UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 20, 2011
RURAL/METRO CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE | 0-22056 | 86-0746929 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
9221 East Via de Ventura
Scottsdale, Arizona
85258
(Address of Principal Executive Offices)
(Zip Code)
Registrants telephone number, including area code: (480) 606-3886
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 7.01 | Regulation FD Disclosure. |
On June 16, 2011, Rural/Metro Corporation (the Company), through a wholly-owned subsidiary, entered into a definitive two-year agreement to continue to provide emergency medical transportation services to the City of San Diego through June of 2013. Under this arrangement, the Company expects to generate annualized net revenue of approximately $55 million. In addition, the San Diego City Council voted to approve the sale of the City of San Diegos interest in the joint venture that it has with the Company, San Diego Medical Services Enterprise, LLC (SDMSE), to the Company for $5.5 million. Upon completion of the purchase, which is scheduled to occur on June 30, 2011, the Company will own 100% of the interest in SDMSE and will retain all operating assets of SDMSE and contracts currently served by SDMSE.
As previously reported, on April 25, 2011, a report was issued by the San Diego City Auditors Office regarding claims against the Company and SDMSE. The report focused primarily on the accounting for SDMSE and recommended, among other things, that SDMSEs revenues and expenses be reviewed to ensure that they were proper and that reimbursements to the Company were appropriate. To facilitate a timely resolution, the Company and the City entered into an interim settlement agreement that provides for submission of the matter to a mediator and third-party forensic auditor. As part of this interim settlement, the Company also agreed to provide the City with a $7.5 million surety bond to cover potential liabilities. The forensic audit is ongoing, and although the Company is unable at this time to predict the timing or outcome of this process, or any potential impact on its business operations, based on information currently available, the Company does not anticipate any amounts will be drawn against the bond and that it will be fully released at the conclusion of the process.
The information in this Item 7.01 of this Current Report on Form 8-K shall not be deemed to be filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities thereof, nor shall it be deemed to be incorporated by reference in any filing under the Exchange Act or under the Securities Act of 1933, as amended, except to the extent specifically provided in any such filing.
Item 8.01 | Other Events. |
As Rural/Metro Corporation (the Company) previously disclosed in its Annual Report on Form 10-K for the year ended June 30, 2010, filed on September 8, 2010 (the Annual Report), the Company made certain modifications to its reporting segments effective July 1, 2010. The Company is filing information under Item 8.01 of this Current Report on Form 8-K to (i) provide investors with recast historical financial information in the Companys Annual Report reflecting the previously disclosed change to the Companys reporting segments, and (ii) incorporate by reference such recast historical financial information into the Companys filings with the SEC, including registration statements filed under the Securities Act of 1933, as amended.
The reporting segment changes and related disclosures discussed herein have no impact on the Companys historical consolidated financial position, results of operations, stockholders equity or cash flows, and the recast financial statements contained in Exhibits 99.1 to this Form 8-K do not represent a modification or restatement of previously issued financial statements for any period. The information in this Current Report, including Exhibits 99.1 and 99.2 which are incorporated herein by reference, should be read in conjunction with the Annual Report and any documents filed by the Company subsequent to June 30, 2010.
The following notes to the financial statements under Part II, Item 8 of the Annual Report included in Exhibit 99.1 of this Form 8-K have been revised and updated from their original presentation solely to reflect the Companys realigned reporting segments: Note 5 (Goodwill), Note 19 (Segment Reporting), and Note 20 (Discontinued Operations). Similarly, Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of the Annual Report included in Exhibit 99.2 of this Form 8-K has been revised and updated from its original presentation solely to reflect the Companys realigned reporting segments. All other information in the Annual Report remains unchanged. This Current Report does not modify or update the disclosures therein in any way, nor does it reflect any subsequent information or events, other than as required to reflect the change in reporting segments as described herein.
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits. |
Exhibit No. |
Description | |
23.1 |
Consent of PricewaterhouseCoopers LLP | |
99.1 |
Financial Statements and Supplementary Data under Part II, Item 8 of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010, revised solely to reflect the change in segment reporting | |
99.2 |
Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010, revised solely to reflect the change in segment reporting |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
RURAL/METRO CORPORATION | ||||||
Date: June 20, 2011 | By: | /s/ Michael P. DiMino | ||||
Michael P. DiMino President and Chief Executive Officer |
EXHIBIT INDEX
Exhibit No. |
Description | |
23.1 |
Consent of PricewaterhouseCoopers LLP | |
99.1 |
Financial Statements and Supplementary Data under Part II, Item 8 of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010, revised solely to reflect the change in segment reporting | |
99.2 |
Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010, revised solely to reflect the change in segment reporting |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-76526, 33-80454, 33-88302, 333-2818, 333-07457, 333-62517, 333-62983, 333-64139, 333-68161, 333-49004, 333-61412, 333-76826, 333-150011) of Rural/Metro Corporation of our report dated September 8, 2010, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of the change to reporting segments discussed in Notes 1 and 19 as to which the date is June 20, 2011, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
June 20, 2011
Exhibit 99.1
ITEM 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm |
2 | |||
Consolidated Balance Sheets as of June 30, 2010 and 2009 |
3 | |||
Consolidated Statements of Operations for the Years Ended June 30, 2010, 2009 and 2008 |
4 | |||
Consolidated Statements of Changes in Stockholders Equity (Deficit) and Comprehensive Income (Loss) for the Years Ended June 30, 2010, 2009 and 2008 |
5 | |||
Consolidated Statements of Cash Flows for the Years Ended June 30, 2010, 2009 and 2008 |
6 | |||
Notes to Consolidated Financial Statements |
7 |
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Rural/Metro Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations, of changes in stockholders equity (deficit) and comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of Rural/Metro Corporation and its subsidiaries at June 30, 2010 and June 30, 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting (not presented herein) appearing under Item 9A of the Companys 2010 annual report on Form 10-K. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 12 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertainty in income taxes in the year ended 2008.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests in the year ended 2010.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Phoenix, AZ
September 8, 2010, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of the change to reporting segments discussed in Notes 1 and 19 as to which the date is June 20, 2011.
2
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of June 30, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,228 | $ | 37,108 | ||||
Accounts receivable, net |
63,581 | 64,355 | ||||||
Inventories |
8,001 | 8,535 | ||||||
Deferred income taxes |
23,737 | 25,032 | ||||||
Prepaid expenses and other |
7,907 | 19,895 | ||||||
Total current assets |
123,454 | 154,925 | ||||||
Property and equipment, net |
50,670 | 49,096 | ||||||
Goodwill |
36,516 | 37,700 | ||||||
Restricted cash |
20,376 | | ||||||
Deferred income taxes |
41,538 | 41,678 | ||||||
Other assets |
15,908 | 11,556 | ||||||
Total assets |
$ | 288,462 | $ | 294,955 | ||||
LIABILITIES AND DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,914 | $ | 14,883 | ||||
Accrued liabilities |
48,290 | 57,588 | ||||||
Deferred revenue |
21,244 | 21,585 | ||||||
Current portion of long-term debt |
6,436 | 199 | ||||||
Total current liabilities |
88,884 | 94,255 | ||||||
Long-term debt, net of current portion |
262,606 | 277,110 | ||||||
Other liabilities |
38,130 | 28,497 | ||||||
Total liabilities |
389,620 | 399,862 | ||||||
Commitments and contingencies (Note 18) |
||||||||
Rural/Metro stockholders deficit: |
||||||||
Common stock, $0.01 par value, 40,000,000 shares authorized, 25,254,713 and 24,852,726 shares issued and outstanding at June 30, 2010 and 2009, respectively |
252 | 248 | ||||||
Additional paid-in capital |
156,748 | 155,187 | ||||||
Treasury stock, 96,246 shares at both June 30, 2010 and 2009 |
(1,239 | ) | (1,239 | ) | ||||
Accumulated other comprehensive loss |
(3,782 | ) | (2,597 | ) | ||||
Accumulated deficit |
(254,823 | ) | (258,331 | ) | ||||
Total Rural/Metro stockholders deficit |
(102,844 | ) | (106,732 | ) | ||||
Noncontrolling interest |
1,686 | 1,825 | ||||||
Total deficit |
(101,158 | ) | (104,907 | ) | ||||
Total liabilities and deficit |
$ | 288,462 | $ | 294,955 | ||||
See accompanying notes
3
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net revenue |
$ | 530,754 | $ | 491,800 | $ | 475,860 | ||||||
Operating expenses: |
||||||||||||
Payroll and employee benefits |
324,748 | 305,271 | 294,138 | |||||||||
Depreciation and amortization |
15,982 | 14,258 | 12,405 | |||||||||
Other operating expenses |
121,891 | 115,641 | 115,794 | |||||||||
General/auto liability insurance expense |
13,902 | 11,649 | 14,314 | |||||||||
Goodwill impairment |
1,184 | | | |||||||||
Gain on sale of assets and property insurance settlement |
(623 | ) | (536 | ) | (1,426 | ) | ||||||
Total operating expenses |
477,084 | 446,283 | 435,225 | |||||||||
Operating income |
53,670 | 45,517 | 40,635 | |||||||||
Interest expense |
(29,096 | ) | (30,843 | ) | (31,731 | ) | ||||||
Interest income |
235 | 324 | 374 | |||||||||
Loss on debt extinguishment |
(14,154 | ) | | | ||||||||
Income from continuing operations before income taxes |
10,655 | 14,998 | 9,278 | |||||||||
Income tax provision |
(4,395 | ) | (7,433 | ) | (4,706 | ) | ||||||
Income from continuing operations |
6,260 | 7,565 | 4,572 | |||||||||
Income (loss) from discontinued operations, net of income taxes |
(491 | ) | (930 | ) | 337 | |||||||
Net income |
5,769 | 6,635 | 4,909 | |||||||||
Net income attributable to noncontrolling interest |
(2,261 | ) | (1,609 | ) | (812 | ) | ||||||
Net income attributable to Rural/Metro |
$ | 3,508 | $ | 5,026 | $ | 4,097 | ||||||
Income (loss) per share |
||||||||||||
Basic |
||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.16 | $ | 0.24 | $ | 0.15 | ||||||
Income (loss) from discontinued operations attributable to Rural/Metro |
(0.02 | ) | (0.04 | ) | 0.02 | |||||||
Net income attributable to Rural/Metro |
$ | 0.14 | $ | 0.20 | $ | 0.17 | ||||||
Diluted |
||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.16 | $ | 0.24 | $ | 0.15 | ||||||
Income (loss) from discontinued operations attributable to Rural/Metro |
(0.02 | ) | (0.04 | ) | 0.01 | |||||||
Net income attributable to Rural/Metro |
$ | 0.14 | $ | 0.20 | $ | 0.16 | ||||||
Average number of common shares outstandingBasic |
25,106 | 24,834 | 24,787 | |||||||||
Average number of common shares outstandingDiluted |
25,351 | 24,915 | 24,952 | |||||||||
See accompanying notes
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
AND COMPREHENSIVE INCOME
(in thousands, except share amounts)
Rural/Metro Stockholders Deficit | ||||||||||||||||||||||||||||||||||||
Number of Shares |
Common Stock |
Additional Paid-in Capital |
Treasury Stock |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Rural/Metro Stockholders Deficit |
Noncontrolling Interest |
Total | ||||||||||||||||||||||||||||
Balance at June 30, 2007 |
24,737,726 | $ | 247 | $ | 154,777 | $ | (1,239 | ) | $ | (254,628 | ) | $ | 294 | $ | (100,549 | ) | $ | 2,104 | $ | (98,445 | ) | |||||||||||||||
Adjustment due to adoption of uncertain tax position guidance (Note 12) |
| | | | (12,826 | ) | | (12,826 | ) | | (12,826 | ) | ||||||||||||||||||||||||
Share-based compensation expense |
| | 12 | | | | 12 | | 12 | |||||||||||||||||||||||||||
Net common stock issued under share-based compensation plans |
85,000 | 1 | 57 | | | | 58 | | 58 | |||||||||||||||||||||||||||
Excess tax benefit from share-based compensation |
| | 72 | | | | 72 | | 72 | |||||||||||||||||||||||||||
Distributions to noncontrolling shareholders |
| | | | | | | (950 | ) | (950 | ) | |||||||||||||||||||||||||
Comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | 4,097 | | 4,097 | 812 | 4,909 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax Defined benefit pension plan: |
||||||||||||||||||||||||||||||||||||
Net prior service cost |
| | | | | (437 | ) | (437 | ) | | (437 | ) | ||||||||||||||||||||||||
Net loss |
| | | | | (296 | ) | (296 | ) | | (296 | ) | ||||||||||||||||||||||||
Other comprehensive loss |
(733 | ) | | (733 | ) | |||||||||||||||||||||||||||||||
Comprehensive income |
3,364 | 812 | 4,176 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2008 |
24,822,726 | $ | 248 | $ | 154,918 | $ | (1,239 | ) | $ | (263,357 | ) | $ | (439 | ) | $ | (109,869 | ) | $ | 1,966 | $ | (107,903 | ) | ||||||||||||||
Share-based compensation expense |
| | 241 | | | | 241 | | 241 | |||||||||||||||||||||||||||
Net common stock issued under share-based compensation plans |
30,000 | | 19 | | | | 19 | | 19 | |||||||||||||||||||||||||||
Excess tax benefit from share-based compensation |
| | 9 | | | | 9 | | 9 | |||||||||||||||||||||||||||
Distributions to noncontrolling shareholders |
| | | | | | | (1,750 | ) | (1,750 | ) | |||||||||||||||||||||||||
Comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | 5,026 | | 5,026 | 1,609 | 6,635 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax Defined benefit pension plan: |
||||||||||||||||||||||||||||||||||||
Amortization of prior service cost |
| | | | | 40 | 40 | | 40 | |||||||||||||||||||||||||||
Net loss |
| | | | | (2,198 | ) | (2,198 | ) | | (2,198 | ) | ||||||||||||||||||||||||
Other comprehensive loss |
(2,158 | ) | | (2,158 | ) | |||||||||||||||||||||||||||||||
Comprehensive income |
2,868 | 1,609 | 4,477 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2009 |
24,852,726 | $ | 248 | $ | 155,187 | $ | (1,239 | ) | $ | (258,331 | ) | $ | (2,597 | ) | $ | (106,732 | ) | $ | 1,825 | $ | (104,907 | ) | ||||||||||||||
Share-based compensation expense |
| | 545 | | | | 545 | | 545 | |||||||||||||||||||||||||||
Net common stock issued under share-based compensation plans |
401,987 | 4 | 433 | | | | 437 | | 437 | |||||||||||||||||||||||||||
Excess tax benefit from share-based compensation |
| | 583 | | | | 583 | | 583 | |||||||||||||||||||||||||||
Distributions to noncontrolling shareholders |
| | | | | | | (2,400 | ) | (2,400 | ) | |||||||||||||||||||||||||
Comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | 3,508 | | 3,508 | 2,261 | 5,769 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax Change in fair value of interest rate hedge |
| | | | | (397 | ) | (397 | ) | | (397 | ) | ||||||||||||||||||||||||
Defined benefit pension plan: |
||||||||||||||||||||||||||||||||||||
Amortization of prior service cost |
| | | | | 40 | 40 | | 40 | |||||||||||||||||||||||||||
Amortization of net loss |
| | | | | 158 | 158 | | 158 | |||||||||||||||||||||||||||
Net loss |
| | | | | (986 | ) | (986 | ) | | (986 | ) | ||||||||||||||||||||||||
Other comprehensive loss |
(1,185 | ) | | (1,185 | ) | |||||||||||||||||||||||||||||||
Comprehensive income |
2,323 | 2,261 | 4,584 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2010 |
25,254,713 | $ | 252 | $ | 156,748 | $ | (1,239 | ) | $ | (254,823 | ) | $ | (3,782 | ) | $ | (102,844 | ) | $ | 1,686 | $ | (101,158 | ) | ||||||||||||||
See accompanying notes
5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 5,769 | $ | 6,635 | $ | 4,909 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Depreciation and amortization |
16,102 | 14,697 | 12,983 | |||||||||
Non-cash adjustments to insurance claims reserves |
2,517 | (4 | ) | (6,260 | ) | |||||||
Accretion of 12.75% Senior Discount Notes |
7,769 | 9,968 | 8,809 | |||||||||
Accretion of Term Loan due 2014 |
586 | | | |||||||||
Deferred income taxes |
2,647 | 7,622 | 3,493 | |||||||||
Excess tax benefits from share-based compensation |
(583 | ) | (9 | ) | (72 | ) | ||||||
Amortization of debt issuance costs |
1,577 | 2,089 | 2,105 | |||||||||
Non-cash loss on debt extinguishment |
2,345 | | | |||||||||
Loss on disposal of property and equipment and proceeds from property insurance settlement |
(67 | ) | 76 | 288 | ||||||||
Goodwill impairment |
1,184 | | | |||||||||
Share-based compensation expense |
545 | 241 | 12 | |||||||||
Items expensed related to acquisition |
186 | | | |||||||||
Change in assets and liabilities |
||||||||||||
Accounts receivable |
774 | 11,776 | 2,182 | |||||||||
Inventories |
552 | (79 | ) | 326 | ||||||||
Prepaid expenses and other |
(1,081 | ) | 559 | (422 | ) | |||||||
Other assets |
(2,283 | ) | 448 | 3,411 | ||||||||
Accounts payable |
(2,772 | ) | (872 | ) | 31 | |||||||
Accrued liabilities |
3,420 | 221 | 3,106 | |||||||||
Deferred revenue |
(341 | ) | (316 | ) | (3,058 | ) | ||||||
Other liabilities |
(1,321 | ) | (971 | ) | 2,978 | |||||||
Net cash provided by operating activities |
37,525 | 52,081 | 34,821 | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(15,488 | ) | (16,692 | ) | (13,327 | ) | ||||||
Cash paid for acquisition |
(1,400 | ) | | | ||||||||
Increase in restricted cash |
(20,376 | ) | | | ||||||||
Proceeds from the sale of property and equipment and property insurance settlement |
148 | 46 | 96 | |||||||||
Purchases of short-term investments |
| | (5,000 | ) | ||||||||
Sales of short-term investments |
| | 5,000 | |||||||||
Net cash used in investing activities |
(37,116 | ) | (16,646 | ) | (13,231 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Payments on debt and capital leases |
(192,272 | ) | (12,512 | ) | (13,987 | ) | ||||||
Issuance of debt |
178,200 | | 3,800 | |||||||||
Cash paid for debt issuance costs |
(1,837 | ) | | (857 | ) | |||||||
Excess tax benefits from share-based compensation |
583 | 9 | 72 | |||||||||
Net proceeds from issuance of common stock under share-based compensation plans |
437 | 19 | 58 | |||||||||
Distribution of earnings to noncontrolling interest |
(2,400 | ) | (1,750 | ) | (950 | ) | ||||||
Net cash used in financing activities |
(17,289 | ) | (14,234 | ) | (11,864 | ) | ||||||
Increase (decrease) in cash and cash equivalents |
(16,880 | ) | 21,201 | 9,726 | ||||||||
Cash and cash equivalents, beginning of year |
37,108 | 15,907 | 6,181 | |||||||||
Cash and cash equivalents, end of year |
$ | 20,228 | $ | 37,108 | $ | 15,907 | ||||||
Supplemental disclosure of non-cash operating activities: |
||||||||||||
Increase in accumulated deficit, other liabilities and decrease in deferred income taxes upon adoption of uncertain tax position guidance |
$ | | $ | | $ | 12,826 | ||||||
(Decrease) increase in other current assets and accrued liabilities for general liability insurance claims |
(5,073 | ) | 1,508 | | ||||||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||||||
Property and equipment funded by liabilities |
$ | 1,750 | $ | 962 | $ | 892 | ||||||
Note payable incurred for software licenses |
| | 396 | |||||||||
Supplemental cash flow information: |
||||||||||||
Cash paid for interest |
$ | 17,944 | $ | 19,360 | $ | 20,890 | ||||||
Cash paid for income taxes, net |
1,353 | 1,181 | 1,748 |
See accompanying notes
6
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | The Company and its Significant Accounting Policies |
Nature of Business and Operations
Rural/Metro Corporation, a Delaware corporation, and its subsidiaries (collectively, the Company) is a leading provider of medical ambulance response services, which consist primarily of emergency and non-emergency response services. These services are provided under contracts with governmental entities, hospitals, nursing homes and other healthcare facilities and organizations. The Company also provides private fire protection and related services on a subscription fee basis to residential and commercial property owners and under long-term master fire contracts with fire districts, industrial sites and airports. These services consist primarily of fire suppression, fire prevention and first responder medical care.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a variable interest entity; which it controls. All material intercompany accounts and transactions have been eliminated.
Fiscal Years
The Companys fiscal year ends on June 30. Fiscal 2010, 2009 and 2008 refer to the fiscal years ended June 30, 2010, 2009 and 2008, respectively.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recognized during the reporting period. Significant estimates have been made by management in connection with the measurement of contractual allowances applicable to Medicare, Medicaid and other third-party payers, the estimate for uncompensated care, the valuation allowance for deferred tax assets, workers compensation and general liability self-insured claim reserves, fair values of reporting units for purposes of goodwill impairment testing and future cash flows associated with long-lived assets. Actual results could differ from these estimates.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company places its cash with federally insured institutions and monitors the amount of credit exposure with any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographical dispersion.
Reclassifications and Adjustments of Financial Information
The accompanying consolidated financial statements reflect certain reclassifications for the adoption of the new accounting guidance related to noncontrolling interests as described below in Recent Accounting Pronouncements , a change in the Companys reporting segments as described in Note 19 and operations that were classified as discontinued in fiscal 2010 as described in Note 20. These reclassifications have no effect on previously reported earnings per share.
During the fourth quarter of 2010, the Company determined that certain equipment leases were incorrectly accounted for as operating leases and certain capital costs were improperly recognized as operating expenses. The Company assessed the materiality of these errors on prior periods consolidated financial statements and on each quarter of fiscal 2010 in accordance with the SECs Staff Accounting Bulletin (SAB) No. 99 and SAB No. 108 and concluded that these errors were not material to any such periods. The cumulative effect of the errors was recorded as an adjustment in the fourth quarter of 2010. The effect of these adjustments to the Consolidated Statement of Operations for the quarter ended June 30, 2010 was to decrease operating expenses by $0.3 million, to increase interest expense by $0.1 million and to decrease net income by $0.1 million. The adjustment did not impact income (loss) from discontinued operations. The effect of these adjustments to the Statement of Cash Flows for the quarter ended June 30, 2010 was to decrease cash provided by operating activities by $0.5 million, to increase cash used in investing activities by $0.3 million, and to increase cash used in financing activities by $0.2 million.
7
Net Revenue
Ambulance services revenue is recognized when services are provided and are recorded net of estimated contractual allowances applicable to Medicare, Medicaid and other third-party payers and net of estimates for uncompensated care. Such contractual allowances applicable to continuing operations totaled $370.9 million, $321.8 million and $295.9 million in fiscal 2010, 2009 and 2008, respectively, and estimates for uncompensated care, which totaled $123.4 million, $116.5 million and $116.1 million in fiscal 2010, 2009 and 2008, respectively, are reflected as reductions to revenue in the accompanying Consolidated Statement of Operations.
Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year. Additionally, the Company charges an enrollment fee for new subscribers under its fire protection service contracts. Such fees are deferred and recognized over the estimated customer relationship period of nine years. Other services revenue primarily consists of dispatch, fleet, billing, training and home health care service fees, which are recognized when the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with original maturities of three months or less when purchased to be cash equivalents. Under the Companys cash management practices, outstanding checks are netted against cash when there is a sufficient balance of cash available in the Companys bank accounts to cover the outstanding amount and a legally enforceable right of offset exists. Where there is no legally enforceable right of offset against cash balances and a form of overdraft protection does not exist, outstanding checks are classified as accounts payable within the Consolidated Balance Sheets and the change in the related balances is reflected in operating activities on the Consolidated Statement of Cash Flows. There were no overdraft balances included in accounts payable in the Companys Consolidated Balance Sheets as of June 30, 2010 and 2009.
Restricted Cash
The Company classifies cash and cash equivalents which are restricted for use by contractual obligations or the Companys intentions as restricted cash. The restricted cash is classified as current or noncurrent on the Companys Consolidated Balance Sheets based on the expected timing of the expiration or termination of the contractual restriction or in the case of the Companys intent, the expected timing of the use of the restricted cash. The Company classifies changes in restricted cash on its Consolidated Statements of Cash Flows as an investing activity due to the restricted cash placement in interest-bearing accounts or certificates of deposit. Refer to Note 11 for a further discussion of restricted cash transactions.
