 2024 2023
Unrealized income recognized AOCI $ 2,052 $ 9,844 $ 8,139 $ 6,592
Loss reclassified from AOCI into earnings Interest expense, net ( 5,103 ) ( 3,635 ) ( 10,239 ) ( 6,559 )
Net change in AOCI $ ( 3,051 ) $ 6,209 $ ( 2,100 ) $ 33
In the 12 months following June 30, 2024, the Company estimates that an additional $ 15.1 million will be reclassified as a reduction to interest expense.
As of June 30, 2024 and December 31, 2023, the fair value of the Company’s interest rate swap agreements reflected an asset balance of $ 23.0 million and $ 25.1 million, respectively. The following table presents the fair value of the Company’s interest rate swap agreements as recorded in the unaudited condensed consolidated balance sheets (in thousands):
Classification June 30, 2024 December 31, 2023
Other current assets $ 15,136 $ 15,966
Other assets 7,883 9,100
Fair value $ 23,019 $ 25,066
6. Income Taxes
The Company’s tax provisions for the three months ended June 30, 2024 and 2023 were income tax expense of $ 15.2 million, which equates to an effective tax rate of 18.5 %, and $ 12.1 million, which equates to an effective tax rate of 17.9 %, respectively. The Company’s tax provisions for the six months ended June 30, 2024 and 2023 were income tax expense of
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$ 25.9 million, which equates to an effective tax rate of 18.7 %, and $ 17.3 million, which equates to an effective tax rate of 17.9 %, respectively.
The Company follows the provisions of ASC 740, Income Taxes , regarding uncertain tax positions. At June 30, 2024 and December 31, 2023, the Company had a liability for uncertain tax positions of $ 12.1 million. The Company believes that it is reasonably possible that the reserve for uncertain tax positions will change in the coming 12 months as a result of being within the applicable statute of limitations with respect to uncertain tax positions.
As of June 30, 2024, the Company had no ongoing or pending federal examinations for prior years. The Company has outstanding federal income tax refund claims for the 2016 and 2018 tax years. Due to the total amount of refund of $ 10.0 million, which was classified within other current assets on the Company’s unaudited condensed consolidated balance sheet at June 30, 2024, the refund is subject to ongoing Joint Committee on Taxation reviews. The Company’s tax years from 2016 through 2023 remain open to examination by federal and state taxing authorities.
7. Self-Insured Liabilities
The liabilities for professional, general, workers’ compensation and occupational injury liability risks are based on actuarially determined estimates. Such liabilities represent the estimated ultimate cost of all reported and unreported losses incurred through the respective balance sheet dates. The Company provides an accrual for actuarially determined claims reported but not paid and estimates of claims incurred but not reported.
Professional and General Liability
The total costs for professional and general liability losses are based on the Company’s premiums and retention costs, and were $ 16.4 million and $ 13.6 million for the three months ended June 30, 2024 and 2023, respectively, and were $ 34.9 million and $ 27.2 million for the six months ended June 30, 2024 and 2023, respectively.
Workers Compensation and Occupational Injury Liability
The total costs for workers’ compensation liability insurance are based on the Company’s premiums and retention costs, and were $ 0.9 million and $ 2.5 million for the three months ended June 30, 2024 and 2023, respectively, and were $ 3.3 million and $ 5.1 million for the six months ended June 30, 2024 and 2023, respectively.
8. Employee Benefit Plans
Defined Contribution Plan
The Company maintains defined contribution retirement plans that cover its eligible employees. The Company incurred total costs related to the retirement plans of $ 11.8 million and $ 11.1 million for the three months ended June 30, 2024 and 2023, respectively, and $ 25.0 million and $ 23.2 million for the six months ended June 30, 2024 and 2023, respectively.
Employee Health Plan
The Company maintains a self-insured medical and dental plan for substantially all of its employees. Amounts are accrued under the Company’s medical and dental plans as the claims that give rise to them occur and the Company includes a provision for incurred but not reported claims. Incurred but not reported claims are estimated based on an average lag time and experience. Accruals are based on the estimated ultimate cost of settlement, including claim settlement expenses.
The total costs of employee health coverage were $ 42.9 million and $ 40.7 million for the three months ended June 30, 2024 and 2023, respectively, and $ 86.7 million and $ 82.2 million for the six months ended June 30, 2024 and 2023, respectively.