Allowance for Uncompensated Care
Accounts receivable represent amounts due from customers and are recorded at the time that the Companys services are provided. Accounts receivable balances are presented net of both estimated contractual allowances applicable to Medicare, Medicaid and other third-party payers and estimates for uncompensated care. Estimates for uncompensated care are based on historical collection trends, credit risk assessments applicable to certain types of payers and other relevant information. Accounts receivable are written-off against the allowance for uncompensated care when the Company has determined the balance will not be collected. A summary of activity in the Companys allowance for uncompensated care during fiscal 2010, 2009 and 2008 is as follows (in thousands):
As of June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 51,691 | $ | 80,737 | $ | 75,429 | ||||||
Provision for uncompensated carecontinuing operations |
123,573 | 116,353 | 116,239 | |||||||||
Provision for uncompensated carediscontinued operations |
1,968 | 3,611 | 5,281 | |||||||||
Write-off of uncollectible accounts |
(119,228 | ) | (149,010 | ) | (116,212 | ) | ||||||
Balance at end of year |
$ | 58,004 | $ | 51,691 | $ | 80,737 | ||||||
Inventories
Inventories, which consist of medical and fleet supplies, are stated at the lower of cost or market value. Cost is determined on a first in, first-out basis.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and is depreciated over the estimated useful lives using the straight-line method. Equipment and vehicles are depreciated over three to twelve years and buildings are depreciated over ten to thirty years. Leasehold improvements are capitalized and depreciated using the straight-line method over the shorter of the contractual lease terms or the estimated useful lives. Depreciation expense from continuing operations was $15.8 million, $14.0 million and $12.2 million in fiscal 2010, 2009 and 2008, respectively. Maintenance and repairs which do not improve or extend the useful life of assets are expensed as incurred. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss, if any, is recognized in income as realized.
8
Goodwill
Goodwill represents the excess of the cost of an acquired company over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is evaluated for impairment annually or whenever events or changes in circumstances make it likely that impairment may have occurred. The Company performs its annual goodwill two-step impairment test as of the end of its fiscal year. In the first step, the fair value of the reporting unit is compared to the carrying value of its net assets including goodwill. The fair value of a reporting unit is determined by a market approach based on each reporting units estimated discount rate and long-term growth rate or by (or in combination with) an income approach based on discounted estimated future cash flows from each reporting unit. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, then a second step must be performed in order to determine the implied fair value of the goodwill and to compare it to the carrying value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded. The determination of fair value requires the Company to make significant judgments and estimates about future events. The estimated fair value of our reporting units could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or changes in the market capitalization of the Company. Due to the inherent uncertainty involved in making these estimates, actual results could differ materially from the estimates. The Company evaluated the significant judgments used to determine the fair value of each reporting unit, both individually and in the aggregate and concluded they are reasonable.
Based on the results of the impairment test performed as of June 30, 2010, the Company determined that goodwill related to a reporting unit in the South reporting segment was partially impaired and recorded a loss of $1.2 million. For details on the fiscal 2010 impairment, refer to Note 5.
Impairment of Other Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable, by comparing the carrying amount of such assets to the undiscounted future cash flows expected to result from the use and eventual disposition of the asset or asset group. In cases where the undiscounted future cash flows are less than the related carrying amount, an impairment loss is recognized for an amount equal to the excess of the carrying value over the amount by which the carrying amount exceeds the fair value. The fair value is based on quoted market prices or, in instances where quoted market prices are not available, the present value of future cash flows using a discount rate commensurate with the risks involved.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for net operating loss, capital loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which realization of the related benefits is unlikely.
The Company measures and records tax contingency accruals in accordance with accounting principles generally accepted in the United States (GAAP) which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the more likely than not recognition threshold may be recognized or continue to be recognized.
Derivatives and Hedging
The Company may utilize derivative financial instruments to reduce its exposure to certain market risks such as interest rate risk and fuel price risk. All derivative instruments are recognized on the Companys Consolidated Balance Sheet at fair value. The Company formally documents all derivative instruments designated as hedging instruments. The effective portion of the gain or loss on derivative instruments designated as cash flow hedges is recorded in other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Other gains or losses on derivative instruments are recognized in current earnings. Refer to Note 10 for a detailed discussion of derivative instruments.
9
Earnings per Share
Basic earnings per common share is computed by dividing income attributable to Rural/Metro applicable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed based on the weighted-average number of common shares outstanding after consideration of the dilutive effect of stock options, stock appreciation rights and restricted stock units.
Share-based Compensation
Share-based compensation expense is based on the grant-date fair value of the share-based award and the estimated number of awards that are expected to vest. That expense is recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period.
Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-09, Subsequent EventsAmendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance. The Company adopted the ASU in the third quarter of fiscal 2010. The adoption did not have a material effect on the Companys consolidated financial statements and related disclosures.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures for Level 3 activity, which are effective for interim reporting periods for fiscal years beginning after December 15, 2010. Accordingly, the Company adopted the ASU in the third quarter of fiscal 2010, except for the disclosures for Level 3 activity which are not yet required. The adoption of the ASU did not have a material impact on the Companys consolidated financial statements and related disclosures. The Company does not expect that the adoption of the Level 3 activity disclosures will have a material impact on its consolidated financial statements and related disclosures. See Note 3 for a discussion of the fair value of the Companys assets and liabilities.
In December 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 amends ASC 810, Consolidation to include the new guidance issued in August 2009 that changes the accounting and disclosure requirements for the consolidation of variable interest entities (VIE). The ASU changes the approach to determining the primary beneficiary of a VIE and requires entities to more frequently assess whether they must consolidate VIEs. The ASU is effective for annual periods beginning after November 15, 2009. Accordingly, the Company will adopt the ASU in fiscal 2011. The Company does not expect the adoption of the ASU to have a material effect on its consolidated financial statements and related disclosures.
In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2009-12). ASU 2009-12 permits the use of net asset value per share as a practical expedient for measuring fair value of certain investments. The ASU also requires disclosures by major category of these investments. ASU 2009-12 is effective for interim and annual reporting periods ending after December 15, 2009, with early adoption permitted. The Company adopted the ASU in the second quarter of fiscal 2010 and the adoption did not have a material effect on its consolidated financial statements and related disclosures.
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 clarifies how the fair value of liabilities should be measured and establishes a hierarchy for using different valuation methods. This ASU is effective for the first interim reporting period beginning after August 26, 2009. The Company adopted the ASU in the second quarter of fiscal 2010 and the adoption did not have a material effect on its consolidated financial statements and related disclosures.
In December 2008, the FASB issued a staff position that provides additional guidance regarding annual disclosures about plan assets of defined benefit pension or other postretirement plans. The additional guidance is codified under ASC 715-20-65. This additional guidance is effective for financial statements issued for fiscal years ending after December 15, 2009. Accordingly, the Company has adopted the guidance in fiscal 2010. The Companys adoption of the new guidance did not have a material effect on its consolidated financial statements and the Company has made the required disclosures.
10
In December 2007, the FASB issued new guidance on business combinations. The new guidance is codified under ASC 805, Business Combinations. The new guidance establishes accounting standards for all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree) including mergers and combinations achieved without the transfer of consideration. The new guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for the Company is fiscal year 2010. The Companys adoption of the new guidance did not have a material effect on its consolidated financial statements and related disclosures.
In December 2007, the FASB issued new guidance that establishes accounting and reporting standards for the noncontrolling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. The new guidance is codified under ASC 810-10-65. The new guidance, which was effective for the Company on July 1, 2009, was applied prospectively upon adoption except for the presentation and disclosure provisions, which require retrospective application for all periods presented. The presentation provisions require that (1) the noncontrolling interest be reclassified to equity, (2) consolidated net income be adjusted to include the net income attributed to the noncontrolling interest and (3) consolidated comprehensive income be adjusted to include the comprehensive income attributed to the noncontrolling interest. The accompanying consolidated financial statements reflect the required changes in presentation as described in the preceding sentence.
In September 2006, the FASB issued new guidance that defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. The new guidance is codified under ASC 820, Fair Value Measurements and Disclosures. The new guidance applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, the new guidance does not require any new fair value measurements; however, for some entities, the application of the new guidance will change current practice. The new guidance was effective for the Company on July 1, 2008; however, in February 2008, the FASB issued additional guidance, codified under ASC 820-10, which delayed the effective date of the new guidance for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, for one year. The adoption of the new guidance on July 1, 2008 with respect to the Companys financial assets and liabilities did not have a material impact on its consolidated financial statements. The adoption of the provisions of the new guidance with respect to its non-financial assets and non-financial liabilities on July 1, 2009 pursuant to the requirements of the additional guidance did not have a material impact on the Companys consolidated financial statements and related disclosures.
(2) | Fair Value Measurements |
Fair value measurements are classified under the following hierarchy:
| Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. |
| Level 2: Observable inputs other than quoted prices substantiated by market data and observable, either directly or indirectly for the asset or liability. This includes quoted prices for similar assets or liabilities in active markets. |
| Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. |
The following are the fair values as of June 30, 2010 of the Companys assets recorded at fair value (in thousands):
Total Recorded at Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Cash and cash equivalents (1) |
$ | 20,228 | $ | 20,228 | $ | | $ | | ||||||||
Restricted cash (2) |
20,376 | 20,376 | | | ||||||||||||
Interest rate cap (3) |
238 | | 238 | | ||||||||||||
Total assets measured at fair value |
$ | 40,842 | $ | 40,604 | $ | 238 | $ | | ||||||||
(1) | Cash and cash equivalents include bank deposits and money market accounts. |
(2) | At June 30, 2010, restricted cash consisted of certificates of deposit of various maturities. See Note 11 for details on restricted cash. |
(3) | The fair value of the interest rate cap at June 30, 2010 was based on quoted prices for similar instruments in active markets. See Note 10 for details on the interest rate cap. |
The carrying values of accounts receivable, accounts payable, accrued liabilities and other liabilities approximate the related fair values due to the short-term maturities of these assets and liabilities.
11
The following is a comparison of the fair value and recorded value of the Companys long-term debt (in thousands):
As of June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Fair Value | Recorded Value |
Fair Value | Recorded Value |
|||||||||||||
Term Loan due December 2014 (1) |
$ | 179,100 | $ | 174,890 | $ | | $ | | ||||||||
12.75% Senior Discount Notes due March 2016 (2) |
99,110 | 93,500 | 67,320 | 85,731 | ||||||||||||
Term Loan B due March 2011 (3) |
| | 64,680 | 66,000 | ||||||||||||
9.875% Senior Subordinated Notes due March 2015 (4) |
| | 111,250 | 125,000 |
(1) | The fair value of the Term Loan due December 2014 as of June 30, 2010 was based on the quoted ask price for the loan (Level 2). |
(2) | The fair value of the Senior Discount Notes was determined using reported market transaction prices closest to June 30, 2010 and 2009 (Level 2). |
(3) | The fair value of the Term Loan B as of June 30, 2009 was based on the quoted ask price for the loan (Level 2). |
(4) | The fair value of the Senior Subordinated Notes was determined using reported market transaction prices closest to June 30, 2009 (Level 2). |
(3) | Sale of Accounts Receivable |
The Company has entered into transactions to sell certain of its previously written-off self pay accounts receivables to an unrelated third party. The Company accounted for each transaction as a sale. The resulting gains were equal to proceeds received because the Company had previously removed the receivables from the balance sheet upon concluding they would not be collected.
The following table shows gains recognized on sale of accounts receivable (in thousands):
Years ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Continuing operations |
$ | 552 | $ | 610 | $ | 1,703 | ||||||
Discontinued operations |
19 | 33 | 351 | |||||||||
Total gains recognized |
$ | 571 | $ | 643 | $ | 2,054 | ||||||
The gains associated with the Companys continuing operations are included within gain on sale of assets and property insurance settlement in the Consolidated Statement of Operations. The gains associated with the Companys discontinued operations are included within income (loss) from discontinued operations. The proceeds received in connection with these transactions are a component of cash provided by operating activities in the Consolidated Statements of Cash Flows.
(4) | Property and Equipment |
Property and equipment consists of the following (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Equipment |
$ | 75,026 | $ | 67,716 | ||||
Vehicles |
98,654 | 94,179 | ||||||
Land and buildings |
16,540 | 16,389 | ||||||
Leasehold improvements |
5,784 | 5,718 | ||||||
196,004 | 184,002 | |||||||
Less: Accumulated depreciation |
(145,334 | ) | (134,906 | ) | ||||
$ | 50,670 | $ | 49,096 | |||||
12
(5) | Goodwill |
The following table presents changes in the carrying amount of goodwill during fiscal 2010 and 2009 by segment (in thousands):
East | South | Southwest | West | Total | ||||||||||||||||
Balance at June 30, 2008 |
||||||||||||||||||||
Goodwill |
$ | 10,281 | $ | 2,346 | $ | 25,073 | $ | | $ | 37,700 | ||||||||||
Accumulated impairment losses |
| | | | | |||||||||||||||
Goodwill, net |
10,281 | 2, 346 | 25,073 | | 37,700 | |||||||||||||||
Impairment losses |
| | | | | |||||||||||||||
Balance at June 30, 2009 |
||||||||||||||||||||
Goodwill |
10,281 | 2, 346 | 25,073 | | 37,700 | |||||||||||||||
Accumulated impairment losses |
| | | | | |||||||||||||||
Goodwill, net |
10,281 | 2, 346 | 25,073 | | 37,700 | |||||||||||||||
Impairment losses |
| (1,184 | ) | | | (1,184 | ) | |||||||||||||
Balance at June 30, 2010 |
||||||||||||||||||||
Goodwill |
10,281 | 2, 346 | 25,073 | | 37,700 | |||||||||||||||
Accumulated impairment losses |
| (1,184 | ) | | | (1,184 | ) | |||||||||||||
Goodwill, net |
$ | 10,281 | $ | 1,162 | $ | 25,073 | $ | | $ | 36,516 | ||||||||||
As described in Note 1, the Company performs an annual evaluation of goodwill for impairment in a two-step test. The results of the first step of the test performed for fiscal 2010 indicated that the goodwill associated with one of the nine reporting units was potentially impaired. The Company then performed the second step of the impairment test for this reporting unit. Goodwill related to this reporting unit prior to the impairment test totaled $2.3 million. The fair value of the reporting unit was estimated based on discounted cash flow methodologies, which showed that the carrying value of the net assets of the reporting unit exceeded the estimated fair value. The decline in the fair value of the reporting unit is primarily due to a trend in declining profitability and a planned future change in utilization of existing resources in this reporting unit. As a result, a goodwill impairment of $1.2 million was recorded. The Company will continue to monitor the performance of this reporting unit to determine if any interim review of the remaining goodwill is warranted. The results of the first step of the test did not indicate that any of the other reporting units were at risk of impairment.
(6) | Other Assets |
Other assets consist of the following (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Receivables from insurers (see Note 9) |
$ | 9,081 | $ | 2,758 | ||||
Debt issuance costs (see Note 11) |
4,859 | 5,930 | ||||||
Deposits |
1,004 | 1,935 | ||||||
Intangible assets, net |
726 | 550 | ||||||
Interest rate cap (see Note 10) |
238 | | ||||||
Retention bonus |
| 383 | ||||||
Total other assets |
$ | 15,908 | $ | 11,556 | ||||
The changes in the net carrying amount of intangible assets are as follows (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of year |
$ | 550 | $ | 764 | ||||
Amortization |
(330 | ) | (214 | ) | ||||
Additions |
506 | | ||||||
Balance at end of year |
$ | 726 | $ | 550 | ||||
13
The carrying amounts of intangible assets as of June 30, 2010 and 2009 are as follows (in thousands):
As of June 30, 2010 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Indefinite-lived certificate of need |
$ | 382 | $ | | $ | 382 | ||||||
Non-compete agreements |
1,525 | 1,287 | 238 | |||||||||
Service area contracts |
99 | 6 | 93 | |||||||||
Other |
30 | 17 | 13 | |||||||||
Total |
$ | 2,036 | $ | 1,310 | $ | 726 | ||||||
As of June 30, 2009 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Non-compete agreement |
$ | 1,500 | $ | 964 | $ | 536 | ||||||
Other |
30 | 16 | 14 | |||||||||
Total |
$ | 1,530 | $ | 980 | $ | 550 | ||||||
In April 2010, the Company purchased the assets of a medical transportation services provider in Kentucky. The assets purchased included a certificate of need with a fair value of $0.4 million and service area contracts with a total fair value of $0.1 million. The certificate of need has been deemed an indefinite-lived intangible asset due to the automatic renewal process for it. The service area contracts are being amortized over the life of the agreements including assumed renewals.
During fiscal 2005, the Company capitalized $1.5 million related to a non-compete agreement with its former Chief Executive Officer (CEO) which is being amortized on a straight-line basis, adjusted for termination provisions, over the seven year term of the agreement which ends in fiscal 2011. The unamortized balance as of June 30, 2010 was $0.2 million.
During fiscal 2005, the Company entered into an employment agreement with its former CEO, under which the former CEO was paid a retention bonus which was subject to repayment through December 2010 should the Company terminate his employment with cause or should the former CEO terminate his employment without good reason. The former CEO terminated his employment without good reason in January 2010 and repaid $0.3 million of the retention bonus.
The following table shows the expected amortization of intangible assets for each of the fiscal years ending June 30 (in thousands):
2011 |
$ | 244 | ||
2012 |
29 | |||
2013 |
29 | |||
2014 |
29 | |||
2015 |
5 | |||
Thereafter |
8 | |||
$ | 344 | |||
(7) | Accrued Liabilities |
Accrued liabilities consist of the following (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Accrued employee benefits |
$ | 12,770 | $ | 13,665 | ||||
Accrued payroll and taxes |
9,845 | 8,248 | ||||||
Workers compensation related liabilities (see Note 9) |
6,232 | 5,460 | ||||||
Accrued interest |
5,604 | 4,476 | ||||||
General/auto liability related liabilities (see Note 9) |
4,530 | 17,596 | ||||||
Severance |
817 | 1,060 | ||||||
Other |
8,492 | 7,083 | ||||||
Total accrued liabilities |
$ | 48,290 | $ | 57,588 | ||||
14
(8) | Other Liabilities |
Other liabilities consist of the following (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
General/auto liability related liabilities (see Note 9) |
$ | 18,690 | $ | 11,659 | ||||
Workers compensation related liabilities (see Note 9) |
9,184 | 7,443 | ||||||
Income taxes payable |
5,103 | 5,240 | ||||||
Deferred rent |
2,224 | 2,191 | ||||||
Net pension benefit liability (see Note 16) |
1,700 | 656 | ||||||
Deferred revenue |
1,202 | 1,308 | ||||||
Other |
27 | | ||||||
Total other liabilities |
$ | 38,130 | $ | 28,497 | ||||
(9) | General/Auto Liability and Workers Compensation Insurance Programs |
The Company carries a broad range of insurance policies, including general/auto liability, workers compensation, property, professional and other lines of coverage in order to minimize the risk of loss due to accident, injury, automobile and professional liability claims resulting from our operations, and to comply with certain legal and contractual requirements,.
The Company retains certain levels of exposure in its general/auto liability and workers compensation programs and purchases coverage from third-party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, the Company establishes reserves for claims, both reported and incurred but not reported, on a gross basis. A receivable is recognized for amounts expected to be recovered from insurers in excess of the retention limits. The Company regularly evaluates the financial capacity of its insurers to assess the recoverability of the receivable.
The Company engages third-party administrators (TPAs) to manage general/auto liability and workers compensation claims. The TPAs estimate a loss reserve at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. Semi-annually, or in interim periods if events or changes in circumstances indicate additional evaluation is necessary, management engages independent actuaries to assist with estimating its claim reserves based on loss reserve estimates provided by the TPAs. The Company adjusts its claim reserves with an associated increase or decrease to expense as new information on the underlying claims is obtained.
Additionally, the Companys general/auto liability and workers compensation insurers require the Company to post collateral to support future expected claim payments. The Company has provided letters of credit as collateral to support retention limits. These letters of credit, issued primarily under the Credit Facility and discussed in Note 11 to the Consolidated Financial Statements, totaled $44.7 million and $42.2 million as of June 30, 2010 and 2009, respectively.
General/Auto Liability
A summary of activity in the Companys general/auto liability claim reserves and related receivable from insurers is as follows (in thousands):
Gross Claim Reserves |
Receivables from Insurers |
Net General/ Auto Related Liabilities |
||||||||||
Balance June 30, 2008 |
$ | 29,661 | $ | 14,524 | $ | 15,137 | ||||||
Provision charged to general/auto liability insurance |
5,290 | | 5,290 | |||||||||
Claim payments |
(4,706 | ) | | (4,706 | ) | |||||||
Actuarial adjustment |
(2,498 | ) | (775 | ) | (1,723 | ) | ||||||
Increase in estimated recoverable claims |
1,508 | 1,508 | | |||||||||
Balance June 30, 2009 |
29,255 | 15,257 | 13,998 | |||||||||
Provision charged to general/auto liability insurance |
6,827 | | 6,827 | |||||||||
Claim payments |
(5,207 | ) | | (5,207 | ) | |||||||
Actuarial adjustment |
(2,582 | ) | (1,290 | ) | (1,292 | ) | ||||||
Decrease in estimated recoverable claims |
(5,073 | ) | (5,073 | ) | | |||||||
Balance June 30, 2010 |
$ | 23,220 | $ | 8,894 | $ | 14,326 | ||||||
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The classification of general/auto liability related amounts in the consolidated balance sheets as of June 30, 2010 and 2009 is as follows (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Receivables from insurers included in prepaid expenses and other |
$ | | $ | 13,074 | ||||
Receivables from insurers included in other assets |
8,894 | 2,183 | ||||||
Total general/auto liability related assets |
8,894 | 15,257 | ||||||
Claims reserves included in accrued liabilities |
4,530 | 17,596 | ||||||
Claims reserves included in other liabilities |
18,690 | 11,659 | ||||||
Total general/auto liability related liabilities |
23,220 | 29,255 | ||||||
Net general/auto liability related liabilities |
$ | 14,326 | $ | 13,998 | ||||
In 2004, an individual filed suit against the Company for injuries that were allegedly sustained as a result of negligence on the part of the Company. In 2007, a jury awarded the plaintiff compensatory damages of $12.1 million. The Company filed a motion to appeal. The Company is covered under an automobile liability insurance program and maintains excess insurance with coverage limits in excess of the award, for the related policy year. In December 2009, the appeal was denied and the claim was paid by the Companys insurance carriers. The Company had recorded a liability and an offsetting receivable representing the amount due from the insurer of $13.1 million as of June 30, 2009. This amount represented the difference between the award plus accrued interest and the self-insured deductible. The liability was classified as a component of accrued liabilities and the receivable was classified as a component of prepaid expenses and other on the consolidated balance sheet as of June 30, 2009. The accrual, including accrued interest, was reversed in the second quarter of fiscal 2010 due to the settlement described above and therefore there are no amounts recorded as of June 30, 2010 related to this case. As of June 30, 2010 and 2009, respectively, we had liabilities and offsetting receivables of $8.0 million and $13.1 million, respectively, related to outstanding claims.
Workers Compensation
A summary of activity in the Companys workers compensation claim related reserves, deposits and premium asset/liabilities is as follows (in thousands):
Gross Claims Reserves and Premium Liabilities |
Receivables from Insurers and Deposits |
Net
Workers Compensation Related Liabilities |
||||||||||
Balance June 30, 2008 |
$ | 11,243 | $ | 2,057 | $ | 9,186 | ||||||
Provision charged to payroll and employee benefits |
5,829 | | 5,829 | |||||||||
Claim payments |
(5,899 | ) | | (5,899 | ) | |||||||
Actuarial adjustment |
1,730 | 12 | 1,718 | |||||||||
Decrease in estimated recoverable claims |
| (439 | ) | 439 | ||||||||
Balance June 30, 2009 |
12,903 | 1,630 | 11,273 | |||||||||
Provision charged to payroll and employee benefits |
7,740 | | 7,740 | |||||||||
Claim payments |
(7,756 | ) | | (7,756 | ) | |||||||
Actuarial adjustment |
1,849 | (388 | ) | 2,237 | ||||||||
Increase in estimated recoverable claims |
798 | (504 | ) | 1,302 | ||||||||
Prior year premium refund |
(118 | ) | (118 | ) | | |||||||
Balance June 30, 2010 |
$ | 15,416 | $ | 620 | $ | 14,796 | ||||||
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The classification of workers compensation related amounts in the consolidated balance sheets as of June 30, 2010 and 2009 is as follows (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Insurance deposits included in prepaid expenses and other |
$ | 137 | $ | 339 | ||||
Insurance deposits included in other assets |
296 | 716 | ||||||
Receivables from insurers included in other assets |
187 | 575 | ||||||
Total workers compensation related assets |
620 | 1,630 | ||||||
Claims reserves and premium liabilities included in accrued liabilities |
6,232 | 5,460 | ||||||
Claims reserves included in other liabilities |
9,184 | 7,443 | ||||||
Total workers compensation related liabilities |
15,416 | 12,903 | ||||||
Net workers compensation related liabilities |
$ | 14,796 | $ | 11,273 | ||||
The Company has a per-occurrence self-insured retention for the policy periods which cover May 2005 through April 2011. The Companys aggregate retention limit for those periods is unlimited. For policy years prior to May 2002, policies also included a per-occurrence retention with no annual aggregate limit. For the policy periods May 2002 through May 2005, the Company purchased a first dollar coverage program with a retrospectively rated endorsement whereby the related premiums are subject to adjustment at certain intervals based on subsequent review of actual losses incurred as well as payroll amounts.
The Company determined that the policies for the policy years ended April 30, 2003 and 2004 effectively transferred the risk of loss to the insurer. As a result, the cost applicable to those policy years consisted entirely of the related premium expense and no related claim reserves are recorded. However, the Company has recorded an estimated premium receivable/liability, based on estimates provided by an independent actuary, for subsequent premium adjustments. For these policy years as of June 30, 2010 and 2009, the Company had recorded premium liabilities of $0.5 million and $1.0 million, respectively.
For the policy year ended April 30, 2005, the Company determined that the risk of loss was not effectively transferred to the insurer. As a result, the Company recorded a deposit for amounts paid to the insurer during the policy period in excess of the identified premiums along with a corresponding insurance claim reserve. These amounts are periodically revalued as claims are paid under the policy. As of June 30, 2010 and 2009, the Companys deposit balances for this policy year were $0.4 million and $1.1 million, respectively. As of June 30, 2010 and 2009, the claim reserves for this policy year were $1.5 million and $0.9 million, respectively.
The Company has issued a letter of credit, which totaled $2.2 million and $2.3 million as of June 30, 2010 and 2009, respectively, to cover any remaining claims on the policy periods 1992 to 2001.
Legion
During fiscal 2002, the Company purchased certain portions of its workers compensation coverage from Legion Insurance Company (Legion). Legion required assurances that the Company would fund its related retention obligations, which were estimated by Legion to approximate $6.2 million. The Company provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual), a Legion affiliate. That policy required the Company to deposit $6.2 million with Mutual and required Mutual to utilize such funds to satisfy the Companys retention obligations under the Legion policy.
On July 25, 2003, the Pennsylvania Insurance Department placed Legion into liquidation. In January 2003, the Commonwealth Court of Pennsylvania (the Court) ordered the Legion liquidator and Mutual to establish segregated trust accounts to be funded by cash deposits held by Mutual for the benefit of individual insureds, such as the Company. It is the Companys understanding that the Legion liquidator and Mutual continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. Under Act 46, the Legion liquidator is required to first utilize the cash deposits available with Mutual before attempting to collect any amounts from the Company. Based on the information currently available, the Company believes that the amounts on deposit with Mutual are fully recoverable and will either be returned to the Company or used to pay claims on its behalf. In the event that the Company or the Legion liquidator are unable to access the funds on deposit with Mutual, the Company may be required to fund the related workers compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. In fiscal 2003 and 2004, the Legion liquidator ordered the Companys TPA to forward all workers compensation claims related to fiscal 2002 to the state guaranty funds that will be administering these claims. Since these claims are not in the Companys control, it may not be able to obtain current information as to the settlement of these claims and to the use of their deposits to satisfy these claims. The Company had a net receivable totaling $0.1 million and $0.5 million as of June 30, 2010 and 2009, respectively, related to this policy year.
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(10) | Derivative Instruments and Hedging Activities |
To reduce its exposure to interest rate risk related to its variable-rate debt, the Company entered into a three-year interest rate cap contract during the third quarter of fiscal 2010. The interest rate cap covers a notional amount of $60.0 million of the 2009 Term Loan for three years (see Note 11). The interest rate cap qualifies for hedge accounting and has been formally designated as a cash flow hedging instrument. The fair value of the instrument is reported on the Companys Consolidated Balance Sheet. The effective portion of the gain or loss on the instrument is reported as a component of other comprehensive income and reclassified into earnings as interest income/expense in the same periods during which the hedged forecasted transactions affect earnings.
The fair value of the instrument as of June 30, 2010 was $0.2 million (see Note 2) and is reported in other assets on the Consolidated Balance Sheet. The fair value of the components of the contract that mature within twelve months is reported as prepaid expenses and other and is not significant. For fiscal 2010, a decrease in the fair value of the instrument of $0.4 million, net of income tax benefit of $0.2 million, was recognized in other comprehensive income and no amounts of accumulated other comprehensive income were reclassified into earnings. The Company expects to reclassify $43,000 of existing losses reported in accumulated other comprehensive income to interest expense within the next twelve months. The balance of the comprehensive loss in accumulated other comprehensive income as of June 30, 2010 was $0.4 million, net of income tax benefit. There was no cash flow hedge ineffectiveness for fiscal 2010.
(11) | Long-Term Debt |
The following is a summary of the Companys outstanding long-term debt (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Term Loan due December 2014 |
$ | 174,890 | $ | | ||||
12.75% Senior Discount Notes due March 2016 |
93,500 | 85,731 | ||||||
Term Loan B due March 2011 |
| 66,000 | ||||||
9.875% Senior Subordinated Notes due March 2015 |
| 125,000 | ||||||
Other obligations, at varying rates from 5.90% to 14.64%, due through 2013 |
652 | 578 | ||||||
Long-term debt |
269,042 | 277,309 | ||||||
Less: Current maturities |
(6,436 | ) | (199 | ) | ||||
Long-term debt, net of current maturities |
$ | 262,606 | $ | 277,110 | ||||
Debt Maturities
Aggregate annual maturities on long-term debt as of June 30, 2010 for each of the fiscal years ending June 30 are as follows (in thousands):
2011 |
$ | 7,475 | ||
2012 |
9,226 | |||
2013 |
9,167 | |||
2014 |
16,542 | |||
2015 |
137,342 | |||
Thereafter |
93,500 | |||
Gross principal |
273,252 | |||
Less: Term Loan due December 2014 discount |
(4,210 | ) | ||
Total debt at June 30, 2010 |
$ | 269,042 | ||
As of June 30, 2010, the Company had outstanding letters of credit which mature during the next twelve months totaling $44.6 million, of which $44.5 million support general/auto liability and workers compensation insurance programs. The Company anticipates renewing these letters of credit.
2009 Credit Facility
Effective December 9, 2009, the Company, through its wholly-owned subsidiary Rural/Metro Operating Company, LLC (Rural/Metro LLC) entered into a transaction whereby the 2005 Credit Facility was terminated. In connection with this transaction a tender offer was also made for the Senior Subordinated Notes. In order to terminate the existing debt Rural/Metro LLC entered into a new five-year $180.0 million term loan and a four-year $40.0 million revolving credit facility with a $25.0 million letter of credit sub-line (2009 Credit Facility). The Company and its domestic subsidiaries are guarantors of Rural/Metro LLCs obligations under the 2009 Credit Facility. Additionally, the Company entered into a cash collateralized letter of credit facility agreement that provided $17.6 million in letters of credit secured by $17.8 million deposited in a restricted account. The Company elected to use the gross
18
method to account for the debt refinancing. As a result of the refinancing, the Company recognized a $13.8 million loss on debt extinguishment in the Consolidated Statement of Operations. The loss on debt extinguishment was comprised of the write-off of unamortized debt issuance costs related to the Companys 2005 Credit Facility and the expensing of certain third-party and lender fees, offset by the capitalization of debt issuance costs on the 2009 Credit Facility. The Company called the remaining $4.0 million of Senior Subordinated Notes during the third quarter of fiscal 2010 and recognized additional loss on debt extinguishment of $0.3 million. See Senior Subordinated Notes below.
The loss on debt extinguishment and changes in unamortized debt issuance costs at the date of the transaction (in thousands) are summarized as follows:
Senior Subordinated Notes |
Term Loan B |
2005 Revolving Credit Facility |
2005 Letter of Credit Facility |
2009 Term Loan |
2009 Revolving Credit Facility |
Cash Collateralized Letter of Credit Facility |
Total | |||||||||||||||||||||||||
Unamortized Debt Issuance Costs |
$ | 2,775 | $ | 547 | $ | 51 | $ | 425 | $ | | $ | | $ | | $ | 3,798 | ||||||||||||||||
Lender Fees |
8,971 | | | | 1,800 | 800 | | 11,571 | ||||||||||||||||||||||||
Third Party Fees |
1,313 | 95 | 326 | 733 | 4,505 | 658 | 21 | 7,651 | ||||||||||||||||||||||||
Fees Allocated to 2009 Credit Facility |
(3,894 | ) | (494 | ) | (34 | ) | (23 | ) | 4,388 | 57 | | | ||||||||||||||||||||
Total Debt Refinancing Costs |
$ | 9,165 | $ | 148 | $ | 343 | $ | 1,135 | $ | 10,693 | $ | 1,515 | $ | 21 | $ | 23,020 | ||||||||||||||||
Loss on Debt Extinguishment |
9,076 | 148 | 343 | 1,135 | 3,140 | | | 13,842 | ||||||||||||||||||||||||
Unamortized Debt Issuance Costs Balance at Transaction Date |
89 | | | | 2,756 | 1,515 | 21 | 4,381 | ||||||||||||||||||||||||
Fees Recorded as Discount |
| | | | 4,797 | | | 4,797 |
Term Loan due December 2014
The 2009 Credit Facility includes a $180.0 million Term Loan due in December 2014 (Term Loan due December 2014). The Term Loan due December 2014 bears interest at the LIBOR plus an applicable margin of 5% subject to a LIBOR floor of 2%, or at Rural/Metro LLCs option, the Alternate Base Rate (ABR) as defined in the credit agreement plus an applicable margin of 4% subject to an ABR floor of 3%. In the case of the LIBOR option, whereby the contract periods may be equal to one, two, three or six months from the date of initial borrowing, interest is payable on the last day of each contract period, subject to a maximum payment term of three months. Interest is payable at the end of each quarter in the case of the ABR option. The Term Loan due December 2014 requires quarterly principal payments totaling 1% of the original Term Loan principal balance in the first year, 5% of the original Term Loan principal balance in the second through fourth years and 10% of the original Term Loan principal balance in the fifth year of the agreement. Additionally, annual principal payments equal to 50% of fiscal year-end excess cash flow, as defined in the credit agreement, are required. The required excess cash flow payments may decrease to 25% or 0% based on the total leverage ratio, as defined in the credit agreement. The Term Loan due December 2014 may be prepaid without penalty (other than payment of certain losses and expenses incurred by the lender as a result of such prepayment) at any time at the option of Rural/Metro LLC. In addition to the scheduled principal payments, the Company is required to make an excess cash flow payment, as defined under its 2009 Credit Facility, of $1.9 million within 90 days of June 30, 2010. The excess cash flow payment will be applied to the principal balance of the Term Loan due 2014.
Based on the required principal payment terms and the excess cash flow payment, $6.4 million of the Term Loan due December 2014 has been classified as current on the Consolidated Balance Sheet as of June 30, 2010.
The Company purchased an interest rate cap as a hedge for $60.0 million of the Term Loan due December 2014 as discussed in Note 10 above.
The Company capitalized $2.8 million of debt issuance costs related to the Term Loan due December 2014 which includes the transfer of $1.4 million of unamortized debt issuance costs from the 2005 Credit Facility and $1.4 million of fees incurred with third parties. The Company is amortizing those costs as interest expense over the term of the loan. Additionally, the Term Loan due December 2014 was issued at a discount of $1.8 million and $3.0 million of lender fees were also recorded as a discount, both of which are being accreted to interest expense over the term of the loan.
As of June 30, 2010, all of the outstanding Term Loan due December 2014 balance was accruing interest at 7.00% per annum under three-month LIBOR contracts.
19
2009 Revolving Credit Facility
The 2009 Credit Facility includes a $40.0 million revolving credit facility, which matures in December 2013 (2009 Revolving Credit Facility). The 2009 Revolving Credit Facility includes a letter of credit sub-line whereby $25.0 million of the facility can be utilized to issue letters of credit. Letters of credit issued under the facility reduce the borrowing capacity on the total facility. Borrowings on the Revolving Credit Facility bear interest at LIBOR plus an applicable margin of 5% subject to a LIBOR floor of 2% or, at Rural/Metro LLCs option, the ABR as defined in the credit agreement plus an applicable margin of 4% subject to an ABR floor of 3%. In the case of the LIBOR option, whereby the contract periods may be equal to one, two, three or six months from the date of initial borrowing, interest is payable on the last day of each contract period, subject to a maximum payment term of three months. Interest is payable at the end of each quarter in the case of the ABR option. Additionally, Rural/Metro LLC will pay a commitment fee to the Revolving Credit Facility lenders equal to 0.75% on the undrawn revolving commitment, payable quarterly. An administrative fee of $125,000 per year is required to be paid in quarterly installments with the first installment due on the closing date.
Amounts related to outstanding letters of credit issued under the 2009 Revolving Credit Facility bear a participation fee of 5.0% and a fronting fee of 0.25%, payable quarterly.
The Company capitalized $1.5 million of debt issuance costs related to the 2009 Revolving Credit Facility which includes $0.8 million paid to the lenders in the facility and $0.7 million of fees incurred with third parties. The Company is amortizing those costs as interest expense over the term of the facility.
As of June 30, 2010, letters of credit totaling $24.6 million were outstanding under the 2009 Revolving Credit Facility. These letters of credit primarily support the Companys insurance deductible programs. Aside from the letters of credit issued under the facility, no other amounts were outstanding under the 2009 Revolving Credit Facility as of June 30, 2010.
Cash Collateralized Letter of Credit Facility
In addition to the $25.0 million letter of credit sub-line available under the 2009 Revolving Credit Facility, the Company entered into an additional letter of credit agreement (Cash Collateralized LC Facility). The initial commitment under the Cash Collateralized LC Facility was $17.6 million and matures on December 9, 2011 (the Maturity Date). Letters of credit issued under the agreement expire on the earlier of one year after the date of issuance, renewal or extension up to one year after the Maturity Date (subject to renewal in certain cases). These letters of credit primarily support the Companys insurance deductible programs.
The Company executed a collateral pledge agreement as a condition to the Cash Collateralized LC Facility. The collateral pledge agreement requires the Company to maintain on deposit an amount equal to the amount of the commitments under the Cash Collateralized LC Facility plus 1.375% for fees and cash reserves. The deposit is maintained in certificates of deposit and will be used as security in the event any of the lenders are required to make a letter of credit disbursement. As of June 30, 2010, the Company had $20.1 million in letters of credit outstanding under the Cash Collateralized LC Facility and $20.4 million in restricted cash on deposit to guarantee those letters of credit. The restricted cash related to the Cash Collateralized LC Facility has been classified as a noncurrent asset on the Consolidated Balance Sheets due to the Companys intent for the letters of credit to remain outstanding for a period greater than 12 months.
The Company must pay a participation fee of 1.25% of the face amount of the letters of credit, quarterly in arrears, to the administrative agent. The Company also must pay a 0.125% fronting fee to any new lenders if additional lenders enter the agreement.
The Company capitalized $28,000 of debt issuance costs related to the Cash Collateralized LC Facility. The Company is amortizing those costs as interest expense over the term of the facility.
2005 Credit Facility
The Companys 2005 Credit Facility included a Term Loan B Facility maturing in 2011, a $45.0 million Letter of Credit Facility maturing in 2011 and a $20.0 million Revolving Credit Facility maturing in March 2010, each of which was terminated in conjunction with the Company entering into the 2009 Credit Facility, as discussed above. The Term Loan B Facility, the Letter of Credit Facility and the Revolving Credit Facility are described below.
Term Loan B Facility
During fiscal 2010, the Company made a $10.0 million principal repayment on its Term Loan B and repaid the balance of $56.0 million in connection with its December 2009 refinancing transaction. There were no prepayment penalties or fees associated with the principal repayments under the Term Loan B (other than our reimbursement of certain losses and expenses incurred by the lender as a result of such repayment). In connection with the $10.0 million principal repayment the Company wrote-off $0.1 million of debt issuance costs. In connection with its December 2009 refinancing transaction the Company incurred third-party fees and wrote off the remaining $0.5 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Term Loan and a portion of which was expensed as loss on debt extinguishment.
20
The Term Loan B bore interest at LIBOR plus 3.50% per annum, based on contractual periods from one to six months in length at the option of the Company. Through December 9, 2009, when the entire balance was repaid, all of the outstanding Term Loan B balance was under LIBOR option one-month contracts accruing interest at 3.74% per annum based on the interest rate contracts in effect at that time. As of June 30, 2009, all of the outstanding Term Loan B balance was under a LIBOR one-month contract accruing interest at 3.8175% per annum.
Letter of Credit Facility
In connection with its December 2009 refinancing transaction the Company terminated the Letter of Credit Facility. In connection with the termination of the facility, the Company incurred third-party fees and wrote-off the remaining $0.4 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as the loss on debt extinguishment. In connection with its December 2009 refinancing transaction the Company transferred its letters of credit under the 2005 Credit Facility to its letter of credit facility sub-line under its 2009 Revolving Credit Facility and its Cash Collateralized Letter of Credit Facility.
The Letter of Credit Facility was available primarily to support and/or replace existing and future insurance deductible arrangements of the Company, Rural/Metro LLC and the Guarantors as defined by the 2005 Credit Facility agreement. The Letter of Credit Facility required the Company to pay a participation fee of 3.50% plus an administrative fee of 0.15% for a total of 3.65% per annum on the total facility payable quarterly. In addition, Rural/Metro LLC was required to pay a fronting fee of 0.125% per annum on issued letters of credit payable quarterly.
Revolving Credit Facility
In connection with its December 2009 refinancing transaction the Company terminated its Revolving Credit Facility under the 2005 Credit Facility. In connection with the termination of the facility, the Company incurred third-party fees and wrote-off the remaining $51,000 of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as the loss on debt extinguishment. The Companys $20.0 million Revolving Credit Facility included a letter of credit sub-line in the amount of $10.0 million and any letters of credit issued under the sub-line reduced the amount of drawings available under the Revolving Credit Facility by the amount of such letters of credit. A commitment fee of 0.50% was payable on the total undrawn revolving commitment, plus a fronting fee of 0.25% on any letter of credit issued under the sub-line, payable at the end of each quarter.
Senior Subordinated Notes
In the second quarter of fiscal 2010, the Company announced the launch of a tender offer and consent solicitation for its outstanding 9.875% Senior Subordinated Notes. The purchase price per $1,000 principal amount of Senior Subordinated Notes to be paid for each validly tendered Senior Subordinated Note was (1) the redemption price of the Senior Subordinated Notes plus scheduled interest to March 15, 2010, discounted based on a yield to March 15, 2010 that is equal to the sum of (i) the yield on the 4.00% US Treasury note due March 15, 2010, and (ii) a fixed spread of 50 basis points, less (2) an amount equal to the consent payment. Those Senior Subordinated Note holders who tendered on or before the consent date of November 20, 2009 were paid a consent fee of $20 per $1,000 of principal amount of Senior Subordinated Notes. This equated to a payment of $1,074.14 for each $1,000 of principal amount of Senior Subordinated Notes for those tendered on or before the consent date and $1,054.14 for each $1,000 of principal amount of Senior Subordinated Notes tendered subsequent to the consent date. A total of $121.0 million of principal amount of Senior Subordinated Notes were tendered on or before the consent date. None of the remaining Senior Subordinated Notes were tendered after the consent date but prior to the expiration date of December 8, 2009.
In connection with its December 2009 refinancing transaction the Company paid lenders $9.0 million of tender and consent fees, incurred third-party fees and wrote-off $2.8 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as debt extinguishment.
The Company used $4.2 million of restricted cash to call the remaining $4.0 million of Senior Subordinated Notes during the third quarter of fiscal 2010. The Company remitted to lenders the $4.0 million outstanding principal plus a call premium of $0.2 million which was equal to 4.938% of the principal balance as required by the terms of the agreement governing such Senior Subordinated Notes. The Company recognized a loss on debt extinguishment of $0.3 million which includes the call premium and the write-off of $0.1 million of unamortized debt issuance costs.
21
12.75% Senior Discount Notes
In March 2005, Rural/Metro Corporation completed a private placement of the Senior Discount Notes and received gross proceeds of $50.2 million. While interest was accrued prior to March 15, 2010, cash interest payments will be due beginning September 15, 2010. The Senior Discount Notes had an initial accreted value of $536.99 per $1,000 principal amount at maturity. The accreted value increased from the date of issuance until March 15, 2010 at a rate of 12.75% per annum compounded semiannually such that the accreted value equaled the principal amount at maturity of each Senior Discount Note on that date. The accreted value of the Senior Discount Notes was $93.5 million at June 30, 2010 and $85.7 million at June 30, 2009. The Senior Discount Notes have been registered under the Securities Act of 1933, as amended.
The Senior Discount Notes are unsecured senior obligations of Rural/Metro Corporation and will rank equally in right of payment with all its existing and future unsecured senior obligations and senior to its subordinated indebtedness. The Senior Discount Notes will be subordinated to the Companys existing and future secured indebtedness, including its guarantee of the 2009 Credit Facility, to the extent of the assets securing that indebtedness. The Senior Discount Notes are not guaranteed by any of Rural/Metro Corporations subsidiaries and are subordinated to all obligations of Rural/Metro Corporations subsidiaries.
Rural/Metro Corporation may redeem all or part of the Senior Discount Notes at various redemption prices given the date of redemption as set forth in the indenture governing the Senior Discount Notes. If Rural/Metro Corporation experiences a change of control, it may be required to offer to purchase the Senior Discount Notes at a purchase price equal to 101% of their accreted value, plus accrued and unpaid interest.
The Company capitalized costs totaling $2.2 million related to this issuance and is amortizing these costs to interest expense over the term of the Senior Discount Notes. Unamortized deferred financing costs related to the Senior Discount Notes were $1.1 million and $1.3 million at June 30, 2010 and 2009, respectively.
Debt Covenants
The 2009 Credit Facility and the Senior Discount Notes include various financial and non-financial covenants applicable to Rural/Metro LLC as well as quarterly and annual financial reporting obligations.
Specifically, the 2009 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet certain financial tests, including an interest expense coverage ratio, a total leverage ratio, and a senior secured leverage ratio. The 2009 Credit Facility also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances, capital expenditures, business activities by the Company as a holding company, and other matters customarily restricted in such agreements. The financial covenants related to the Senior Discount Notes are similar to or less restrictive than those under the 2009 Credit Facility. The Company was in compliance with all of the applicable covenants under the 2009 Credit Facility and under the Senior Discount Notes as of June 30, 2010.