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9. Commitments and Contingencies
Litigation and Regulatory Matters
From time to time, claims and suits arise in the ordinary course of the Company’s business. The Company has been, is currently, and may in the future be subject to claims, lawsuits, qui tam actions, civil investigative demands, subpoenas, investigations, audits and other inquiries related to its operations. In certain of these actions, plaintiffs request punitive or other damages against the Company that may not be covered by insurance. These claims, lawsuits, and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on the Company’s results of operations, financial position or liquidity.
The Company records accruals for such contingencies to the extent that the Company concludes it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not believe that it is party to any proceeding that, either individually or in the aggregate, in the opinion of management, could have a material adverse effect on the business, financial condition, results of operations or liquidity.
As a result of the Cybersecurity Incident that occurred in November 2023, three putative class actions were filed against the Company in the U.S. District Court for the Middle District of Tennessee: Burke v. AHS Medical Holdings LLC, No. 3:23-cv-01308; Redd v. AHS Medical Holdings, LLC, No. 3:23-cv-01342; and Epperson v. AHS Management Company, Inc., No. 3:24-cv-00396. These cases were consolidated by the court on April 24, 2024, under the caption Hodge v. AHS Management Company, Inc., No. 3:23-cv-01308 (M.D. Tenn.). The complaint for the consolidated class action, filed on behalf of approximately 38,000 individuals who allege their personal information and protected health information were affected by the Cybersecurity Incident, generally asserts state common law claims of negligence, breach of implied contract, unjust enrichment, breach of fiduciary duty, and invasion of privacy with respect to how the Company managed sensitive data. In July 2024, the Company reached an agreement in principle to settle the consolidated case, but the settlement has not yet been approved by the court. Settlement of the consolidated case on the agreed terms will require the Company to make a cash settlement payment that will not have a material impact on the Company’s results of operations, financial position or liquidity. The Company expects the final settlement and resolution of the case to occur in the second or third quarter of 2025. The Company is pursuing insurance coverage in relation to costs and liabilities incurred due to the Cybersecurity Incident.
Acquisitions
The Company has acquired, and plans to continue to acquire, businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and anti-kickback laws. The Company has from time to time identified certain past practices of acquired companies that do not conform to its standards. Although the Company institutes policies designed to conform such practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for the past activities of these acquired facilities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification or, if covered, that such indemnification will be adequate to cover potential losses and fines.
10. Earnings Per Share
Basic net income per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares.
For the purposes of determining the basic and diluted weighted-average number of common shares outstanding during the periods presented, the Company retrospectively reflected the effects of the Corporate Conversion and the ALH Contribution. As such, the basic and diluted weighted-average number of common shares outstanding for the periods presented reflect the conversion of the Company's membership units into common stock on the date of the Corporate Conversion and ALH Contribution, assuming that all common stock issued in conjunction with the Corporate Conversion and ALH Contribution was issued and outstanding as of the beginning of the earliest period presented.
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As a result of the Corporate Conversion and ALH Contribution occurring after the balance sheet date as described in Note 1, there were no potentially dilutive instruments outstanding for any of the periods presented. Therefore, basic and diluted net income per share were the same for all periods presented as reflected below.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except share and per share amounts):
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Basic and Diluted:
Net income attributable to common stockholders $ 42,770 $ 33,076 $ 69,817 $ 37,219
Weighted-average number of common shares 126,115,301 126,115,301 126,115,301 126,115,301
Net income per common share $ 0.34 $ 0.26 $ 0.55 $ 0.30
11. Subsequent Events
2024 Omnibus Incentive Award Plan and Non-Employee Director Compensation Program
In conjunction with the IPO, the Company’s 2024 Omnibus Incentive Award Plan (the “Equity Plan”) became effective. The Equity Plan authorized the issuance of up to 15,750,000 shares of common stock associated with its awards. On July 18, 2024, (i) 1,882,979 restricted stock units ("RSUs") were granted under the Equity Plan to certain key members of management, which consisted of 835,272 service-based RSUs and 1,047,707 performance-based RSUs, and (ii) 92,496 service-based RSUs were granted under the Equity Plan to non-employee directors of the Company. The RSUs were granted at the IPO price of $ 16.00 per share. For the RSUs issued to management, the service-based awards vest in three substantially equal annual installments on each anniversary of March 31, 2024 and the performance-based RSUs vest upon the achievement of certain Company-wide profitability metrics and include a service-based vesting component. The RSUs issued to the Company's board of directors vest in full on the first anniversary of March 31, 2024.
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