(12) | Income Taxes |
The following table shows the components of the income tax (provision) benefit from total operations (in thousands):
Years ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current income tax (provision) benefit |
$ | (1,456 | ) | $ | 738 | $ | (1,413 | ) | ||||
Deferred income tax provision |
(2,647 | ) | (7,622 | ) | (3,493 | ) | ||||||
Total income tax provision |
$ | (4,103 | ) | $ | (6,884 | ) | $ | (4,906 | ) | |||
Continuing operations provision |
$ | (4,395 | ) | $ | (7,433 | ) | $ | (4,706 | ) | |||
Discontinued operations (provision) benefit |
292 | 549 | (200 | ) | ||||||||
Total income tax provision |
$ | (4,103 | ) | $ | (6,884 | ) | $ | (4,906 | ) | |||
The following table shows the components of the income tax (provision) benefit applicable to continuing operations (in thousands):
Years ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (43 | ) | $ | 319 | $ | (307 | ) | ||||
State |
(1,452 | ) | 349 | (1,078 | ) | |||||||
Total |
(1,495 | ) | 668 | (1,385 | ) | |||||||
Deferred: |
||||||||||||
Federal |
(2,742 | ) | (6,151 | ) | (3,138 | ) | ||||||
State |
(158 | ) | (1,950 | ) | (183 | ) | ||||||
Total |
(2,900 | ) | (8,101 | ) | (3,321 | ) | ||||||
Total income tax provision attributable to continuing operations |
$ | (4,395 | ) | $ | (7,433 | ) | $ | (4,706 | ) | |||
22
The income tax (provision) benefit differs from the amount computed by applying the statutory U.S. federal income tax rate of 35% to income (loss) from continuing operations before income taxes as follows (in thousands):
Years ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Federal income tax provision at statutory rate |
$ | (3,729 | ) | $ | (5,249 | ) | $ | (3,247 | ) | |||
State taxes, net of federal tax benefit |
(979 | ) | (2,330 | ) | (1,371 | ) | ||||||
Wage tax credits |
134 | 970 | | |||||||||
Change in valuation allowance |
| 449 | | |||||||||
Disallowed interest on Senior Discount Notes |
(486 | ) | (624 | ) | (551 | ) | ||||||
Executive compensation |
448 | (807 | ) | (691 | ) | |||||||
Change in reserve estimates |
(83 | ) | (158 | ) | 1,067 | |||||||
Noncontrolling interest |
791 | 563 | 284 | |||||||||
Meals and entertainment |
(69 | ) | (88 | ) | (71 | ) | ||||||
Legislative expenses |
(118 | ) | (157 | ) | (114 | ) | ||||||
Goodwill impairment |
(298 | ) | | | ||||||||
Other, net |
(6 | ) | (2 | ) | (12 | ) | ||||||
Total income tax provision attributable to continuing operations |
$ | (4,395 | ) | $ | (7,433 | ) | $ | (4,706 | ) | |||
The following table summarizes the components of the Companys deferred tax assets and liabilities (in thousands):
As of June 30, | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 31,708 | $ | 33,561 | ||||
Tax credit carryforwards |
2,517 | 2,136 | ||||||
Insurance claim reserves |
11,744 | 10,545 | ||||||
Estimate for uncompensated care |
9,689 | 12,000 | ||||||
Settlements |
1,847 | 1,433 | ||||||
Compensation and benefits |
2,037 | 2,149 | ||||||
Deferred revenue |
576 | 1,511 | ||||||
Interest expense |
13,297 | 10,964 | ||||||
Joint venture interest |
425 | 482 | ||||||
Other |
5,123 | 4,138 | ||||||
Deferred tax assets |
78,963 | 78,919 | ||||||
Deferred tax liabilities: |
||||||||
Accelerated depreciation and amortization |
(5,542 | ) | (4,678 | ) | ||||
Deferred tax liabilities |
(5,542 | ) | (4,678 | ) | ||||
Net deferred tax assets before valuation allowance |
73,421 | 74,241 | ||||||
Less: valuation allowance |
(8,146 | ) | (7,531 | ) | ||||
Net deferred tax asset |
$ | 65,275 | $ | 66,710 | ||||
23
As of June 30, 2010, the Company had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $65.8 million, which expire in 2021-2024, and state NOL carryforwards of approximately $211.7 million, which expire in 2010-2030. The Company had minimum tax credit carryforwards of $2.0 million for federal income tax purposes. These credits can be carried forward indefinitely, but may only be used to the extent that regular tax exceeds the alternative minimum tax in any given year. The Company also had Federal General Business Credit carryforwards of $0.5 million which expire in 2026-2029.
As required by GAAP, management assesses the recoverability of the Companys deferred tax assets on a regular basis and records a valuation allowance for any such assets where recoverability is determined to be unlikely. The Companys evaluation of its valuation allowance against certain state deferred tax assets resulted in a release of the valuation allowance for two states in fiscal 2009. The Company determined that realization of these deferred tax assets is more likely than not based on past results, projected future results, and the tax laws of these jurisdictions. The valuation allowance release resulted in a benefit of $0.4 million for fiscal 2009. The Company maintained a valuation allowance of $8.1 million as of June 30, 2010 for those net operating loss carryforwards that management currently expects will expire prior to utilization.
A summary of activity in the Companys valuation allowance for deferred tax assets during fiscal 2010, 2009 and 2008 is as follows (in thousands):
As of June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 7,531 | $ | 30,424 | $ | 30,846 | ||||||
Change in related deferred tax assets |
615 | (22,444 | ) | (422 | ) | |||||||
Valuation allowance release |
| (449 | ) | | ||||||||
Balance at end of year |
$ | 8,146 | $ | 7,531 | $ | 30,424 | ||||||
Pursuant to Internal Revenue Code Section 382, if the Company underwent an ownership change, the NOL carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by the Companys NOL generated prior to the ownership change. If an ownership change were to occur, the Company may be unable to use a significant portion of its NOL to offset taxable income.
The income tax provision for fiscal 2009 reflects a $1.0 million benefit for wage tax credits related to the Companys participation in Federal and state wage tax incentive programs in the state of New York from 2002 to 2008. The income tax provision for fiscal 2010 reflects a $0.1 million benefit for wage credits earned during the year.
The Company adopted new guidance related to uncertain tax positions as of July 1, 2007. The adoption of the guidance resulted in a $12.8 million cumulative effect adjustment to retained earnings. As of the date of adoption, the Companys unrecognized tax benefits totaled approximately $34.1 million, $30.4 million of which would favorably impact the Companys effective tax rate if subsequently recognized. As of June 30, 2010, the Company had unrecognized tax benefits totaling approximately $33.9 million, $30.4 million of which would favorably impact the Companys effective tax rate if subsequently recognized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Years ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Unrecognized tax benefits balance at beginning of fiscal year |
$ | 34,099 | $ | 34,111 | $ | 34,075 | ||||||
Additions for tax positions taken in current periods |
80 | 70 | 18 | |||||||||
Additions for tax positions taken in prior periods |
| | 713 | |||||||||
Reductions for tax positions taken in current periods |
| (5 | ) | | ||||||||
Reductions for tax positions taken in prior periods |
(90 | ) | (20 | ) | (694 | ) | ||||||
Reductions for lapses of statute of limitations |
(149 | ) | (57 | ) | (1 | ) | ||||||
Unrecognized tax benefits balance at end of fiscal year |
$ | 33,940 | $ | 34,099 | $ | 34,111 | ||||||
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties as of June 30, 2010 and 2009 were approximately $0.4 million and $0.5 million, respectively. Approximately $0.1 million of interest and penalties were recorded for both fiscal 2010 and 2009. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
24
The Company and its subsidiaries are subject to the following significant taxing jurisdictions: U.S. federal, Arizona, California, Florida, Indiana, New York, Ohio and Tennessee. The Company has had NOLs in various years for Federal purposes and for many states. The statute of limitations for a particular tax year for examination by the Internal Revenue Service is generally three years subsequent to the filing of the associated tax return. However, the Internal Revenue Service can adjust NOL carryovers up to three years subsequent to the last year in which the loss carryover is finally used. Accordingly, there are multiple years open to examination. The statute of limitations is generally three to four years for many of the states where the Company operates. The State of New York is examining the Companys New York franchise tax returns for the years ended June 30, 2005 through 2007. The Company does not expect the result of this audit to significantly change the Companys total unrecognized tax benefits in the next twelve months, but the outcome of tax examinations is uncertain, and unforeseen results can occur. The Company is currently not under income tax examination in any other tax jurisdictions.
The Company anticipates a reduction of $0.1 million in the total amount of unrecognized tax benefits during the next twelve months as a result of the lapsing of the statute of limitations related to a state tax position.
(13) | Preferred Stock |
As of June 30, 2010 and 2009, there were 2,000,000 shares of preferred stock, par value $0.01 per share, authorized, none of which were issued and outstanding.
(14) | Shareholder Rights Plan |
On August 24, 2005, the Company entered into a shareholder rights plan to replace the previous plan that expired on August 23, 2005. The shareholder rights plan provides for one right to be attached to each share of common stock of the Company. Each right entitles the registered holder to purchase a unit consisting of one one-thousandth of a share (a Unit) of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $45 per Unit, subject to adjustment. The rights will become exercisable following the tenth day (or such later date as may be determined by the Board of Directors) after a person or group (a) acquires beneficial ownership of 15% or more of the Companys common stock, or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Companys common stock. On March 19, 2009, the Company amended the shareholder rights plan to change the beneficial ownership at which the shareholder rights plan is triggered to 10%. On December 22, 2009, the Company amended the shareholder rights plan to change the beneficial ownership at which the shareholder rights plan is triggered to 15%.
Upon exercise and subject to adjustment, each right will entitle the holder (other than the party seeking to acquire control of the Company) to acquire a number of shares of common stock of the Company or, in certain circumstances, such acquiring person having a value equal to two times the then applicable purchase price. The rights may be terminated by the Board of Directors at any time prior to the date they become exercisable at a price of $0.01 per right; thereafter, they may be redeemed for a specified period of time at $0.01 per right. The shareholder rights plan expires on August 24, 2015.
(15) | Share-based Compensation |
2008 Incentive Stock Plan
In March 2008 the Companys stockholders approved the 2008 Incentive Stock Plan (the 2008 Plan) which provides for the award of up to 1.0 million shares of the Companys common stock to employees, executive officers and non-employee directors. Awards may be made in different forms including options, restricted stock, restricted stock units (RSUs) and stock appreciation rights (SARs). Options and SARs are subject to a minimum vesting period of not less than one year from the grant date. Generally awards other than options and SARs are subject to a minimum vesting period of not less than three years from the grant date. Through June 30, 2010, all awards granted under the 2008 Plan have been RSUs and SARs. As of June 30, 2010, there were 0.4 million shares available under the 2008 Plan.
RSUs
RSUs granted to employees and executive officers have a fair value per unit based on the closing price of the Companys common stock on the grant date. Vesting of the RSUs is based on continued service, certain performance metrics and a time based vesting schedule. The awards consist of three tranches equal to approximately one-third of the award each. The grant date fair value of the RSUs is recognized as compensation expense over a graded schedule with the first tranche recognized over the period between the grant date and the expected date the performance condition will be satisfied, and the remaining tranches recognized over the period between the grant date and the vesting date for each tranche.
RSUs granted to the non-employee members of the Board of Directors of the Company have a grant date fair value per unit based on the closing price of the Companys common stock on the grant date. Subject to continued service, the RSUs vest in three equal installments upon the date of the Companys annual meeting of stockholders each fiscal year following the grant. The grant date fair value of the RSUs is recognized as compensation expense on a straight-line basis over the vesting period.
25
The following table summarizes the RSU activity in the 2008 Plan for fiscal 2010:
Year Ended June 30, 2010 | ||||||||||||||||
Number of Shares |
Weighted Average Grant Date Fair Value |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
Nonvested at beginning of year |
217,000 | $ | 1.98 | |||||||||||||
Granted |
213,500 | $ | 4.26 | |||||||||||||
Vested |
(75,988 | ) | $ | 2.00 | ||||||||||||
Forfeited |
(84,001 | ) | $ | 3.17 | ||||||||||||
Nonvested at end of year |
270,511 | $ | 3.40 | 1.8 years | $ | 2,201,960 | ||||||||||
The table below summarizes information related to RSUs for fiscal 2010, 2009 and 2008 (in thousands, except shares and per RSU amounts):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Weighted average grant date fair value per RSU granted |
$ | 4.26 | $ | 1.95 | $ | 2.15 | ||||||
Total fair value of RSUs vested |
$ | 152 | $ | 32 | $ | | ||||||
Shares of common stock issued for RSU vesting |
59,578 | 15,000 | | |||||||||
Total intrinsic value of RSUs vested |
$ | 352 | $ | 38 | $ | | ||||||
Income tax benefits realized for RSUs vested |
$ | 131 | $ | 10 | $ | |
The Company satisfies RSUs vested by authorizing its transfer agent to issue new shares after confirming that all requisite service periods and performance measures have been attained. As of June 30, 2010, there was approximately $0.5 million of total unrecognized compensation cost related to nonvested RSUs granted under the 2008 Plan which is expected to be recognized over a weighted-average period of 1.8 years.
SARs
SARs have an exercise price equal to the closing price of the Companys common stock on the date of grant, and a weighted average fair value determined using the Black-Scholes option pricing model with the following assumptions:
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 (1) | ||||||||||
Weighted average expected term |
6.0 years | 6.1 years | | |||||||||
Weighted average risk-free interest rate |
3.09 | % | 3.43 | % | | |||||||
Dividend yield |
0 | % | 0 | % | | |||||||
Volatility |
89 | % | 75 | % | | |||||||
Weighted average grant date fair value per SAR granted |
$ | 2.94 | $ | 1.03 | $ | |
(1) | No SARs were granted under the 2008 Plan during fiscal 2008. |
The weighted average expected term is based on the expected exercise behavior of the executive and non-executive groups of employees granted SARs. The weighted average risk free interest rate is based on the Daily Treasury Yield Curve Rates on the grant date for each expected term. Volatility was calculated based on an average of the Companys actual volatility over the seven years prior to each grant date.
The SARs are subject to continued service, vest over three years and have contractual terms of seven years from the grant date. The grant date fair value of the SARs is recognized as compensation expense on a straight-line basis over the vesting period.
As of June 30, 2010, there was approximately $0.3 million of total unrecognized compensation cost related to nonvested SARs granted under the 2008 Plan, which is expected to be recognized over a weighted-average period of 2.0 years.
26
The following table summarizes the SAR activity in the 2008 Plan for fiscal 2010:
Year Ended June 30, 2010 | ||||||||||||||||
Number of Units |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding at beginning of year |
143,500 | $ | 1.99 | |||||||||||||
Granted |
174,500 | $ | 3.93 | |||||||||||||
Exercised |
(13,832 | ) | $ | 2.13 | ||||||||||||
Forfeited |
(85,834 | ) | $ | 3.11 | ||||||||||||
Outstanding at end of year |
218,334 | $ | 3.09 | 5.7 years | $ | 1,102,194 | ||||||||||
Exercisable at end of year |
31,323 | $ | 1.99 | 5.0 years | $ | 192,636 | ||||||||||
The table below summarizes information related to SARs for fiscal 2010, 2009 and 2008 (in thousands, except shares):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Total fair value of SARs vested |
$ | 52 | $ | | $ | | ||||||
Shares of common stock issued for SAR exercises |
6,032 | | | |||||||||
Total intrinsic value of SARs exercised |
$ | 54 | $ | | $ | | ||||||
Income tax benefits realized for SAR exercises |
$ | 19 | $ | | $ | |
The Company satisfies SAR exercises by authorizing its transfer agent to issue new shares after confirming that all requisite conditions have been satisfied.
The following table shows share-based compensation expense and income tax benefit recognized under the 2008 Plan (in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Share-based compensation expense: |
||||||||||||
Non-employee director RSUs |
$ | 101 | $ | 51 | $ | 12 | ||||||
Employee and executive officer RSUs |
299 | 147 | | |||||||||
SARs |
145 | 43 | | |||||||||
Total share-based compensation expense |
$ | 545 | $ | 241 | $ | 12 | ||||||
Income tax benefit recognized for share-based compensation expense |
$ | 204 | $ | 90 | $ | 4 | ||||||
Non-employee director RSU expense is recognized in other operating expense and employee RSU and SAR expense are recognized in payroll and employee benefits in the Consolidated Statements of Operations.
The Company withholds shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of RSUs and the exercise of SARs.
2000 Non-Qualified Stock Option Plan
The Companys 2000 Non-Qualified Stock Option Plan (the 2000 Plan) was adopted in August 2000 and provides for the granting of options to acquire common stock of the Company. At the time of adoption, the maximum number of shares of common stock issuable under the 2000 Plan was 2.0 million. As of June 30, 2010, 1.4 million options had been exercised and 0.1 million options remain outstanding under the 2000 Plan. In November 2007, the 2000 Plan was modified to provide that no future option grants will be made pursuant to the 2000 Plan unless the Companys stockholders approve an amendment to the 2000 Plan to permit future option grants.
1992 Stock Option Plan
The Companys 1992 Stock Option Plan (the 1992 Plan) was adopted in November 1992 and expired November 5, 2002. The 1992 Plan provided for the granting of up to 6.0 million options to acquire common stock of the Company as well as the granting of common stock, SARs or other cash awards. As of June 30, 2010, 3.1 million options had been exercised and 0.1 million options remain outstanding under the 1992 Plan. Options under the 1992 Plan were granted as incentive stock options or non-qualified stock options.
27
All options granted under the 1992 Plan and the 2000 Plan through June 30, 2010 have exercise prices equal to the fair value of the Companys stock on the date of grant. Options granted under both plans have a 10 year contractual term. Shares issued upon option exercise consist of authorized but unissued shares of the Companys common stock.
The following table summarizes stock option activity in the 1992 Plan and the 2000 Plan for fiscal 2010:
Year Ended June 30, 2010 | ||||||||||||||||
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
Options outstanding at beginning of year |
617,525 | $ | 2.78 | |||||||||||||
Granted |
| | ||||||||||||||
Expired |
(125,359 | ) | $ | 7.78 | ||||||||||||
Exercised |
(335,000 | ) | $ | 1.56 | ||||||||||||
Options outstanding at end of year |
157,166 | $ | 1.41 | 1.9 years | $ | 1,057,937 | ||||||||||
Options exercisable at end of year |
157,166 | $ | 1.41 | 1.9 years | $ | 1,057,937 | ||||||||||
Options available for grant at end of year |
|
The table below summarizes information related to stock option exercises for fiscal 2010, 2009 and 2008 (in thousands, except shares):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Shares of common stock issued for stock option exercises |
335,000 | 15,000 | 85,000 | |||||||||
Cash proceeds from stock option exercises |
$ | 522 | $ | 19 | $ | 58 | ||||||
Total intrinsic value of stock options exercised |
$ | 1,327 | $ | 18 | $ | 194 | ||||||
Income tax benefits realized for stock option exercises |
$ | 496 | $ | 4 | $ | 72 |
The Company satisfies stock option exercises by authorizing its transfer agent to issue new shares after confirming that all requisite consideration has been received from the option holder.
(16) | Employee Benefit Plans |
401(k) Plan
The Company has a defined contribution plan (401(k) Plan) covering eligible employees. The 401(k) Plan allows employees to contribute a portion of their compensation on a pre-tax basis in accordance with plan and statutory rules. The Company matches a percentage of the employees contributions according to the 401(k) Plan rules. Contributions for non-union employees are made at the Companys discretion. The match may be made in the Companys common stock at the Companys discretion and subject to plan terms. The Company may also make discretionary profit sharing contributions subject to the 401(k) Plan terms. Matching contributions of $2.3 million, $2.1 million and $1.9 million were made for the 401(k) Plan during fiscal 2010, 2009 and 2008, respectively. The contributions expense was recorded as payroll and employee benefits expense in the Consolidated Statements of Operations. The Companys matching contribution liability was $2.4 million and $2.7 million as of June 30, 2010 and 2009, respectively. The Company did not provide matching in its common stock or contribute discretionary profit sharing during fiscal 2010, 2009, or 2008.
Defined Benefit Pension Plan
Effective July 1, 2004, the Company established a defined benefit pension plan (the Pension Plan) covering eligible employees of one of its subsidiaries, primarily those covered by collective bargaining arrangements. Eligibility is achieved upon the completion of one year of service. Participants become fully vested in their accrued benefit after the completion of five years of service. The amount of benefit is determined using a two-part formula, one of which is based upon compensation and the other which is based upon a flat dollar amount.
The Companys general funding policy is to make annual contributions to the Pension Plan as required by the Employee Retirement Income Security Act (ERISA). Contributions by the Company during fiscal 2010 and 2009 totaled $2.0 million and $2.2 million, respectively.
28
The following table shows a reconciliation of changes in the Pension Plans benefit obligation and plan assets for fiscal 2010 and 2009 (in thousands):
Years Ended June 30, |
||||||||
2010 | 2009 | |||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 8,025 | $ | 5,231 | ||||
Service cost |
1,634 | 1,079 | ||||||
Interest cost |
495 | 358 | ||||||
Plan participants contributions |
8 | 10 | ||||||
Benefits paid |
(28 | ) | (10 | ) | ||||
Administrative expenses paid |
(15 | ) | (19 | ) | ||||
Actuarial loss |
1,987 | 1,376 | ||||||
Benefit obligation at end of year |
12,106 | 8,025 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
7,369 | 6,747 | ||||||
Actual return on plan assets |
1,033 | (1,544 | ) | |||||
Employer contributions |
2,039 | 2,185 | ||||||
Benefits paid |
(28 | ) | (10 | ) | ||||
Administrative expenses paid |
(15 | ) | (19 | ) | ||||
Plan participants contributions |
8 | 10 | ||||||
Fair value of plan assets at end of year |
10,406 | 7,369 | ||||||
Funded status at end of year |
$ | (1,700 | ) | $ | (656 | ) | ||
Amounts recognized in the Consolidated Balance Sheets totaling $1.7 million and $0.7 million as of June 30, 2010 and 2009, respectively, were classified as noncurrent liabilities.
Amounts in accumulated other comprehensive income (loss) before income taxes that have not been recognized as net periodic benefit cost as of June 30, 2010 and 2009 consist of (in thousands):
Years Ended June 30, |
||||||||
2010 | 2009 | |||||||
Net loss |
$ | 4,835 | $ | 3,512 | ||||
Prior service cost |
583 | 647 | ||||||
$ | 5,418 | $ | 4,159 | |||||
The accumulated benefit obligation for the Pension Plan was $9.6 million and $6.6 million as of June 30, 2010 and June 30, 2009, respectively.
The components of net periodic benefit cost and other amounts recognized as comprehensive (income) loss are as follows (in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net periodic benefit cost |
||||||||||||
Service cost |
$ | 1,634 | $ | 1,079 | $ | 1,733 | ||||||
Interest cost |
495 | 358 | 207 | |||||||||
Expected return on plan assets |
(621 | ) | (589 | ) | (449 | ) | ||||||
Amortization of net prior service cost |
64 | 64 | | |||||||||
Amortization of net loss |
252 | | | |||||||||
Net periodic benefit cost |
$ | 1,824 | $ | 912 | $ | 1,491 | ||||||
Other changes in plan assets and benefit obligations recognized as other comprehensive (income) loss |
||||||||||||
Net loss |
$ | 1,575 | $ | 3,509 | $ | 480 | ||||||
Prior service cost (a) |
(64 | ) | (64 | ) | 711 | |||||||
Net loss recognized during year |
(252 | ) | | | ||||||||
Total recognized in other comprehensive (income) loss (b),(c),(d) |
$ | 1,259 | $ | 3,445 | $ | 1,191 | ||||||
Total recognized as net periodic benefit cost and other comprehensive (income) loss |
$ | 3,083 | $ | 4,357 | $ | 2,682 | ||||||
(a) | On July 1, 2008, the Company amended the Pension Plan to change the benefit formula for eligible participants. This change resulted in the recognition of $0.7 million of prior service costs, which are reported as an adjustment to other comprehensive (income) loss. |
29
(b) | In the Consolidated Statement of Stockholders Deficit and Comprehensive Income, the adjustments to accumulated other comprehensive income (loss) in fiscal 2010 were net of an income tax benefit of $0.5 million consisting of a $24,000 tax provision relating to the amortization of prior service cost, a $0.1 million tax provision related to the amortization of net loss and a $0.6 million tax benefit related to the net loss. |
(c) | In the Consolidated Statement of Stockholders Deficit and Comprehensive Income, the adjustments to accumulated other comprehensive income (loss) in fiscal 2009 were net of an income tax benefit of $1.3 million consisting of a $24,000 tax provision relating to the amortization of prior service cost and a $1.3 million tax benefit related to the net loss. |
(d) | In the Consolidated Statement of Stockholders Deficit and Comprehensive Income, the adjustments to accumulated other comprehensive income (loss) in fiscal 2008 were net of an income tax benefit of $0.5 million consisting of a $0.3 million tax benefit relating to the prior service cost and a $0.2 million tax benefit related to the net loss. |
The prior service cost for the Pension Plan and the net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in fiscal 2011 are $0.1 million and $0.3 million, respectively.
The assumptions used to determine the Companys benefit obligation as of June 30, 2010 and 2009 were:
2010 | 2009 | |||||||
Discount rate |
5.64 | % | 6.17 | % | ||||
Rate of increase in compensation levels |
4.00 | % | 4.00 | % |
The assumptions used to determine the Companys net periodic benefit cost for fiscal 2010, 2009 and 2008 were:
2010 | 2009 | 2008 | ||||||||||
Discount rate |
6.17 | % | 6.86 | % | 6.26 | % | ||||||
Rate of increase in compensation levels |
4.00 | % | 4.00 | % | 4.00 | % | ||||||
Expected long-term rate of return on assets |
7.50 | % | 7.50 | % | 7.50 | % |
Assumed discount rates were determined by applying the spot rates underlying the Citigroup Pension Discount Curve to the Pension Plans anticipated cash flows. A level rate was calculated that when compounded annually produced the same present value as the result of the spot rate calculation above, with an adjustment to reflect a provision for expenses. The resulting adjusted level rate is the discount rate.
In developing the expected long-term rate of return assumption, management evaluated the outputs of financial models designed to simulate results under multiple investment scenarios and to estimate long-term investment returns based on the Pension Plans asset allocation.
The Companys Pension Plan assets as of June 30, 2010 and 2009 by asset category are shown below:
Target Allocation |
Actual 2010 Allocation |
Actual 2009 Allocation |
||||||||||
Asset allocation: |
||||||||||||
Equity securities |
60%-70 | % | 58.1 | % | 59.8 | % | ||||||
Debt securities |
25%-40 | % | 37.2 | % | 33.9 | % | ||||||
Real estate |
5%-15 | % | 4.7 | % | 6.3 | % | ||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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The Company invests in a diversified portfolio to ensure that adverse or unexpected results from a security class will not have a detrimental impact on the entire portfolio. The portfolio is diversified by asset type, performance and risk characteristics and number of investments. Asset classes and ranges considered appropriate for investment of the Pension Plans assets are determined by the Pension Plans investment committee. The asset classes include domestic and foreign equities, emerging market equities, domestic and foreign investment grade and high-yield bonds and domestic real estate.
The fair values of the Pension Plan assets as of June 30, 2010 by asset class are as follows (in thousands):
Total Measured at Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Equity securities: |
||||||||||||||||
Domestic large-cap |
$ | 3,824 | $ | 3,824 | $ | | $ | | ||||||||
Domestic small- and mid-cap |
740 | 740 | | | ||||||||||||
International |
1,481 | 1,329 | 152 | | ||||||||||||
Total equity securities |
6,045 | 5,893 | 152 | | ||||||||||||
Debt securities |
3,874 | 2,469 | 1,405 | | ||||||||||||
Real estate |
487 | 215 | | 272 | ||||||||||||
Total plan assets |
$ | 10,406 | $ | 8,577 | $ | 1,557 | $ | 272 | ||||||||
The following table presents the changes in Level 3 Pension Plan assets for fiscal 2010 (in thousands):
Fair Value at June 30, 2009 |
Loss on Plan Assets (a) |
Net Purchases/Sales |
Net Transfers Into/(Out of) Level 3 |
Fair Value at June 30, 2010 |
||||||||||||||||
Real estate |
$ | 299 | $ | (101 | ) | $ | 74 | $ | | $ | 272 | |||||||||
Total |
$ | 299 | $ | (101 | ) | $ | 74 | $ | | $ | 272 | |||||||||
(a) | Unrealized loss on Level 3 Pension Plan assets was $11,000 for the period ended June 30, 2010. |
The Company expects to contribute approximately $2.1 million to the plan during fiscal 2011.
Future benefit payments expected to be made from plan assets are summarized below by fiscal year (in thousands):
Expected benefit payments: |
||||
2011 |
$ | 15 | ||
2012 |
18 | |||
2013 |
29 | |||
2014 |
133 | |||
2015 |
237 | |||
2016-2020 |
2,601 |
(17) Earnings per Share
Income from continuing operations per share assuming no dilution is computed by dividing income from continuing operations by the weighted-average number of shares outstanding. Income from continuing operations per share assuming dilution is computed based on the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and RSUs.
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A reconciliation of the weighted-average number of shares outstanding utilized in the basic and diluted income from continuing operations per share computations is as follows (in thousands, except per share amounts):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income from continuing operations |
$ | 6,260 | $ | 7,565 | $ | 4,572 | ||||||
Less: Net income attributable to noncontrolling interest |
2,261 | 1,609 | 812 | |||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 3,999 | $ | 5,956 | $ | 3,760 | ||||||
Average number of shares outstandingBasic |
25,106 | 24,834 | 24,787 | |||||||||
Add: Incremental shares for: |
||||||||||||
Dilutive effect of share-based awards |
245 | 81 | 165 | |||||||||
Average number of shares outstandingDiluted |
25,351 | 24,915 | 24,952 | |||||||||
Income (loss) from continuing operations per share attributable to Rural/MetroBasic |
$ | 0.16 | $ | 0.24 | $ | 0.15 | ||||||
Income (loss) from continuing operations per share attributable to Rural/MetroDiluted |
$ | 0.16 | $ | 0.24 | $ | 0.15 | ||||||
For fiscal 2009 and 2008, 0.1 million and 0.4 million shares of common stock underlying stock options and SARs, respectively, were excluded from consideration for the earnings per share computation because such options had exercise prices in excess of the average market price of the Companys common stock during the respective period and, therefore would have had an antidilutive effect. For fiscal 2010, no such options or SARs were excluded.
(18) | Commitments and Contingencies |
Performance Bonds
Certain counties, municipalities, and fire districts require the Company to provide a performance bond or other assurance of financial or performance responsibility. The Company may also be required by law to post a performance bond as a prerequisite to obtaining and maintaining a license to operate. As a result, the Company has performance bonds that are renewable annually. The Company had $8.6 million of performance bonds outstanding as of June 30, 2010.
Operating Leases
The Company leases various facilities and equipment under operating lease agreements. Rental expense charged to continuing operations under these leases (including leases with terms of less than one year) was $15.3 million, $15.5 million and $13.9 million in fiscal 2010, 2009 and 2008, respectively.
Minimum rental commitments under non-cancelable operating leases for each of the fiscal years ending June 30 are as follows (in thousands):
2011 |
$ | 13,025 | ||
2012 |
11,053 | |||
2013 |
10,008 | |||
2014 |
8,681 | |||
2015 |
7,080 | |||
Thereafter |
16,544 | |||
$ | 66,391 | |||
Indemnifications
The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify other parties against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Companys negligence or willful misconduct, or breach of representations and warranties and covenants.
Additionally, some of the Companys customer agreements require the Company to provide certain assurances related to the performance of its services. Such assurances, from time to time, obligate the Company to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of uncured material defaults or other certain circumstances, or (iii) provide performance bonds or letters of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default. With respect to such performance bonds, the Company is also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.
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The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. In addition, the Company has entered into indemnification agreements with its directors and certain officers of the Company. The Company maintains directors and officers insurance, which should enable it to recover a portion of any future amounts paid.
In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors, and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties, or in certain other circumstances relating to the sale of securities or their engagement by the Company.
While the Companys future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations, and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Companys obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Companys business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Companys business, financial condition, results of operations or cash flows.
Legal Proceedings
From time to time, the Company is a party to, or otherwise involved in, lawsuits, claims, proceedings, investigations and other legal matters that have arisen in the ordinary course of conducting its business. The Company cannot predict with certainty the ultimate outcome of any of these lawsuits, claims, proceedings, investigations and other legal matters which it is a party to, or otherwise involved in, due to, among other things, the inherent uncertainties of litigation, government investigations and proceedings and legal matters in general. The Company is also subject to requests and subpoenas for information in independent investigations. An unfavorable outcome in any of the lawsuits pending against the Company or in a government investigation or proceeding could result in substantial potential liabilities and have a material adverse effect on the Companys business, financial condition, results of operations and cash flows. Further, these proceedings and investigations, and the Companys actions in response to them, could result in substantial potential liabilities, additional defense and other costs, increase the Companys indemnification obligations, divert managements attention, and/or adversely affect the Companys ability to execute its business and financial strategies.
Regulatory Compliance
The Company is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Within the healthcare industry, government investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers is ongoing. From time to time, the Company is subject to investigations relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperates fully with the government agencies that conduct these investigations. Violations of these laws and regulations could result in exclusion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Under the Companys existing compliance program, the Company initiates its own investigations and conducts audits to examine compliance with various policies and regulations, including periodic reviews of the levels of service and corresponding rates the Company bills to various payers. Internal investigations or audits may result in significant repayment obligations for patient services previously billed or the modification of estimates relating to reimbursements. For example, in the quarter ended March 31, 2010, following a review of certain claims in the Companys East segment, a reserve was established in the amount of $1.5 million for a change in estimate relating to levels of service on claims for which the Company was previously reimbursed. The Company believes that it is substantially in compliance with fraud and abuse statutes and their applicable governmental interpretation.
Ohio Medicare
The Company is cooperating with an investigation by the U.S. government regarding the Companys operations in the State of Ohio in connection with allegations of certain billing inaccuracies. Specifically, the government alleges that certain services performed between 1997 and 2001 did not meet Medicare medical necessity and reimbursement requirements. The government has examined sample records for each of the years stated above. The Company disagrees with the allegations and believes that there are errors in the sampling methodology performed by the government. Although the Company continues to disagree with the governments allegations, the Company is engaged in settlement negotiations with the government and has made a counteroffer of $2.4 million in exchange for a full release relating to the governments allegations. During fiscal 2009, the Company recorded charges of $0.8 million
33
to continuing operations and $0.4 million to discontinued operations, as a portion of this matter relates to the Companys discontinued operation in Marion, Ohio. In fiscal 2010, no additional charges were recorded. As of June 30, 2010, $2.4 million remained accrued for this matter. Although there can be no assurances that a settlement agreement will be reached, any such settlement agreement would likely require the Company to make a substantial payment to the government and may require the Company to enter into a Corporate Integrity Agreement (CIA) or similar arrangement. If a settlement is not reached, the government has indicated that it will pursue further civil action. At this time it is not possible to predict the ultimate conclusion of this investigation.
Texas Anti-Kickback Statute
In fiscal 2007, the Company negotiated a settlement in connection with the U.S. government investigation into alleged discounts made in violation of the federal Anti-Kickback Statute related to the Companys discontinued operations in the State of Texas. Specifically, that certain of the Companys contracts with medical facilities in effect in Texas prior to 2002 contained discounts in violation of the federal Anti-Kickback Statute. In connection with the settlement of the matter, the Company entered into a CIA, which is effective for a period of five years, beginning April 18, 2007. Pursuant to the CIA, the Company is required to maintain a compliance program that includes, among other things, the appointment of a compliance officer and committee; the training of employees nationwide; enhancing procedures relating to certain of our contracting processes, including tracking contractual arrangements; review by an independent review organization; and reporting of certain reportable events.
These requirements are currently a part of the Companys ongoing compliance program. Although this matter has been settled, there can be no assurances that other investigations or legal action related to these or similar matters will not be pursued against the Company in other jurisdictions or for different time frames.
During fiscal 2008, the Company made full payment on the remaining $1.4 million Texas obligation.
Tennessee Medicare
The Company appealed a determination made by a Medicare intermediary that certain claims for services provided in the Companys Tennessee market were not reimbursable. Following an appeal and subsequent recalculation by the Medicare intermediary during fiscal 2008, the Company repaid $1.7 million to the Medicare intermediary in order to satisfy these overpayments.
The Company believes that reserves established for specific contingencies of $3.9 million and $2.4 million as of June 30, 2010 and 2009, respectively, are adequate based on information currently available. The specific contingencies at June 30, 2010 primarily include the Ohio matter and service level matter discussed above.
(19) | Segment Reporting |
Effective July 1, 2010, the Company realigned its reporting segments. Segment information has been recast to reflect the operations in the realigned reporting segments. The Company has four geographical operating zones that correspond with the manner in which the associated operations are managed and evaluated by its chief operating decision maker. These reporting segments are:
Segment |
States | |
East |
Connecticut, Delaware, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, Wisconsin, West Virginia and the District of Columbia | |
South |
Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Missouri, North Carolina, South Carolina and Tennessee | |
Southwest |
Arizona, Kansas, New Mexico, Oklahoma and Texas | |
West |
Alaska, California, Colorado, Hawaii, Idaho, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming |
Although each state (and the District of Columbia) has been assigned to an operating zone, the Company currently has operations in the following 20 states: Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Jersey, New York, North Dakota, Ohio, Oregon, Tennessee, South Dakota and Washington.
Each reporting segment provides ambulance services while the Companys fire and other services are primarily in the South and Southwest segments. The Companys specialty fire operations, which consist primarily of airport and industrial facility fire protection, operate in multiple states but are reported in the South segment.
34
The accounting policies used in the preparation of the Companys consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For management purposes, the Companys measure of segment profitability is defined as income from continuing operations before depreciation and amortization, interest, income taxes and loss on extinguishment of debt. Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only. Segment asset information is not used by the Companys chief operating decision maker in assessing segment performance.
The following table summarizes segment information for fiscal 2010, 2009 and 2008:
East | South | Southwest | West | Total | ||||||||||||||||
Year ended June 30, 2010 |
||||||||||||||||||||
Net revenues from external customers; |
||||||||||||||||||||
Ambulance services |
$ | 122,047 | $ | 95,633 | $ | 146,598 | $ | 93,528 | $ | 457,806 | ||||||||||
Other services (1) |
3,733 | 29,244 | 39,545 | 426 | 72,948 | |||||||||||||||
Total net revenue |
$ | 125,780 | $ | 124,877 | $ | 186,143 | $ | 93,954 | $ | 530,754 | ||||||||||
Segment profit |
$ | 23,090 | $ | 10,454 | $ | 29,910 | $ | 7,382 | $ | 70,836 | ||||||||||
Year ended June 30, 2009 |
||||||||||||||||||||
Net revenues from external customers; |
||||||||||||||||||||
Ambulance services |
$ | 111,510 | $ | 87,204 | $ | 130,984 | $ | 88,150 | $ | 417,848 | ||||||||||
Other services (1) |
3,907 | 28,430 | 40,905 | 710 | 73,952 | |||||||||||||||
Total net revenue |
$ | 115,417 | $ | 115,634 | $ | 171,889 | $ | 88,860 | $ | 491,800 | ||||||||||
Segment profit |
$ | 21,421 | $ | 10,259 | $ | 24,070 | $ | 4,025 | $ | 59,775 | ||||||||||
Year ended June 30, 2008 |
||||||||||||||||||||
Net revenues from external customers; |
||||||||||||||||||||
Ambulance services |
$ | 106,412 | $ | 78,716 | $ | 133,518 | $ | 84,951 | $ | 403,597 | ||||||||||
Other services (1) |
3,846 | 26,864 | 40,794 | 759 | 72,263 | |||||||||||||||
Total net revenue |
$ | 110,258 | $ | 105,580 | $ | 174,312 | $ | 85,710 | $ | 475,860 | ||||||||||
Segment profit |
$ | 18,898 | $ | 8,759 | $ | 22,324 | $ | 3,059 | $ | 53,040 |
(1) | Other services consists of revenue generated from fire protection services; including master fire contract and subscription fire services, airport fire and rescue, home health care services, dispatch contracts, billing contracts and other miscellaneous forms of revenue. |
The following is a reconciliation of segment profit to income from continuing operations before income taxes (in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Segment profit |
$ | 70,836 | $ | 59,775 | $ | 53,040 | ||||||
Depreciation and amortization |
(15,982 | ) | (14,258 | ) | (12,405 | ) | ||||||
Goodwill impairment |
(1,184 | ) | | | ||||||||
Interest expense |
(29,096 | ) | (30,843 | ) | (31,731 | ) | ||||||
Interest income |
235 | 324 | 374 | |||||||||
Loss on debt extinguishment |
(14,154 | ) | | | ||||||||
Income from continuing operations before income taxes |
$ | 10,655 | $ | 14,998 | $ | 9,278 | ||||||
(20) | Discontinued Operations |
During fiscal 2010, the Company made the decision to exit fire protection contracts in Florida and Wisconsin and ambulance services contracts in Salt Lake City, Utah and Jefferson County, Georgia. Because the operations in these markets are considered separate components of the Company as defined by GAAP, their results of operations are reported as income from discontinued operations in the Consolidated Statements of Operations for fiscal 2010, 2009 and 2008. Although the decision to exit these markets occurred in fiscal 2010, the Consolidated Statements of Operations for fiscal 2009 and 2008 have been recast to reflect these operations as discontinued. There were no discontinued operations related to the noncontrolling interest for fiscal 2010, 2009 and 2008.
35
Revenue and income (loss) from discontinued operations for fiscal 2010, 2009 and 2008 (in thousands) were as follows:
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net revenue: |
||||||||||||
East |
$ | 142 | $ | 1,640 | $ | 3,979 | ||||||
South |
1,139 | 2,846 | 4,000 | |||||||||
Southwest |
39 | 169 | 4,088 | |||||||||
West |
1,655 | 4,215 | 3,549 | |||||||||
Net revenue from discontinued operations |
$ | 2,975 | $ | 8,870 | $ | 15,616 | ||||||
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income (loss): |
||||||||||||
East |
$ | 38 | $ | (443 | ) | $ | 509 | |||||
South |
(19 | ) | (256 | ) | (498 | ) | ||||||
Southwest |
114 | (147 | ) | 621 | ||||||||
West |
(624 | ) | (84 | ) | (295 | ) | ||||||
Income (loss) from discontinued operations |
$ | (491 | ) | $ | (930 | ) | $ | 337 | ||||
Income (loss) from discontinued operations is presented net of income tax provision/(benefit) of $(0.3) million, $(0.5) million and $0.2 million for fiscal 2010, 2009 and 2008, respectively.
In addition to the recurring revenues and expenses associated with operations classified as discontinued, the Company recognized certain non-recurring pre-tax gains and losses during fiscal 2010, 2009 and 2008 as described below.
| As discussed in Note 2, during fiscal 2008, the Company recognized gains of $2.1 million on the sale of certain previously written-off self pay accounts receivables of which $0.4 million was included within income (loss) from discontinued operations for fiscal 2008. The gains associated with discontinued operations were allocated to the Companys East, South, Southwest and West segments and were $30,000, $184,000, $122,000 and $15,000, respectively. |
| During fiscal 2008, the Company recorded an additional reserve in the amount of $0.7 million for a change in estimate relating to the U.S. governments review of reimbursement levels for certain patients in the Companys Washington, D.C. operations, which were discontinued during fiscal 2004. The impact of this additional reserve is included in the East segments loss from discontinued operations for fiscal 2008. The total reserve for this issue was $0.6 million at June 30, 2008. |
| During fiscal 2008, the Company recognized $0.6 million of revenue upon the termination of its contract in Queen Creek, Arizona, effective January 1, 2008. This revenue is recorded in the Southwest segments income from discontinued operations for fiscal 2008. |
(21) | Variable Interest Entities |
GAAP may require a company to consolidate in its financial statements the assets, liabilities and activities of a VIE. GAAP provides guidance as to the definition of a VIE and requires that such VIEs be consolidated if the interest in the entity has certain characteristics including: voting rights not proportional to ownership and the right to receive the majority of expected residual returns or the requirement to absorb a majority of the expected losses. Additionally, the party exposed to the majority of the risks and rewards is the entitys primary beneficiary, and the primary beneficiary must consolidate the entity.
In 2003, the Company determined that its investment in San Diego Medical Services Enterprise, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that the Company is the primary beneficiary. The determination was made because:
| The Company is entitled to a 50% interest in the profits and losses of SDMSE based on ownership percentage, but is only entitled to a 40% interest in voting; |
| SDMSE operates as the emergency services provider to the City of San Diego and certain surrounding areas. The Company provides emergency services personnel as well as administrative functions such as billing, purchasing and accounting to SDMSE. Therefore substantially all of SDMSEs activities involve the Company; and |
| If cumulative losses exceed a determined threshold, the Company must absorb 100% of losses above that threshold. |
36
Accordingly, the Companys investment in SDMSE must be consolidated under GAAP. The Company began consolidating SDMSE during the fiscal 2003 based on its analysis and restated prior periods as allowed under GAAP.
The Company believes, based on the historical financial performance of SDMSE, that the probability is remote that SDMSEs losses will exceed the cumulative threshold and require the Company to absorb 100% of the additional losses.
The following is a summary of SDMSEs assets and liabilities (in thousands):
As of June 30, 2010 |
As of June 30, 2009 |
|||||||
Current assets |
$ | 8,761 | $ | 8,913 | ||||
Noncurrent assets |
547 | 200 | ||||||
Total assets |
$ | 9,308 | $ | 9,113 | ||||
Current liabilities |
$ | 5,931 | $ | 5,465 | ||||
Noncurrent liabilities |
| | ||||||
Total liabilities |
$ | 5,931 | $ | 5,465 | ||||
The assets held by SDMSE are generally not available for use by the Company. SDMSEs operations are financed from cash flows from operations.
Under GAAP, the Company must reassess the VIE status if there are changes in the entitys capital structure and/or in its activities or assets. The Company has not changed its determination of SDMSEs status as a VIE since its original analysis in fiscal 2003.
37
Exhibit 99.2
ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This discussion and analysis should be read in conjunction with our Selected Financial Data and our consolidated financial statements and notes appearing elsewhere herein.
Managements Overview
During fiscal 2010, our focus remained on implementing the Companys strategic and operating activities, including operational excellence in patient care delivery, revenue cycle management, new emergency revenue generation and continued expansion of the non-emergency business within existing markets. We achieved these through continued focus on billing initiatives aimed at reducing uncompensated care and increasing average patient charge (APC), responsiveness to customer needs and investments in technology designed to maximize billing performance. Our continued focus on these items has contributed to a 7.9% growth in net revenue and 18.3% growth in adjusted EBITDA, as defined below, in fiscal 2010 as compared to fiscal 2009.
We continue to focus on expanding our profit margin by increasing our gains in non-emergency market share and increasing transports through hospital-outsourced opportunities and partnerships with public systems. We believe this strategy will allow for our continued growth in this challenging economy. Cash flow remains strong at $37.5 million of cash flow from operations for fiscal 2010, which continued to support our goals to reduce debt and enhance the long-term value of our Company for investors.
2009 Debt Refinancing
In fiscal 2010, we effected a refinancing of our 2005 Credit Facility by terminating and extinguishing our Term Loan B, Revolving Credit Facility and our Senior Subordinated Notes. These instruments were replaced by the 2009 Credit Facility and a cash collateralized letter of credit facility. The refinancing resulted in a loss on the debt extinguishment of $14.2 million. The new facility provides for extended maturities as well as increased flexibility with respect to the principal reduction on our other debt instruments. We expect that cash paid for interest will decrease approximately $2.0 million annually under the new credit facility.
Looking Ahead
The increased flexibility in our capital structure afforded by the 2009 debt refinancing allows us to pursue acquisitions of ambulance transport and other service line business and consolidate business in the fragmented ambulance transport market. We intend to pursue acquisitions that are accretive to our profitability and leverage our strengths. We are well positioned to grow our business both organically and strategically.
It is important to note that the ambulance industry has recently experienced some changes in the Medicare reimbursement environment. These changes include the lack of an annual CPI adjustment for calendar year 2010 and the final phase-in of the national Medicare fee schedule on December 31, 2009. In addition, CMS issued a proposed rule that would update the Medicare fee schedule to be subject to a multifactor productivity reduction that could result in a negative ambulance inflation factor effective January 2011. We believe that these changes in the reimbursement environment may adversely affect the growth rate on our net medical transport APC.
Executive Summary
We provide services, which consist primarily of emergency and non-emergency ambulance services, to approximately 440 communities in 20 states within the United States. We provide these services under contracts with governmental entities, hospitals, nursing homes, and other healthcare facilities and organizations. As of June 30, 2010, we had approximately 103 exclusive contracts to provide emergency medical ambulance services and approximately 760 contracts to provide non-emergency medical ambulance and wheelchair services. For fiscal 2010 and 2009, respectively, 43.4% and 44.3% of our transports were generated from emergency ambulance services. Non-emergency ambulance services, including critical care transfers and other interfacility transports, comprised 56.6% and 55.7% of our transports for the same periods. All ambulance related services generated 86.3% and 85.0% of net revenue for fiscal 2010 and 2009, respectively. The remainder of our net revenue was generated from private fire protection services, airport fire and rescue, home healthcare services, and other services.
1
Key Factors and Metrics We Use to Evaluate Our Operations
The key factors we use to evaluate our operations focus on the number of ambulance transports we provide, the amount we expect to collect per transport and the costs we incur to provide these services.
The following is a summary of certain key operating statistics (adjusted EBITDA from continuing operations in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net Medical Transport APC (1) |
$ | 393 | $ | 370 | $ | 354 | ||||||
DSO (2) |
43 | 52 | 60 | |||||||||
Adjusted EBITDA from continuing operations (3) |
$ | 69,120 | $ | 58,407 | $ | 52,240 | ||||||
Medical Transports (4) |
1,098,001 | 1,055,132 | 1,058,191 |
(1) | Net Medical Transport APC is defined as gross medical ambulance transport revenue less provisions for contractual allowances applicable to Medicare, Medicaid and other third-party payers and uncompensated care divided by medical transports from continuing operations. For fiscal year 2008, the calculation excludes $1.7 million of the effect of the alleged overpayment claims in Tennessee. See Note 18 the Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K. |
(2) | Days Sales Outstanding is calculated using the average accounts receivable balance on a rolling 13-month basis and net revenue on a rolling 12-month basis and has not been adjusted to eliminate discontinued operations. |
(3) | See the discussion below of Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization including goodwill impairment. |
(4) | Defined as emergency and non-emergency medical patient transports from continuing operations. |
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
EBITDA from continuing operations attributable to Rural/Metro (EBITDA) is defined by us as income (loss) from continuing operations before Interest Expense (Income), Taxes and Depreciation and Amortization, less Income Attributable to Noncontrolling Interest. Adjusted EBITDA from continuing operations attributable to Rural/Metro (Adjusted EBITDA) excludes share-based compensation expense, goodwill impairment and loss on debt extinguishment. Adjusted EBITDA is commonly used by management and investors as a measure of leverage capacity, debt service ability and liquidity. Adjusted EBITDA is not considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to such GAAP measures as net income, cash flows provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of financial performance or liquidity. Since Adjusted EBITDA is not a measure determined in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.
The following table sets forth our EBITDA and adjusted EBITDA, as well as a reconciliation to (loss) income from continuing and discontinued operations, the most directly comparable financial measures under GAAP (in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income from continuing operations |
$ | 6,260 | $ | 7,565 | $ | 4,572 | ||||||
Add (deduct): |
||||||||||||
Depreciation and amortization |
15,982 | 14,258 | 12,405 | |||||||||
Interest expense |
29,096 | 30,843 | 31,731 | |||||||||
Interest income |
(235 | ) | (324 | ) | (374 | ) | ||||||
Income tax provision |
4,395 | 7,433 | 4,706 | |||||||||
Income attributable to noncontrolling interest |
(2,261 | ) | (1,609 | ) | (812 | ) | ||||||
EBITDA from continuing operations attributable to Rural/Metro |
53,237 | 58,166 | 52,228 | |||||||||
Add (deduct): |
||||||||||||
Share-based compensation expense |
545 | 241 | 12 | |||||||||
Goodwill impairment |
1,184 | | | |||||||||
Loss on debt extinguishment |
14,154 | | | |||||||||
Adjusted EBITDA from continuing operations attributable to Rural/Metro |
69,120 | 58,407 | 52,240 | |||||||||
Income (loss) from discontinued operations |
(491 | ) | (930 | ) | 337 | |||||||
Add (deduct): |
||||||||||||
Depreciation and amortization |
121 | 439 | 578 | |||||||||
Income tax provision (benefit) |
(292 | ) | (550 | ) | 200 | |||||||
EBITDA from discontinued operations attributable to Rural/Metro |
(662 | ) | (1,041 | ) | 1,115 | |||||||
Total Adjusted EBITDA attributable to Rural/Metro |
$ | 68,458 | $ | 57,366 | $ | 53,355 | ||||||
2
Factors Affecting Operating Results
Net Change in Contracts
Our operating results are affected directly by the number of net new contracts we have in a period, reflecting the effects of both new contracts and contract expirations. We regularly bid for new contracts, frequently in a formal competitive bidding process that often requires written responses to a Request for Proposal, or RFP, and in any fiscal period, certain of our contracts will expire. We may elect not to seek extension or renewal of a contract if we determine that we cannot do so on favorable terms. With respect to expiring contracts we would like to renew, we may be required to seek renewal through an RFP, and we may not be successful in retaining any such contracts, or retaining them on terms that are as favorable as present terms.
Ability to Effect Rate Increases
To offset higher costs of uncompensated care and other direct operating costs, such as labor, we submit requests to increase commercial insurance rates to the state or local government agencies that regulate ambulance service rates. Our ability to negotiate rate increases on a timely basis to offset increases in our cost structure may impact our operating performance.
Uncompensated Care
When we contract with municipal, county or other governing authorities as an exclusive provider of emergency ambulance services, we are required to provide services to their citizens regardless of the ability or willingness of patients to pay. While we make every attempt to negotiate subsidies to support the level of medical services we provide, not all authorities will agree to provide such subsidies. As a result, we incur write-offs for uncompensated care in the normal course of providing ambulance services. The following table shows the source of our uncompensated care write-offs as a percentage of total uncompensated care write-offs:
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Commercial Insurance |
20 | % | 19 | % | 18 | % | ||||||
Co-Pays/Deductibles |
9 | % | 8 | % | 8 | % | ||||||
Medicare/Medicaid Denials |
8 | % | 11 | % | 10 | % | ||||||
Self-Pay |
63 | % | 62 | % | 64 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
The majority, 63%, of our uncompensated care write-offs in fiscal 2010 were generated from self-pay accounts. The balance of our uncompensated care write-offs in fiscal 2010 were from: (1) commercial insurance (20%); (2) co-pays and deductibles (9%); and (3) Medicare or Medicaid denials (8%). These components are described in detail below:
Commercial Insurance: We have seen an increase in commercial insurance carriers following Medicare proof of medical necessity standards for non-emergency transport reimbursement. In the event commercially insured patients are transported and their insurance companies subsequently inform us the transports were not covered services, the unpaid balances become self-pay accounts.
Co-pays/Deductibles: Co-pay and deductible amounts under Medicare and commercial insurance programs are the responsibility of the patient. Medicare co-pay and deductible levels have remained consistent when compared to the prior year; however, changes in employer-provided healthcare insurance coverage levels may result in higher co-pays and deductibles to the employee under commercial insurance programs. These co-pay and deductible amounts become self-pay accounts.
3
Medicare/Medicaid Denials: We make every effort to determine medical necessity prior to transporting a patient; however, there are times when Medicare, Medicaid or a commercial insurance provider may, on a retrospective review, deem the transport not medically necessary and deny reimbursement. In these cases, the unpaid balances become self-pay accounts.
While we make every attempt to negotiate subsidies to support the level of medical services we provide, not all authorities will agree to provide such subsidies.
In terms of transport volume, the self-pay patients we transport who are uninsured or otherwise have no ability to pay for our services have decreased as a percentage of our transport mix in fiscal 2010 to 8.8% as compared to 9.6% in fiscal 2009. Although we are not seeing an impact at this time and believe we have measures in place to promptly identify negative payer mix trends, we do recognize that a weakened economy combined with significant loss of jobs and related employee benefits may shift our current transport mix to a higher volume of uninsured and underinsured claims. If this occurs, we may see higher uncompensated care write-offs as a result of a reduction in collections based on historical collections trends for this payer mix; which would in turn impact our cash flows from operations and overall liquidity.
Other factors that may, positively or negatively, impact the overall dollars associated with uncompensated care include: (1) rate increases and (2) changes in transport volumes among the payer groups.
On a periodic basis, we evaluate our cost structure within each area we serve and, as appropriate, request rate increases. Ambulance rate increases generate additional revenue only from certain commercial insurance programs and self-pay patients, due to the fixed rates, co-pay amounts and deductibles of payers such as Medicare, Medicaid and certain commercial insurance. Rate increases applied to patients who are self-pay patients can compound an already challenging collection process. Increasing the dollars per transport on this payer group may, in turn, result in an increase in the uncompensated care.
From quarter to quarter, the number of patients we transport within each payer group can vary. A shift in payer mix may increase or decrease levels of uncompensated care. For instance, if we experience a shift from the Medicare payer group to the commercial insurance payer group, we might expect to see a decrease in our uncompensated care write-offs due to a higher historical collection pattern associated with the commercial insurance payers.
Work Force Management
Our business strategy focuses on optimizing the deployment of our work force in order to meet contracted response times and otherwise maintain high levels of quality care and customer service. A key measure is our ability to efficiently and effectively manage labor resources and enhance operating results. Several factors may influence our labor management efforts, including our ability to maximize our mix of emergency and non-emergency response business, significant wait times associated with emergency rooms that delay redeployment, and market-specific shortages of qualified paramedics and emergency medical technicians that affect temporary wages. We also may experience increases in overtime and training wages due to growth in transport volume related to new contracts, expansion in existing markets and seasonal transport demand patterns.
4
Results of Operations
Fiscal 2010 Compared To Fiscal 2009Consolidated
Overview
The following table sets forth a comparison of certain items from our consolidated statements of operations for fiscal 2010 and 2009. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item (in thousands, except per share amounts):
Years Ended June 30, | ||||||||||||||||||||||||
2010 | % of Net Revenue |
2009 | % of Net Revenue |
Change | % Change |
|||||||||||||||||||
Net revenue |
$ | 530,754 | 100.0 | % | $ | 491,800 | 100.0 | % | $ | 38,954 | 7.9 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Payroll and employee benefits |
324,748 | 61.2 | % | 305,271 | 62.1 | % | 19,477 | 6.4 | % | |||||||||||||||
Depreciation and amortization |
15,982 | 3.0 | % | 14,258 | 2.9 | % | 1,724 | 12.1 | % | |||||||||||||||
Other operating expenses |
121,891 | 23.0 | % | 115,641 | 23.5 | % | 6,250 | 5.4 | % | |||||||||||||||
General/auto liability insurance |
13,902 | 2.6 | % | 11,649 | 2.4 | % | 2,253 | 19.3 | % | |||||||||||||||
Goodwill impairment |
1,184 | 0.2 | % | | | 1,184 | # | |||||||||||||||||
Gain on sale of assets and property insurance settlement |
(623 | ) | (0.1 | %) | (536 | ) | (0.1 | %) | (87 | ) | (16.2 | %) | ||||||||||||
Total operating expenses |
477,084 | 89.9 | % | 446,283 | 90.7 | % | 30,801 | 6.9 | % | |||||||||||||||
Operating income |
53,670 | 10.1 | % | 45,517 | 9.3 | % | 8,153 | 17.9 | % | |||||||||||||||
Interest expense |
(29,096 | ) | (5.5 | %) | (30,843 | ) | (6.3 | %) | 1,747 | 5.7 | % | |||||||||||||
Interest income |
235 | 0.0 | % | 324 | 0.1 | % | (89 | ) | (27.5 | %) | ||||||||||||||
Loss on debt extinguishment |
(14,154 | ) | (2.7 | %) | | | (14,154 | ) | # | |||||||||||||||
Income from continuing operations before income taxes |
10,655 | 2.0 | % | 14,998 | 3.0 | % | (4,343 | ) | (29.0 | %) | ||||||||||||||
Income tax provision |
(4,395 | ) | (0.8 | %) | (7,433 | ) | (1.5 | %) | 3,038 | 40.9 | % | |||||||||||||
Income from continuing operations |
6,260 | 1.2 | % | 7,565 | 1.5 | % | (1,305 | ) | (17.3 | %) | ||||||||||||||
Loss from discontinued operations, net of income taxes |
(491 | ) | (0.1 | %) | (930 | ) | (0.2 | %) | 439 | 47.2 | % | |||||||||||||
Net income |
5,769 | 1.1 | % | 6,635 | 1.3 | % | (866 | ) | (13.1 | %) | ||||||||||||||
Net income attributable to noncontrolling interest |
(2,261 | ) | (0.4 | %) | (1,609 | ) | (0.3 | %) | (652 | ) | (40.5 | %) | ||||||||||||
Net income attributable to Rural/Metro |
$ | 3,508 | 0.7 | % | $ | 5,026 | 1.0 | % | $ | (1,518 | ) | (30.2 | %) | |||||||||||
Income (loss) per share |
||||||||||||||||||||||||
Basic |
||||||||||||||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.16 | $ | 0.24 | $ | (0.08 | ) | |||||||||||||||||
Loss from discontinued operations attributable to Rural/Metro |
(0.02 | ) | (0.04 | ) | 0.02 | |||||||||||||||||||
Net income attributable to Rural/Metro |
$ | 0.14 | $ | 0.20 | $ | (0.06 | ) | |||||||||||||||||
Diluted |
||||||||||||||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.16 | $ | 0.24 | $ | (0.08 | ) | |||||||||||||||||
Loss from discontinued operations attributable to Rural/Metro |
(0.02 | ) | (0.04 | ) | 0.02 | |||||||||||||||||||
Net income attributable to Rural/Metro |
$ | 0.14 | $ | 0.20 | $ | (0.06 | ) | |||||||||||||||||
Average number of common shares outstandingBasic |
25,106 | 24,834 | 272 | |||||||||||||||||||||
Average number of common shares outstandingDiluted |
25,351 | 24,915 | 436 | |||||||||||||||||||||
# Variances over 100% not displayed.
5
Net Revenue
The following table shows a comparison of consolidated net revenue (in thousands):
Years Ended June 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Ambulance services |
$ | 457,806 | $ | 417,848 | $ | 39,958 | 9.6 | % | ||||||||
Other services |
72,948 | 73,952 | (1,004 | ) | (1.4 | %) | ||||||||||
Total net revenue |
$ | 530,754 | $ | 491,800 | $ | 38,954 | 7.9 | % | ||||||||
Ambulance Services
The increase in ambulance services revenue is due to $37.4 million in same service area revenue and $2.6 million from new emergency and non-emergency contracts in our Tennessee, Kentucky and Oregon markets. The increase in same service area revenue included $25.1 million in net medical transport APC and $13.5 million in medical transport volume. The increase related to net medical transport APC is inclusive of a $1.5 million decrease for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase related to a supplemental payment received from the New York Medicaid program.
Below are two tables providing fiscal year comparative transport data. The first table summarizes medical transport volume into same service area and new contracts, while the second table summarizes total transport volume into emergency and non-emergency.
Years Ended June 30, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
Same service area medical transports |
1,090,765 | 1,055,132 | 35,633 | 3.4 | % | |||||||||||
New contract medical transports |
7,236 | N/A | 7,236 | # | ||||||||||||
Medical transports from continuing operations |
1,098,001 | 1,055,132 | 42,869 | 4.1 | % | |||||||||||
# Variances over 100% not displayed.
The change in our same service area medical transports includes a decrease of approximately 5,100 transports related to the discontinuation of service on an emergency contract in Orange County, Florida. Absent the discontinuation of this contract, transport volume increased 4.6%. New contract transport growth was related to our new emergency and non-emergency contracts in our Tennessee, Kentucky and Oregon markets. Our growth in Kentucky was due to 3,100 transports in fiscal 2010 related to our purchase of the assets of a medical transportation services provider and we anticipate providing 12,000 transports annually related to that business. Additionally, in July 2010 we were awarded a contract to provide emergency transport services in DeKalb County, Georgia, where we expect to provide 26,800 transports annually.
Years Ended June 30, | ||||||||||||||||||||||||
2010 | % of Transports |
2009 | % of Transports |
Transport Change |
% Change | |||||||||||||||||||
Emergency medical transports |
476,812 | 43.4 | % | 467,586 | 44.3 | % | 9,226 | 2.0 | % | |||||||||||||||
Non-emergency medical transports |
621,189 | 56.6 | % | 587,546 | 55.7 | % | 33,643 | 5.7 | % | |||||||||||||||
Medical transports from continuing operations |
1,098,001 | 100.0 | % | 1,055,132 | 100.0 | % | 42,869 | 4.1 | % | |||||||||||||||
Contractual Allowances and Uncompensated Care
Contractual allowances applicable to Medicare, Medicaid and other third-party payers related to continuing operations, which are reflected as a reduction of gross ambulance services revenue, totaled $370.9 million and $321.8 million for fiscal 2010 and 2009, respectively. The increase of $49.1 million was the result of rate increases, changes in payer mix in certain markets, changes in service level mix and increased transport volume. Uncompensated care as a percentage of gross ambulance services revenue declined to 13.0% for fiscal 2010 from 13.6% in fiscal 2009. The decline in uncompensated care reflects our continued focus on billing and collections efforts. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary, Uncompensated Care)
6
Both contractual allowances and uncompensated care are reflected as a reduction of gross ambulance services revenue. A reconciliation of gross ambulance services revenue to net ambulance services revenue is included in the table below (in thousands):
Years Ended June 30, | ||||||||||||||||||||||||
2010 | % of Gross |
2009 | % of Gross |
$ Change | % Change | |||||||||||||||||||
Gross ambulance services revenue |
$ | 952,093 | 100.0 | % | $ | 856,137 | 100.0 | % | $ | 95,956 | 11.2 | % | ||||||||||||
Contractual allowances |
(370,872 | ) | (39.0 | %) | (321,792 | ) | (37.6 | %) | (49,080 | ) | (15.3 | %) | ||||||||||||
Uncompensated care |
(123,415 | ) | (13.0 | %) | (116,497 | ) | (13.6 | %) | (6,918 | ) | (5.9 | %) | ||||||||||||
Net ambulance services revenue |
$ | 457,806 | 48.1 | % | $ | 417,848 | 48.8 | % | $ | 39,958 | 9.6 | % | ||||||||||||
Net Medical Transport APC
Our net medical transport APC increased $23 to $393 compared to $370 for fiscal 2009. The 6.2% increase was primarily due to improved collections and rate increases.
Other Services
The $1.0 million decrease in other services revenue was primarily due to the discontinuation of shuttle services previously performed for a customer.
Operating Expenses
Payroll and Employee Benefits
The increase in payroll and employee benefits expense was primarily due to a $7.0 million increase in health insurance expense, $3.3 million increase in workers compensation expense including $0.5 million related to actuarial claims adjustments ($2.2 million of unfavorable actuarial claims adjustments in the current year compared to unfavorable actuarial claims adjustments of $1.7 million in the prior year), $0.9 million of severance expense, $0.9 million of increased pension expense, with the balance due to increased direct labor costs associated with higher transport volumes. We have experienced a rise in employee health insurance expense with an increase in the frequency of claims in excess of $50,000. These claims expenses are driven by higher costs from specialized care including cancer treatment and neonatal care.
Depreciation and Amortization
The increase in depreciation and amortization was primarily due to additional capital expenditures during the year.
Other Operating Expenses
The $6.3 million increase in other operating expenses was primarily due to increases of $2.1 million in vehicle and equipment expense, $2.1 million in professional fees and $1.7 million in non-capital equipment purchases. The professional fee increase was primarily related to legal and other professional service fees related to our review of various governance and operational items.
General/Auto Liability
The increase in general/auto liability insurance was primarily due to $2.7 million of increases related to current year claims estimates offset by a change in actuarial adjustments of $0.4 million year to year (fiscal 2010 positive adjustment of $1.3 million compared to a fiscal 2009 positive adjustment of $1.7 million).
Goodwill Impairment
During our annual goodwill impairment testing, we determined that the carrying value of the net assets of a reporting unit in the South reporting segment exceeded the estimated fair value. As a result, a goodwill impairment charge of $1.2 million was recorded. The decline in fair value of the reporting unit is primarily related to a trend in declining profitability and a future planned change in utilization of existing resources in this reporting unit. We will continue to monitor the performance of this reporting unit to determine if any interim review of remaining goodwill is warranted. The remaining goodwill related to this reporting unit after the impairment charge is $1.0 million.
7
Gain on Sale of Assets
During fiscal 2010 and 2009, we entered into transactions to sell certain of our previously written-off self-pay accounts receivable to an unrelated third party.
Interest Expense
The decrease in interest expense was related to the December 2009 restructuring of our debt.
Loss on Debt Extinguishment
A $14.2 million loss on debt extinguishment was recorded in connection with the December 2009 refinancing of the 2005 Credit Facility and Senior Subordinated Notes. The loss consisted of the write-off of unamortized debt issuance costs and a portion of the third-party and lender fees incurred to effect the refinancing. The refinancing is discussed in Note 11 in the Notes to the Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K.
Net Income Attributable to Noncontrolling Interest
Noncontrolling interest relates to the City of San Diegos portion (50%) of the San Diego Medical Services Enterprise, LLC fiscal year-to-date net income.
Income Tax Provision
During fiscal 2010, we recorded a $4.4 million income tax provision related to continuing operations, resulting in an effective rate of 41.2% of pre-tax income. During fiscal 2009, we recorded a $7.4 million income tax provision related to continuing operations, resulting in an effective rate of 49.6% of pre-tax income. The effective rate differed from the federal statutory rate of 35.0% primarily as a result of increases for the portion of non-cash interest expense related to our Senior Discount Notes, which is not deductible for income tax purposes until interest is paid in cash, non-deductible executive compensation, state income taxes, and a goodwill impairment recorded in fiscal 2010. Additionally, our effective tax rate included a reduction related to pretax income that was attributable to the noncontrolling interest in our joint venture with the City of San Diego. See Note 12 to our Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K for a full reconciliation of differences from the statutory federal tax rate.
In fiscal 2010, the tax provision included a $0.6 million benefit related to prior year executive compensation that was deductible in fiscal 2010 as a result of the resignation of our chief executive officer and a $0.1 million benefit for wage tax credits. The income tax provision for fiscal 2009 reflects a $1.0 million benefit for wage tax credits related to our participation in Federal and state wage tax incentive programs in the state of New York from 2002 through 2008. The income tax provision for fiscal 2009 also reflects a $0.4 million benefit resulting from the release of valuation allowances for two states where the Company determined that realization of these deferred tax assets is more likely than not.
The continuing operations tax provision for fiscal 2010 and fiscal 2009 included deferred income tax expense of $2.9 million and $8.1 million, respectively. The deferred income tax expense results primarily from utilization of tax benefits, primarily related to net operating loss carryforwards generated in prior years, and did not require a current cash payment.
As of June 30, 2010, we maintained a valuation allowance of $8.1 million against deferred tax assets related to state net operating loss carryforwards that we do not believe will be realized.
Discontinued Operations
During fiscal 2010, the Company exited fire protection contracts in Florida and Wisconsin and ambulance services contracts in Utah and Georgia. The financial results of these service areas are included within income (loss) from discontinued operations.
Loss from discontinued operations for fiscal 2010 was $0.5 million and included an income tax benefit of $0.3 million.
Loss from discontinued operations for fiscal 2009 was $0.9 million and included an income tax benefit of $0.5 million. The loss from discontinued operations before the income tax benefit was due primarily to $0.4 million recorded as a result of increasing our Medicare reserve contingency related to the Ohio compliance matter, a portion of which related to our former Marion, Ohio operation.
8
Fiscal 2010 Compared To Fiscal 2009Segments
Overview
Effective July 1, 2010, we realigned our reporting segments. Prior period segment information has been recast to reflect the operations in the realigned reporting segments. We have four geographical operating zones that correspond with the manner in which the associated operations are managed and evaluated by our chief operating decision maker. These reporting segments are:
Segment |
States | |
East | Connecticut, Delaware, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, Wisconsin, West Virginia and the District of Columbia | |
South |
Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Missouri, North Carolina, South Carolina and Tennessee | |
Southwest |
Arizona, Kansas, New Mexico, Oklahoma and Texas | |
West |
Alaska, California, Colorado, Hawaii, Idaho, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming |
Although each state (and the District of Columbia) has been assigned to an operating zone, we currently have operations in the following 20 states: Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Jersey, New York, North Dakota, Ohio, Oregon, Tennessee, South Dakota and Washington.
Each reporting segment provides ambulance services while our fire and other services are primarily in the South and Southwest segments. Our specialty fire operations, which consist primarily of airport and industrial facility fire protection, operate in multiple states but are reported in the South segment.
The accounting policies used in the preparation of our consolidated financial statements have been followed in the preparation of the accompanying financial information for each reporting segment. For management purposes, our measure of segment profitability is defined as income from continuing operations before depreciation and amortization, including goodwill impairment, interest expense (income), income taxes and noncontrolling interests. Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only. For a reconciliation of segment profit, refer to Note 19 of the Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K.
East
The following table presents financial results and key operating statistics for the East operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2010 | 2009 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 122,047 | $ | 111,510 | $ | 10,537 | 9.4 | % | ||||||||
Other services |
3,733 | 3,907 | (174 | ) | (4.5 | %) | ||||||||||
Total net revenue |
$ | 125,780 | $ | 115,417 | $ | 10,363 | 9.0 | % | ||||||||
Segment profit |
$ | 23,090 | $ | 21,421 | $ | 1,669 | 7.8 | % | ||||||||
Segment profit margin |
18.4 | % | 18.6 | % | ||||||||||||
Medical transports |
339,093 | 324,166 | 14,927 | 4.6 | % | |||||||||||
Net Medical Transport APC |
$ | 348 | $ | 329 | $ | 19 | 5.8 | % | ||||||||
DSO |
44 | 48 | (4 | ) | (8.3 | %) |
9
Revenue
The increase in ambulance services revenue was primarily due to a $9.6 million increase in same service area revenue and a $0.9 million increase related to new emergency and non-emergency contracts in Kentucky. The new contracts in Kentucky included 3,100 transports related to our purchase of the assets of a medical transportation services provider and we anticipate providing 12,000 transports annually related to that business.
The increase in same service area revenue was primarily due to $6.3 million of increases in net medical transport APC and $3.9 million in increased medical transport volume. The net medical transport volume is inclusive of a $1.5 million decrease ($4 reduction in APC) for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase ($3 increase in APC) related to a supplemental payment received from the New York Medicaid program. Same service area medical transports increased due to increased emergency and non-emergency transport volume in our Ohio and New York markets and non-emergency transport volume in our Kentucky market. The net medical transport APC increase was primarily due to improvement in collections, changes in service level mix and rate increases.
Payroll and employee benefits
Payroll and employee benefits was $68.4 million, or 54.4% of net revenue for fiscal 2010, compared to $62.9 million, or 54.5% of net revenue, for fiscal 2009. The increase is primarily due to $1.4 million of increased health insurance expense and $0.7 million of severance expense. The remainder of the change in payroll and employee benefits expense is primarily related to increases in transports and unit hours as well as annual merit increases.
Operating Expenses
Operating expenses, including general/auto liability expenses was $26.1 million for fiscal 2010, or 20.8% of net revenue, compared to $23.6 million, or 20.4% of net revenue for fiscal 2009. The increase was due to $0.9 million of increased general/auto liability insurance expense, $0.7 million of non-capital equipment purchases, $0.5 million of operational supplies and less significant changes in operational expenses primarily to support new technology, increased transports and unit hour volume.
South
The following table presents financial results and key operating statistics for the South operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2010 | 2009 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 95,633 | $ | 87,204 | $ | 8,429 | 9.7 | % | ||||||||
Other services |
29,244 | 28,430 | 814 | 2.9 | % | |||||||||||
Total net revenue |
$ | 124,877 | $ | 115,634 | $ | 9,243 | 8.0 | % | ||||||||
Segment profit |
$ | 10,454 | $ | 10,259 | $ | 195 | 1.9 | % | ||||||||
Segment profit margin |
8.4 | % | 8.9 | % | ||||||||||||
Medical transports |
292,225 | 271,288 | 20,937 | 7.7 | % | |||||||||||
Net Medical Transport APC |
$ | 302 | $ | 293 | $ | 9 | 3.1 | % | ||||||||
DSO |
42 | 43 | (1 | ) | (2.3 | %) |
Revenue
The increase in ambulance services revenue was primarily due to a $7.3 million increase in same service area revenue and a $1.1 million increase related to a new emergency and non-emergency contract in Tennessee. In July 2010 we were awarded a contract to provide emergency transport services in DeKalb County, Georgia, where we expect to provide 26,800 transports annually.
The increase in same service area revenue was primarily due to a $5.3 million increase in medical transport volume and a $2.4 million increase in net medical transport APC. The increase in medical transports was due to growth in non-emergency transport volume in our Georgia and Alabama markets related to concentrated marketing efforts to expand our non-emergency business. The change in our same service area medical transports also includes a decrease of approximately 5,100 transports related to the discontinuation of service on an emergency contract in Orange County, Florida. The increase in net medical transport APC is primarily due to changes in service level mix and rate increases.
10
Other services revenue growth is primarily due to increases in master fire contract revenue related to additional services performed for an industrial fire protection customer.
Payroll and employee benefits
Payroll and employee benefits was $80.3 million, or 64.3% of net revenue, for fiscal 2010, compared to $72.8 million, or 63.0% of net revenue, for the same period in the prior year. The increase was due to $1.7 million of increased health insurance expense, $0.9 million of increased workers compensation insurance expense as well as expenses related to increased transports, unit hours and annual merit increases.
Operating Expenses
Operating expenses, including general/auto liability expenses, for fiscal 2010 was $25.2 million, or 20.2% of net revenue compared to $24.1 million, or 20.8% of net revenue, for the same period in the prior year. The increase was primarily due to $1.1 million in increased general/auto liability insurance expense and less significant changes in operational expenses primarily to support new technology, increased transports and unit hour volume.
Southwest
The following table presents financial results and key operating statistics for the Southwest operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2010 | 2009 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 146,598 | $ | 130,984 | $ | 15,614 | 11.9 | % | ||||||||
Other services |
39,545 | 40,905 | (1,360 | ) | (3.3 | %) | ||||||||||
Total net revenue |
$ | 186,143 | $ | 171,889 | $ | 14,254 | 8.3 | % | ||||||||
Segment profit |
$ | 29,910 | $ | 24,070 | $ | 5,840 | 24.3 | % | ||||||||
Segment profit margin |
16.1 | % | 14.0 | % | ||||||||||||
Medical transports |
242,810 | 241,932 | 878 | 0.4 | % | |||||||||||
Net Medical Transport APC |
$ | 597 | $ | 534 | $ | 63 | 11.8 | % | ||||||||
DSO |
36 | 54 | (18 | ) | (33.3 | %) |
Revenue
The increase in ambulance services revenue was primarily due to a $15.3 million increase in net medical APC and $0.5 million increase in medical transport volume. The increase in net medical transport APC was primarily due to collection rate increases as well as rate increases.
The decrease in other services revenue was related to decreased fire subscription revenue due to a decreasing subscriber base primarily in our southern Arizona market.
We were notified that we had not been selected as the continuing ambulance provider for the City of Peoria, Arizona effective with the expiration of our current contract on August 18, 2010. This contract accounts for approximately 8,500 emergency transports and $4.6 million of net revenue annually. The Southwest segment will be affected by the reduction of revenue related to this contract beginning with the first quarter of fiscal 2011.
Payroll and employee benefits
Payroll and employee benefits was $100.7 million, or 54.1% of net revenue for fiscal 2010, compared to $96.8 million, or 56.3% of net revenue, for fiscal 2009. The increase was primarily due to $1.4 million of increased health insurance expense, $0.9 million of increased pension expense, $0.6 million of increased workers compensation expense as well as increased expenses related to increased transports, unit hours and annual merit increases.
Operating Expenses
Operating expenses, including general/auto liability expenses increased to $43.5 million for fiscal 2010, or 23.4% of net revenue, compared to $39.8 million, or 23.2% of net revenue, for fiscal 2009. The increase was due to $1.8 million of increased vehicle and equipment and station expenses, $1.0 million in increase in general/auto liability insurance expense and $0.6 million of non-capital equipment.
11
West
The following table presents financial results and key operating statistics for the West operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2010 | 2009 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 93,528 | $ | 88,150 | $ | 5,378 | 6.1 | % | ||||||||
Other services |
426 | 710 | (284 | ) | (40.0 | %) | ||||||||||
Total net revenue |
$ | 93,954 | $ | 88,860 | $ | 5,094 | 5.7 | % | ||||||||
Segment profit |
$ | 7,382 | $ | 4,025 | $ | 3,357 | 83.4 | % | ||||||||
Segment profit margin |
7.9 | % | 4.5 | % | ||||||||||||
Medical transports |
223,873 | 217,746 | 6,127 | 2.8 | % | |||||||||||
Net Medical Transport APC |
$ | 358 | $ | 343 | $ | 15 | 4.4 | % | ||||||||
DSO |
55 | 68 | (13 | ) | (19.1 | %) |
Revenue
The increase in ambulance services revenue was primarily due to a $4.8 million increase in same service area revenue and a $0.6 million increase related to new emergency and non-emergency contracts in Oregon. The increase in same service area revenue included a $3.3 million increase in net medical transport APC and a $1.7 million increase in medical transport volume. Medical transports increased primarily due to non-emergency transports in San Diego. The increase in net medical transport APC is primarily due to rate increases and changes in service level mix.
The decrease in other services revenue is primarily related to the discontinuation of shuttle services previously performed for a customer.
Payroll and employee benefits
Payroll and employee benefits was $54.9 million, or 58.4% of net revenue for fiscal 2010, compared to $52.4 million, or 59.0% of net revenue, for fiscal 2009. The increase was primarily due to $0.9 million of increased health insurance expense and $0.6 million in increased workers compensation expense as well as increased expenses related to increased transports, unit hours and annual merit increases.
Operating Expenses
Operating expenses, including general/auto liability expenses was $28.1 million for fiscal 2010, or 29.9% of net revenue, compared to $28.9 million, or 32.5% of net revenue, for fiscal 2009. The decrease was due to a $0.8 million decrease in general/auto liability insurance expense as well as other less significant changes in operating expenses.
12
Results of Operations
Fiscal 2009 Compared To Fiscal 2008Consolidated
Overview
The following table sets forth a comparison of certain items from our consolidated statements of operations for fiscal 2009 and 2008. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item (in thousands, except per share amounts):
Years Ended June 30, | ||||||||||||||||||||||||
2009 | % of Net Revenue |
2008 | % of Net Revenue |
Change | % Change | |||||||||||||||||||
Net revenue |
$ | 491,800 | 100.0 | % | $ | 475,860 | 100.0 | % | $ | 15,940 | 3.3 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Payroll and employee benefits |
305,271 | 62.1 | % | 294,138 | 61.8 | % | 11,133 | 3.8 | % | |||||||||||||||
Depreciation and amortization |
14,258 | 2.9 | % | 12,405 | 2.6 | % | 1,853 | 14.9 | % | |||||||||||||||
Other operating expenses |
115,641 | 23.5 | % | 115,794 | 24.3 | % | (153 | ) | (0.1 | %) | ||||||||||||||
General/auto liability insurance |
11,649 | 2.4 | % | 14,314 | 3.0 | % | (2,665 | ) | (18.6 | %) | ||||||||||||||
Gain on sale of assets and property insurance settlement |
(536 | ) | (0.1 | %) | (1,426 | ) | (0.3 | %) | 890 | (62.4 | %) | |||||||||||||
Total operating expenses |
446,283 | 90.7 | % | 435,225 | 91.5 | % | 11,058 | 2.5 | % | |||||||||||||||
Operating income |
45,517 | 9.3 | % | 40,635 | 8.5 | % | 4,882 | 12.0 | % | |||||||||||||||
Interest expense |
(30,843 | ) | (6.3 | %) | (31,731 | ) | (6.7 | %) | 888 | (2.8 | %) | |||||||||||||
Interest income |
324 | 0.1 | % | 374 | 0.1 | % | (50 | ) | (13.4 | %) | ||||||||||||||
Income from continuing operations before income taxes |
14,998 | 3.0 | % | 9,278 | 1.9 | % | 5,720 | 61.7 | % | |||||||||||||||
Income tax provision |
(7,433 | ) | (1.5 | %) | (4,706 | ) | (1.0 | %) | (2,727 | ) | 57.9 | % | ||||||||||||
Income from continuing operations |
7,565 | 1.5 | % | 4,572 | 1.0 | % | 2,993 | 65.5 | % | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes |
(930 | ) | (0.2 | %) | 337 | 0.1 | % | (1,267 | ) | # | ||||||||||||||
Net income |
6,635 | 1.3 | % | 4,909 | 1.0 | % | 1,726 | 35.2 | % | |||||||||||||||
Net income attributable to noncontrolling interest |
(1,609 | ) | (0.3 | %) | (812 | ) | (0.2 | %) | (797 | ) | (98.2 | %) | ||||||||||||
Net income attributable to Rural/Metro |
$ | 5,026 | 1.0 | % | $ | 4,097 | 0.9 | % | $ | 929 | 22.7 | % | ||||||||||||
Income (loss) per share |
||||||||||||||||||||||||
Basic |
||||||||||||||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.24 | $ | 0.15 | $ | 0.09 | ||||||||||||||||||
Income (loss) from discontinued operations attributable to Rural/Metro |
(0.04 | ) | 0.02 | (0.06 | ) | |||||||||||||||||||
Net income attributable to Rural/Metro |
$ | 0.20 | $ | 0.17 | $ | 0.03 | ||||||||||||||||||
Diluted |
||||||||||||||||||||||||
Income from continuing operations attributable to Rural/Metro |
$ | 0.24 | $ | 0.15 | $ | 0.09 | ||||||||||||||||||
Income (loss) from discontinued operations attributable to Rural/Metro |
(0.04 | ) | 0.01 | (0.05 | ) | |||||||||||||||||||
Net income attributable to Rural/Metro |
$ | 0.20 | $ | 0.16 | $ | 0.04 | ||||||||||||||||||
Average number of common shares outstandingBasic |
24,834 | 24,787 | 47 | |||||||||||||||||||||
Average number of common shares outstandingDiluted |
24,915 | 24,952 | (37 | ) | ||||||||||||||||||||
# Variances over 100% not displayed.
13
Net Revenue
The following table shows a comparison of consolidated net revenue (in thousands):
Years Ended June 30, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
Ambulance services |
$ | 417,848 | $ | 403,597 | $ | 14,251 | 3.5 | % | ||||||||
Other services |
73,952 | 72,263 | 1,689 | 2.3 | % | |||||||||||
Total net revenue |
$ | 491,800 | $ | 475,860 | $ | 15,940 | 3.3 | % | ||||||||
Ambulance Services
The increase in ambulance services revenue was primarily related to a $9.7 million increase in same service area revenue, $3.9 million from new emergency and non-emergency contracts in our Tennessee, Washington, Colorado and Oregon markets; and $1.7 million related to a reserve for contractual allowances pursuant to an alleged overpayment of Medicare claims in Tennessee for the period 2004 and 2005 that was recorded in the previous fiscal year. The increase in same service area revenue included $14.5 million in net medical transport APC and $0.5 million in master contract and standby revenue offset by $4.8 million of decreases in transport volume and a $1.7 million decrease in subsidy revenue. The decrease in subsidy revenue was primarily the result of two counties in our Georgia market requiring cities to contract separately for services combined with the discontinuation of an industrial EMS contract in our Southern Arizona market.
Below are two tables providing fiscal year comparative transport data. The first table summarizes medical transport volume into same service area and new contracts, while the second table summarizes total transport volume into emergency, non-emergency and wheelchair.
Years Ended June 30, | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Same service area medical transports |
1,044,686 | 1,058,191 | (13,505 | ) | (1.3 | %) | ||||||||||
New contract medical transports |
10,446 | N/A | 10,446 | # | ||||||||||||
Medical transports from continuing operations |
1,055,132 | 1,058,191 | (3,059 | ) | (0.3 | %) | ||||||||||
# Variances over 100% not displayed.
The decrease in same service area medical transports was primarily related to the discontinuation of service on two emergency contracts in Tempe, Arizona and Orange County, Florida. Combined, these contracts total approximately 27,400 transports annually. Absent the discontinuation of these contracts, transport volume increased 2.4%. New contract transport growth was related to our new emergency and non-emergency contracts in our Washington, Colorado, Tennessee and Oregon markets.
Years Ended June 30, | ||||||||||||||||||||||||
2009 | % of Transports |
2008 | % of Transports |
Transport Change |
% Change | |||||||||||||||||||
Emergency medical transports |
467,586 | 44.3 | % | 488,276 | 46.1 | % | (20,690 | ) | (4.2 | %) | ||||||||||||||
Non-emergency medical transports |
587,546 | 55.7 | % | 569,915 | 53.9 | % | 17,631 | 3.1 | % | |||||||||||||||
Medical transports from continuing operations |
1,055,132 | 100.0 | % | 1,058,191 | 100.0 | % | (3,059 | ) | (0.3 | %) | ||||||||||||||
Contractual Allowances and Uncompensated Care
Contractual allowances applicable to Medicare, Medicaid and other third-party payers related to continuing operations, which are reflected as a reduction of gross ambulance services revenue, totaled $321.8 million and $295.9 million for fiscal 2009 and 2008, respectively. The increase of $25.9 million was the result of rate increases, changes in payer mix in certain markets, changes in service level mix, increased transport volume and the effect of a $1.7 million reserve to contractual allowances pursuant to an alleged overpayment of Medicare claims in Tennessee for the period 2004 through 2005 that was recorded in the previous fiscal year. Uncompensated care as a percentage of gross ambulance services revenue declined to 13.6% for fiscal 2009 from 14.2% in fiscal 2008. The decline in uncompensated care reflects our continued focus on billing and collections efforts.
14
Both contractual allowances and uncompensated care are reflected as a reduction of gross ambulance services revenue. A reconciliation of gross ambulance services revenue to net ambulance services revenue is included in the table below (in thousands):
Years Ended June 30, | ||||||||||||||||||||||||
2009 | % of Gross |
2008 | % of Gross |
$ Change | % Change | |||||||||||||||||||
Gross ambulance services revenue |
$ | 856,137 | 100.0 | % | $ | 815,690 | 100.0 | % | $ | 40,447 | 5.0 | % | ||||||||||||
Contractual allowances |
(321,792 | ) | (37.6 | %) | (295,948 | ) | (36.3 | %) | (25,844 | ) | (8.7 | %) | ||||||||||||
Uncompensated care |
(116,497 | ) | (13.6 | %) | (116,145 | ) | (14.2 | %) | (352 | ) | (0.3 | %) | ||||||||||||
Net ambulance services revenue |
$ | 417,848 | 48.8 | % | $ | 403,597 | 49.5 | % | $ | 14,251 | 3.5 | % | ||||||||||||
Net Medical Transport APC
Our net medical transport APC for fiscal 2009 was $370 compared to $354 for fiscal 2008. The 4.5% increase was primarily due to improved collections and rate increases.
Other Services
The $1.7 million increase in other services revenue was primarily due to a $2.1 million increase in master fire contract fees primarily related to the conversion of a subscription fire area to a master contract and rate increases on our specialty fire contracts offset by decreases in fire response and forestry fee revenue.
Operating Expenses
Payroll and Employee Benefits
The increase in payroll and employee benefits was due to $6.5 million of net changes in workers compensation actuarial adjustments from year to year (fiscal 2009 negative adjustment of $1.7 million compared to a positive adjustment of $4.8 million in fiscal 2008), and a $1.5 million increase in health insurance expense, offset by a $1.8 million decrease in current-year workers compensation claims expense, with the rest of the increase due to cost of living increases and higher unit hour volume.
Depreciation and Amortization
The increase in depreciation and amortization was primarily due to additional capital expenditures during the year.
Other Operating Expenses
The decrease in other operating expenses was primarily due to a $2.9 million increase in station expense offset by a $2.2 million decrease in fuel expense and a $2.1 million decrease in professional fees.
General/Auto Liability
The decrease in general/auto liability expense was primarily due to $3.1 million of decreases related to current year claims estimates and a net positive change in actuarial adjustments of $0.4 million from year to year (fiscal 2009 positive adjustment of $1.7 million compared to a fiscal 2008 positive adjustment of $1.3 million).
Gain on Sale of Assets
During fiscal 2009, we entered into additional transactions to sell certain of our previously written-off self-pay accounts receivable to an unrelated third party. The resulting gains totaled $0.6 million.
15
During fiscal 2008, we sold certain of our previously written-off self-pay accounts receivable to an unrelated third party. The resulting gains totaled $2.1 million, $1.7 million of which were recorded in continuing operations and $0.4 million of which were recorded in discontinued operations.
Interest Expense
The decrease in interest expense was related to decreased interest on the Term Loan B due to lower balances, offset by increases related to the continued non-cash accretion of our Senior Discount Notes.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest relates to the City of San Diegos portion (50%) of the San Diego Medical Services Enterprise, LLC fiscal year-to-date net income.
Income Tax Provision
During fiscal 2009, we recorded a $7.4 million income tax provision related to continuing operations, resulting in an effective rate of 49.6% of pre-tax income. During fiscal 2008, we recorded a $4.7 million income tax provision related to continuing operations, resulting in an effective rate of 50.7% of pre-tax income. The effective rate differed from the federal statutory rate of 35.0% primarily as a result of increases for the portion of non-cash interest expense related to our Senior Discount Notes, which is not deductible for income tax purposes, non-deductible executive compensation, and state income taxes. Additionally, our effective tax rate included a reduction related to pretax income that was attributable to the minority interest in our joint venture with the City of San Diego. See Note 12 to our Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K for a full reconciliation of differences from the statutory federal tax rate.
The income tax provision for fiscal 2009 reflects a $1.0 million benefit for wage tax credits related to our participation in Federal and state wage tax incentive programs in the state of New York from 2002 through 2008. The income tax provision for fiscal 2009 also reflects a $0.4 million benefit resulting from the release of valuation allowances for two states where the Company determined that realization of these deferred tax assets is more likely than not.
The continuing operations tax provision for fiscal 2009 and fiscal 2008 included deferred income tax expense of $8.1 million and $3.3 million, respectively. The deferred income tax expense results primarily from utilization of tax benefits, primarily related to net operating loss carryforwards generated in prior years, and did not require a current cash payment.
As of June 30, 2009, we maintained a valuation allowance of $7.5 million against deferred tax assets related to state net operating loss carryforwards that we do not believe will be realized.
Discontinued Operations
During fiscal 2010, we exited fire protection contracts in Florida and Wisconsin and ambulance services contracts in Utah and Georgia. The financial results of these service areas are included within income (loss) from discontinued operations. The financial results for fiscal 2009 and 2008 were recast to reflect the operations classified as discontinued in fiscal 2010.
During fiscal 2009, we exited ambulance transportation markets in Columbus and Marion, Ohio, and Roswell, New Mexico. The financial results of these service areas are included within income (loss) from discontinued operations.
Loss from discontinued operations for fiscal 2009 was $0.9 million and included an income tax benefit of $0.5 million. The loss from discontinued operations before the income tax benefit was due primarily to $0.4 million recorded as a result of increasing our Medicare reserve contingency related to the Ohio compliance matter, a portion of which related to our former Marion, Ohio operation.
Income from discontinued operations for fiscal 2008 was $0.3 million and included an income tax provision of $0.2 million. Income from this period included a $0.6 million gain of nonrefundable fire subscription prepayments upon the termination of our contract in Queen Creek, Arizona effective January 1, 2008, and a gain of $0.4 million on the sale of self pay receivables. Those gains were partially offset by an additional pre-tax reserve of $0.7 million for a change in estimate related to a Medicaid intermediarys review of service levels provided to certain patients in our Baltimore, Maryland and Washington DC operations, which were discontinued in fiscal 2004.
16
Fiscal 2009 Compared To Fiscal 2008Segments
Overview
Effective July 1, 2010, we realigned our reporting segments. Prior period segment information has been recast to reflect the operations in the realigned reporting segments. We have four geographical operating zones that correspond with the manner in which the associated operations are managed and evaluated by our chief operating decision maker. These reporting segments are:
Segment | States | |
East | Connecticut, Delaware, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, Wisconsin, West Virginia and the District of Columbia | |
South | Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Missouri, North Carolina, South Carolina and Tennessee | |
Southwest | Arizona, Kansas, New Mexico, Oklahoma and Texas | |
West | Alaska, California, Colorado, Hawaii, Idaho, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming |
Although each state (and the District of Columbia) has been assigned to an operating zone, we currently have operations in the following 20 states: Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Jersey, New York, North Dakota, Ohio, Oregon, Tennessee, South Dakota and Washington.
Each reporting segment provides ambulance services while our fire and other services are primarily in the South and Southwest segments. Our specialty fire operations, which consist primarily of airport and industrial facility fire protection, operate in multiple states but are reported in the South segment.
The accounting policies used in the preparation of our consolidated financial statements have been followed in the preparation of the accompanying financial information for each reporting segment. For management purposes, our measure of segment profitability is defined as income from continuing operations before depreciation and amortization, including goodwill impairment, interest expense (income), income taxes and noncontrolling interests. Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only.
East
The following table presents financial results and key operating statistics for the East operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2009 | 2008 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 111,510 | $ | 106,412 | $ | 5,098 | 4.8 | % | ||||||||
Other services |
3,907 | 3,846 | 61 | 1.6 | % | |||||||||||
Total net revenue |
$ | 115,417 | $ | 110,258 | $ | 5,159 | 4.7 | % | ||||||||
Segment profit |
$ | 21,421 | $ | 18,898 | $ | 2,523 | 13.4 | % | ||||||||
Segment profit margin |
18.6 | % | 17.1 | % | ||||||||||||
Medical transports |
324,166 | 320,352 | 3,814 | 1.2 | % | |||||||||||
Net Medical Transport APC |
$ | 329 | $ | 317 | $ | 12 | 3.8 | % | ||||||||
DSO |
48 | 56 | (8 | ) | (14.3 | %) |
Revenue
The increase in ambulance services revenue was due to $4.0 million of increases in net medical transport APC and $1.2 million of increases related to medical transport volume. The increase in medical transports primarily reflected growth in our Kentucky market as a result of concentrated marketing efforts to expand our non-emergency business. The net medical transport APC increased due to rate increases and collection rate increases.
17
Payroll and employee benefits
Payroll and employee benefits was $62.9 million, or 54.5% of net revenue for fiscal 2009, compared to $59.2 million, or 53.7% of net revenue, for fiscal 2008. The increase was primarily due to a $1.4 million increase in workers compensation expense, and $0.8 million increase in health insurance expense, with the remainder of the increase related to changes in cost-of-living adjustments, unit hours and training.
Operating Expenses
Operating expenses, including general/auto liability expenses was $23.6 million for fiscal 2009, or 20.4% of net revenue, compared to $23.6 million, or 21.4% of net revenue for fiscal 2008. The decreases of $1.0 million in general/auto liability expense and $0.4 million in vehicle and equipment expenses was offset by $0.8 million related to a Medicare reserve contingency for the Ohio compliance matter and other less significant changes in expenses.
In addition, corporate overhead allocations decreased, primarily due to decreased professional fees.
South
The following table presents financial results and key operating statistics for the South operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2009 | 2008 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 87,204 | $ | 78,716 | $ | 8,488 | 10.8 | % | ||||||||
Other services |
28,430 | 26,864 | 1,566 | 5.8 | % | |||||||||||
Total net revenue |
$ | 115,634 | $ | 105,580 | $ | 10,054 | 9.5 | % | ||||||||
Segment profit |
$ | 10,259 | $ | 8,759 | $ | 1,500 | 17.1 | % | ||||||||
Segment profit margin |
8.9 | % | 8.3 | % | ||||||||||||
Medical transports |
271,288 | 263,100 | 8,188 | 3.1 | % | |||||||||||
Net Medical Transport APC |
$ | 293 | $ | 267 | $ | 26 | 9.7 | % | ||||||||
DSO |
43 | 39 | 4 | 10.3 | % |
Revenue
The increase in ambulance services revenue was due to a $4.8 million increase in same service area revenue, a $2.0 million increase related to new contract revenue in Tennessee and a $1.7 million increase related to a reserve for contractual allowances pursuant to an alleged overpayment of Medicare claims in Tennessee for the period 2004 and 2005 that was recorded in fiscal 2008. The same service area revenue increase included $4.8 million in net medical APC and $0.7 million in medical transport volume offset by a $0.8 million decrease in subsidy revenue. The decrease in subsidy revenue was a result of two counties in our Georgia market requiring cities to contract separately for service. The increase in net medical transport APC was due to rate increases and changes in service level mix. The increase in medical transports was due to growth in non-emergency transport volume in our Tennessee (including those generated from the new contract mentioned above), Alabama and Georgia markets as a result of concentrated marketing efforts to expand our non-emergency business. These increases were partially offset by the discontinuation of an emergency contract in Orange County, Florida, which had approximately 19,700 transports annually. This contract was not put out for RFP, and the transports related to this service area are currently serviced by the local fire department.
Other services revenue increased due to increases in fire services revenue. The increase included $0.9 million related to fire subscription revenue and $0.6 million related to rate increases on our specialty fire contracts.
Payroll and employee benefits
Payroll and employee benefits was $72.8 million, or 63.0% of net revenue, for fiscal 2009, compared to $64.9 million, or 61.5% of net revenue, for the same period in the prior year. The increase was due to a $1.4 million increase in health insurance expense and a $1.2 million increase in workers compensation expense, with the remainder of the increase related to changes in cost-of-living adjustments, unit hours and training.
18
Operating Expenses
Operating expenses, including general/auto liability expenses, for fiscal 2009 was $24.1 million, or 20.8% of net revenue compared to $22.9 million, or 21.7% of net revenue, for the same period in the prior year. The increase was primarily due to $0.9 million of increases in vehicle and equipment expense primarily related to increased transport volume, and a $1.1 million increase in station expenses offset by a $0.5 million decrease in general/auto liability expense.
In addition, corporate overhead allocations decreased, primarily due to decreased professional fees.
Southwest
The following table presents financial results and key operating statistics for the Southwest operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2009 | 2008 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 130,984 | $ | 133,518 | $ | (2,534 | ) | (1.9 | %) | |||||||
Other services |
40,905 | 40,794 | 111 | 0.3 | % | |||||||||||
Total net revenue |
$ | 171,889 | $ | 174,312 | $ | (2,423 | ) | (1.4 | %) | |||||||
Segment profit |
$ | 24,070 | $ | 22,324 | $ | 1,746 | 7.8 | % | ||||||||
Segment profit margin |
14.0 | % | 12.8 | % | ||||||||||||
Medical transports |
241,932 | 255,521 | (13,589 | ) | (5.3 | %) | ||||||||||
Net Medical Transport APC |
$ | 534 | $ | 513 | $ | 21 | 4.1 | % | ||||||||
DSO |
54 | 70 | (16 | ) | (22.9 | %) |
Revenue
The decrease in ambulance services revenue was primarily due to a $7.0 million decrease related to medical transport volume and a $0.8 million decrease in subsidy revenue related to the discontinuation of an industrial EMS contract in our Southern Arizona market, offset by $5.0 million of increases in net medical transport APC. Medical transports decreased primarily due to the discontinuation of service on an emergency contract in Tempe, Arizona, which had approximately 7,700 transports annually combined with transport volume decreases in the emergency sector due to fewer temporary residents and leisure travelers. The increase in net medical transport APC was primarily due to rate increases and collection rate increases.
Other services revenue remained consistent with the prior year, with increased master fire contract revenue being offset by decreases in fire subscription and fire and forestry fee revenue.
Payroll and employee benefits
Payroll and employee benefits was $96.8 million, or 56.3% of net revenue for fiscal 2009, compared to $98.4 million, or 56.5% of net revenue, for fiscal 2008. The $1.6 million decrease was due to a $1.5 million increase in workers compensation expense and a $0.7 million increase in health insurance expense, offset by changes in cost-of-living adjustments, unit hours and training.
Operating Expenses
Operating expenses, including general/auto liability expenses, was relatively consistent at $39.8 million for fiscal 2009, or 23.2% of net revenue, compared to $40.0 million, or 22.9% of net revenue, for the same period in the prior year. The current year included $1.5 million of decreases in vehicle and equipment expenses offset by increases of $1.3 million in other operating expenses.
In addition, corporate overhead allocations decreased, primarily due to decreased professional fees.
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West
The following table presents financial results and key operating statistics for the West operations (in thousands, except medical transports, Net Medical Transport APC and DSO):
2009 | 2008 | Change | % Change | |||||||||||||
Net revenue |
||||||||||||||||
Ambulance services |
$ | 88,150 | $ | 84,951 | $ | 3,199 | 3.8 | % | ||||||||
Other services |
710 | 759 | (49 | ) | (6.5 | %) | ||||||||||
Total net revenue |
$ | 88,860 | $ | 85,710 | $ | 3,150 | 3.7 | % | ||||||||
Segment profit |
$ | 4,025 | $ | 3,059 | $ | 966 | 31.6 | % | ||||||||
Segment profit margin |
4.5 | % | 3.6 | % | ||||||||||||
Medical transports |
217,746 | 219,218 | (1,472 | ) | (0.1 | %) | ||||||||||
Net Medical Transport APC |
$ | 343 | $ | 329 | $ | 14 | 4.3 | % | ||||||||
DSO |
68 | 72 | (4 | ) | (5.6 | %) |
Revenue
The increase in ambulance services revenue was primarily due to a $1.9 million increase in revenue from new emergency and non-emergency contracts in our Washington, Colorado and Oregon markets and a $1.3 million increase in same service area revenue. Same service area revenue included a $3.0 million increase in net medical transport APC and a $0.4 million increase in master contracts offset by $2.1 million related to decreased transport volume. The increase in the net medical APC was due to rate increases and increases related to service level mix and collection rate.
We notified Salt Lake City, Utah, that we would exit the market at the conclusion of our contract term in December 2009. Our decision was based on the inability during our four years in the market to secure a license to provide non-emergency ambulance services. Receiving such a license would have required a change to state law that, in our opinion, was not forthcoming. The Utah market accounted for transports and net revenue of 10,755 and $4.2 million in 2009, respectively, and 11,179 and $3.5 million in 2008, respectively. This market was reclassified to discontinued operations in the second quarter of fiscal 2010.
Payroll and employee benefits
Payroll and employee benefits was $52.4 million, or 59.0% of net revenue for fiscal 2009, compared to $49.3 million, or 57.5% of net revenue, for fiscal 2008. The increase was primarily due to $0.9 million of increases in workers compensation expense and $0.7 million of increases in health insurance, with the remainder of the increase related to changes in cost-of-living adjustments, unit hours and training.
Operating Expenses
Operating expenses, including general/auto liability expenses was $28.9 million for fiscal 2009, or 32.5% of net revenue, compared to $29.3 million, or 34.2% of net revenue, for fiscal 2008. The decrease was primarily due to decreases in other operating expenses.
In addition, corporate overhead allocations decreased, primarily due to decreased professional fees.
Critical Accounting Estimates and Policies
Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, general liability and workers compensation claim reserves and deferred tax asset recoverability. We base our estimates on historical experience and various assumptions we believe are reasonable under the circumstances. The results 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 under different assumptions or conditions.
We have identified the following accounting estimates and policies as critical to understanding our results of operations. The discussion below is not intended to represent a comprehensive list of our accounting estimates and policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements.
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Revenue Recognition
A significant portion of our revenue is generated in the highly regulated and complex healthcare industry. Ambulance services revenue is recognized when services are provided to our patients and are recorded net of estimated contractual allowances applicable to Medicare, Medicaid and other third-party payers and net of estimates for uncompensated care. We use sophisticated financial models to estimate the provisioning for both contractual allowances and uncompensated care by looking at current service levels, payer mix known at the time of transport and incorporating historical trend information by service area. The evaluation of these data points, along with our interpretation of Medicare, Medicaid and various commercial insurance provider rules and regulations is highly complicated and subjective. If our interpretation or our analysis surrounding historical data is incorrect, revenue could be overstated or understated. For fiscal 2010, a 1% change in our estimate of revenue collectability would impact the Company by $9.5 million of net revenue.
Revenue generated under fire protection service contracts is recognized over the life of the contract. Fire subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year. Additionally, we charge enrollment fees for new subscribers under our fire protection service contracts. Such fees are deferred and recognized over the estimated customer relationship period of nine years.
Insurance Reserves
In the ordinary course of our business, we are subject to accident, injury and professional liability claims. Additionally, certain of our operational contracts, as well as laws in certain of the areas where we operate, require that specified amounts of insurance coverage be maintained. In order to minimize the risk of exposure and comply with such legal and contractual requirements, we carry a broad range of insurance policies, including comprehensive general liability, automobile, property damage, professional, workers compensation and other lines of coverage. We typically renew each of these policies annually and purchase limits of coverage at levels management believes are appropriate, taking into account historical and projected claim trends, reasonable protection of our assets and operations and the economic conditions in the insurance market. Depending upon the specific line of coverage, the total limits of insurance maintained may be achieved through a combination of primary policies, excess policies and self-insurance.
We retain certain levels of exposure with respect to our general liability and workers compensation programs and purchase coverage from third party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, we establish reserves for claims, both reported and an estimate of incurred but not reported claims, on a gross basis using currently available information as well as our historical claims experience. We also recognize a receivable from our insurers for amounts expected to be recovered in excess of our retention. We periodically evaluate the financial capacity of our insurers to assess the recoverability of the related receivables.
We engage third-party administrators (TPAs) to manage claims resulting from our general liability and workers compensation programs. The TPAs establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. Management periodically reviews the claim reserves established by the TPAs and engages independent actuaries to assist with the evaluation of the adequacy of its reserves on at least a semi-annual basis. The Company adjusts its claim reserves with an associated increase or decrease to expense as new information on the underlying claims is obtained.
Property and Equipment
We exercise judgment with regard to property and equipment in the following areas: (1) determining whether an expenditure is eligible for capitalization or if it should be expensed as incurred, (2) estimating the useful life of a capitalized asset, and (3) if events or changes in circumstances warrant an assessment, determining if and to what extent a tangible long-lived asset has been impaired. The accuracy of our judgments impacts the amount of depreciation expense we recognize, the amount of our gain or loss on the disposal of these assets, whether or not an asset is impaired and, if an asset is impaired, the amount of the loss related to the impaired asset that is recognized.
Our judgments about useful lives as well as the existence and degree of asset impairments could be affected by future events, such as discontinued operations, obsolescence, new regulations and new taxes, and other economic factors. We do not anticipate that our current estimates are reasonably likely to change in the future.
Expenditures associated with the repair or maintenance of a capital asset are expensed as incurred. Expenditures that are expected to provide future benefits to the Company or that extend the useful life of an existing asset are capitalized. The useful lives that we assign to property and equipment represent the estimated number of years that the property and equipment is expected to contribute to the revenue generating process based on our current operating strategy. We believe that the useful lives of our property and equipment expire evenly over time. Accordingly, we depreciate our property and equipment on a straight-line basis over their useful lives.
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Goodwill
Our goodwill balances are reviewed for impairment annually (and at interim periods if events or changes in circumstances indicate that the goodwill may be impaired) using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is determined by a market approach based on each reporting units estimated discount rate and long-term growth rate or by (or in combination with) an income approach based on discounted estimated future cash flows from each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The estimated fair value of our reporting units could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or changes in our market capitalization. We perform our annual impairment test as of June 30.
Defined Benefit Pension Plan
We have one defined benefit pension plan covering eligible employees of one of our subsidiaries, primarily those covered by collective bargaining agreements. Eligibility is achieved upon the completion of one year of service. Participants become fully vested in their accrued benefit after the completion of five years of service. The amount of benefit is determined using a two-part formula, one of which is based upon compensation and the other which is based upon a flat dollar amount.
We use an actuarial model to estimate our benefit obligation and the associated pension cost. The key assumptions used in this model are the discount rate for the benefit obligation and the expected long-term rate of return on plan assets. The discount rate is derived from a model that applies the spot rates of an expected yield curve to the estimated timing and amount of future benefit payments. A 1% decrease in the discount rate would increase pension cost in the following year by $0.9 million and would increase the projected benefit obligation by $3.3 million. A 1% increase in the discount rate would decrease pension cost in the following year by $0.7 million and would decrease the projected benefit obligation by $2.4 million.
The expected long-term rate of return on plan assets is estimated based upon current plan asset allocation, historical and expected returns on various asset categories and multiple investment scenarios. A 1% increase or decrease in this assumption would affect pension cost in the following year by $0.1 million and would not affect the projected benefit obligation.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a tax rate change on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. Changes in estimates of future taxable income can materially change the amount of such valuation allowances.
We are subject to federal income taxes and state income taxes in those jurisdictions in which we operate. We exercise judgment with regard to income taxes in the following areas: (1) interpreting whether expenses are deductible in accordance with federal income tax and state income tax codes, (2) estimating annual effective federal and state income tax rates and (3) assessing whether deferred tax assets are, more likely than not, expected to be realized. The accuracy of these judgments impacts the amount of income tax expense we recognize each period.
As a matter of law, we are subject to examination by federal and state taxing authorities. We have estimated and provided for income taxes in accordance with settlements reached with the Internal Revenue Service in prior audits. Although we believe that the amounts reflected in our tax returns substantially comply with the applicable federal and state tax regulations, both the IRS and the various state taxing authorities can and have taken positions contrary to our position based on their interpretation of the law. A tax position that is challenged by a taxing authority could result in an adjustment to our income tax liabilities and related tax provision.
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We measure and record tax contingency accruals in accordance with accounting principles generally accepted in the United States (GAAP) which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the more likely than not recognition threshold at the effective date may be recognized or continue to be recognized.
Liquidity and Capital Resources
Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.
We have available to us, upon compliance with certain conditions, a $40.0 million Revolving Credit Facility due December 2013, less any letters of credit outstanding under the $25.0 million letter of credit sub-line. There were $24.6 million of letters of credit outstanding under the sub-line of the revolving credit facility at June 30, 2010. No other amounts were outstanding under the Revolving Credit Facility as of June 30, 2010. We anticipate renewing the letters of credit.
In addition to the scheduled principal payments, we are required to make an excess cash flow payment, as defined under our 2009 Credit Facility, of $1.9 million within 90 days of June 30, 2010. The excess cash flow payment will be applied to the principal balance of our Term Loan due 2014.
Cash Flows
The table below summarizes cash flow information for fiscal 2010, 2009 and 2008 (in thousands):
Years Ended June 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net cash provided by operating activities |
$ | 37,525 | $ | 52,081 | $ | 34,821 | ||||||
Net cash used in investing activities |
(37,116 | ) | (16,646 | ) | (13,231 | ) | ||||||
Net cash used in financing activities |
(17,289 | ) | (14,234 | ) | (11,864 | ) |
Operating Activities
We had working capital of $36.4 million as of June 30, 2010, including cash and cash equivalents of $20.2 million, compared to working capital of $60.7 million, including cash and cash equivalents of $37.1 million, as of June 30, 2009. The decrease in working capital is primarily related to the reclassification of $20.4 million of cash and cash equivalents as noncurrent restricted cash on the Consolidated Balance Sheets to guarantee the cash collateralized letter of credit facility. Absent the amounts related to restricted cash, working capital decreased $3.9 million, which is primarily being driven by the timing of payments on accrued liabilities.
Effective March 2010, the non-cash accretion of the 12.75% Senior Discount Notes ceased and cash interest began to accrue. The first $6.0 million semi-annual interest payment is due in September 2010.
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The $17.3 million increase in cash flow from operating activities from fiscal 2008 to fiscal 2009 was attributable to a $0.9 million increase in earnings, a $9.9 million increase in non-cash expenses and $6.3 million of net cash inflows resulting in changes in operating assets and liabilities. The increase in non-cash expenses was primarily related to a $6.3 million change in insurance reserves adjustments, an increase of $1.7 million in depreciation and amortization, a $1.2 million increase in accretion of the 12.75% Senior Discount Notes, a $0.8 million increase in noncontrolling interest and a $0.2 million increase in stock-based compensation expense partially offset by a $0.3 million decrease in loss on sale of property and equipment. The net cash inflows in operating assets and liabilities was primarily due to a $9.6 million decrease in accounts receivable, a $4.2 million decrease in deferred income taxes, a $2.7 million increase in deferred revenue and a $1.0 million decrease in prepaid expenses offset by a $3.9 million decrease in other liabilities, a $2.9 million decrease in accrued liabilities, a $2.4 million change in other assets, a $0.9 million decrease in accounts payable, a $0.6 million increase in insurance deposits and a $0.4 million increase in inventory.
Investing Activities
Net cash used in investing activities for fiscal 2010 primarily reflects the use of $20.4 million for deposits of restricted cash in connection with our cash collateralized letter of credit facility and $15.5 million of capital expenditures. Capital expenditures in fiscal 2009 were $16.7 million.
The $3.4 million increase in cash used in investing activities from fiscal 2008 to fiscal 2009 was attributable to a $3.4 million increase in capital expenditures.
Financing Activities
Net cash used in financing activities for fiscal 2010 primarily reflects the use of cash for the repayment of debt and for payment of debt refinancing transaction fees partially offset by cash inflows due to borrowings under our 2009 Credit Facility. See discussion of our debt and the debt refinancing transaction in Note 11 to the consolidated financial statements filed within Exhibit 99.1 on this Form 8-K. Additionally, we made $2.4 million in distributions to the City of San Diego.
The $2.3 million increase in cash used in financing activities from fiscal 2008 to fiscal 2009 was primarily due to a $2.0 million increase in principal payments under the companys credit facility and a $0.8 million increase in distributions to noncontrolling shareholders partially offset by $0.9 million in cash paid for debt issuance costs in fiscal 2008.
2009 Credit Facility
Rural/Metro Operating Company, LLC (Rural/Metro LLC), maintains senior secured credit facilities (collectively, the 2009 Credit Facility) in an aggregate amount of up to $220.0 million, comprised of a $180.0 million Term Loan B facility due December 2014 (the Term Loan due 2014), a $40.0 million revolving credit facility due December 2013 (the Revolving Credit Facility) which includes a $25.0 million letter of credit sub-line (the Letter of Credit Sub-line). For a complete discussion of our 2009 Credit Facility, see Note 11 to the Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K.
Debt Covenants
The 2009 Credit Facility and Senior Discount Notes include various financial and non-financial covenants applicable to the Companys wholly-owned subsidiary, Rural/Metro LLC, as well as quarterly and annual financial reporting obligations.
Specifically, the 2009 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet certain financial tests, including an interest expense leverage ratio, a total leverage ratio, and a senior secured leverage ratio. The 2009 Credit Facility also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances, capital expenditures, business activities by the Company, as a holding company, and other matters customarily restricted in such agreements. The financial covenants related to the Senior Discount Notes are similar to or less restrictive than those under the 2009 Credit Facility. We are in compliance with our covenants at June 30, 2010 and anticipate continuing compliance. The table below sets forth information regarding certain of the financial covenants under the 2009 Credit Facility.
Financial Covenant |
Level Specified in Agreement |
Level Achieved for Specified Period |
Levels to be Achieved at | |||||||||
September 30, 2010 |
December 31, 2010 |
March 31, 2011 |
June 30, 2011 | |||||||||
Interest expense coverage ratio |
> 2.00 | 3.58 | > 2.00 | > 2.00 | > 2.00 | > 2.00 | ||||||
Total leverage ratio (1) |
< 5.40 | 4.01 | < 5.20 | < 5.20 | < 5.00 | < 4.80 | ||||||
Senior secured leverage ratio (1) |
< 3.55 | 2.64 | < 3.35 | < 3.35 | < 3.20 | < 3.10 | ||||||
Capital expenditure (2) |
< $23.0 million | $15.5 million | N/A | N/A | N/A | < $23.5 million |
(1) | Calculated using a Term Loan due 2014 balance of $179.1 million. See discussion in Note 11 to the Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K. |
(2) | Measured annually at June 30. |
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Contractual Obligations and Other Commitments
We have certain contractual obligations related to our debt instruments and lease obligations that come due at various times over the periods presented below. In addition we have other commitments in the form of standby letters of credit and performance bonds. The following table illustrates the expiration of our contractual obligations as well as other commitments as of June 30, 2010 (in thousands):
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations |
Total | Less than 1 Year |
1-3 Years |
3-5 Years |
After 5 Years |
|||||||||||||||
12.75% Senior Discount Notes due March 2016 |
$ | 93,500 | $ | | $ | | $ | | $ | 93,500 | ||||||||||
Term Loan due December 2014 |
179,100 | 7,268 | 18,000 | 153,832 | | |||||||||||||||
Interest payments (1) |
123,964 | 26,133 | 50,117 | 39,303 | 8,411 | |||||||||||||||
Purchase obligations |
7,035 | 3,559 | 1,872 | 1,604 | | |||||||||||||||
Operating leases |
66,391 | 13,025 | 21,061 | 15,760 | 16,545 | |||||||||||||||
Other debt obligations |
652 | 207 | 393 | 52 | | |||||||||||||||
Total contractual cash obligations |
$ | 470,642 | $ | 50,192 | $ | 91,443 | $ | 210,551 | $ | 118,456 | ||||||||||
Other Commitments |
Amount of Commitment Expiration By Period | |||||||||||||||||||
Letters of Credit |
$ | 44,669 | $ | 44,669 | $ | | $ | | $ | | ||||||||||
Performance bonds |
$ | 8,582 | $ | 8,582 | $ | | $ | | $ | | ||||||||||
(1) | Calculated using stated coupon rates for fixed rate debt and interest rates applicable at June 30, 2010 for variable rate debt. |
In addition, as of June 30, 2010, we had $5.1 million of income taxes payable related to uncertain tax positions. We do not expect to make cash payments related to this liability during the next twelve months. Beyond the next twelve months, timing of cash payments are uncertain and therefore no such payments are reflected in the above table.
We intend to renew letters of credits and performance bonds annually.
Indemnifications
We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements we entered into require us to indemnify other parties against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, our negligence or willful misconduct or breach of representations and warranties and covenants.
Additionally, some of our customer agreements require us to provide certain assurances related to the performance of our services. Such assurances, from time to time, obligate us to; (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of uncured material defaults or other certain circumstances, or (iii) provide performance bonds or letters of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default. With respect to such performance bonds, we are also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.
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We provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. In addition, we have entered into indemnification agreements with our directors and certain of our officers. We maintain directors and officers insurance which should enable us to recover a portion of any future amounts paid.
In addition to the above, from time to time we provide standard representations and warranties to counterparties in contracts in connection with sales of our securities and the engagement of financial advisors and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by us.
While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows. Additionally, we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows.
Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements filed within Exhibit 99.1 on this Form 8-K for a summary of recent accounting pronouncements.
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