Close

Form 10-Q TEAM HEALTH HOLDINGS For: Sep 30

November 4, 2014 4:27 PM EST

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September�30, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ������������ to ������������.
Commission�File�Number 001-34583
Team Health Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
36-4276525
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
265 Brookview Centre Way
Suite 400
Knoxville, Tennessee 37919
(865) 693-1000
(Address, zip code, and telephone number, including area code, of registrants principal executive office)
�Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days.����Yes��x����No��
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).�� Yes��x����No��
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large�accelerated�filer
x
Accelerated�filer
Non-accelerated filer
��(Do not check if a smaller reporting company)
Smaller�reporting�company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).����Yes������No��x
As of October 31, 2014, there were outstanding�71,108,605 shares of common stock of Team Health Holdings, Inc., with a par value of $0.01.



FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical facts and that reflect the current view of Team Health Holdings, Inc. (the Company) about future events and financial performance are hereby identified as forward looking statements. Some of these statements can be identified by terms and phrases such as anticipate, believe, intend, estimate, expect, continue, could, should, may, plan, project, predict and similar expressions. The Company cautions readers of this Form 10-Q that such forward looking statements, including without limitation, those relating to the Companys future business prospects, revenue, working capital, professional liability expense, liquidity, capital needs, interest costs and income, wherever they occur in this Form 10-Q or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Companys senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward looking statements. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
"
the current U.S. and global economic conditions;
"
the current U.S. and state healthcare reform legislative initiatives;
"
the effect and interpretation of current or future government regulation of the healthcare industry, and our ability to comply with these regulations;
"
our exposure to billing investigations and audits by private payors and federal and state authorities, as well as auditing contractors for governmental programs;
"
our exposure to professional liability lawsuits;
"
the adequacy of our insurance reserves;
"
our reliance on reimbursements by third-party payors, as well as payments by individuals;
"
change in rates or methods of government payments for our services;
"
the general level of emergency department patient volumes at our clients facilities;
"
our exposure to the financial risks associated with fee for service contracts;
"
our ability to timely or accurately bill for services;
"
our ability to timely enroll healthcare professionals in the Medicare program;
"
a reclassification of independent contractor physicians by tax authorities;
"
the concentration of a significant number of our programs in certain states, particularly Florida and Tennessee;
"
any loss of or failure to renew contracts within the Military Health System Program, which are subject to a competitive bidding process;
"
our exposure to litigation;
"
fluctuations in our quarterly operating results, which could affect our ability to raise new capital for our business;
"
effect on our revenues if we experience a net loss of contracts;
"
our ability to accurately assess the costs we will incur under new contracts;
"
our ability to find suitable acquisition candidates or successfully integrate completed acquisitions;
"
our ability to implement our business strategy and manage our growth effectively;
"
our future capital needs and ability to raise capital when needed;
"
our ability to successfully recruit and retain qualified healthcare professionals;
"
enforceability of our non-competition and non-solicitation contractual arrangements with some affiliated physicians and professional corporations;
"
the high level of competition in our industry;
"
our dependence on numerous complex information systems and our ability to maintain these systems or implement new systems or any disruptions in our information systems;
"
our ability to protect our proprietary technology and services;
"
our loss of key personnel and/or ability to attract and retain highly qualified personnel;
"
our ability to comply with privacy regulations regarding the use and disclosure of patient information;
"
our ability to comply with federal or state anti-kickback laws;
"
our ability to comply with federal and state physician self-referral laws and regulations or issuance of additional legislative restrictions;
"
changes in existing laws or regulations, adverse judicial or administrative interpretations of these laws and regulations or enactment of new legislation;

2


"
changes in accounting standards, rules and interpretations or inaccurate estimates or assumptions in the application of accounting policies and the impact on our financial statements;
"
our exposure to a loss of contracts with our physicians or termination of relationships with our affiliated professional corporations in order to comply with antitrust laws;
"
our substantial indebtedness and ability to incur substantially more debt;
"
our ability to generate sufficient cash to service our debt; and
"
restrictive covenants in our debt agreements, which may restrict our ability to pursue our business strategies and our ability to comply with them.
For a more detailed discussion of these factors, see the information under the caption Risk Factors in the Companys most recent Annual Report on Form�10-K filed with the Securities and Exchange Commission and Managements Discussion and Analysis of Financial Condition and Results of Operations herein and in the Companys most recent Annual Report on Form�10-K.
The Companys forward-looking statements speak only as of the date of this report or as of the date they are made. The Company disclaims any intent or obligation to update any forward looking statement made in this Form�10-Q to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

3


TEAM HEALTH HOLDINGS, INC.
QUARTERLY REPORT FOR THE NINE MONTHS
ENDED SEPTEMBER�30, 2014
Page
Consolidated Statements of Comprehensive EarningsNine Months Ended September 30, 2013 and 2014

4


PART 1. FINANCIAL INFORMATION
Item�1.
Financial Statements
TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December�31,
2013
September�30,
2014
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
$
32,331

$
13,639

Accounts receivable, less allowance for uncollectibles of $377,644 and $394,027 in 2013 and 2014, respectively
392,430

458,734

Prepaid expenses and other current assets
35,029

42,475

Receivables under insured programs
22,961

16,976

Total current assets
482,751

531,824

Investments of insurance subsidiary
84,081

93,183

Property and equipment, net
53,434

57,171

Other intangibles, net
173,178

307,735

Goodwill
428,311

620,838

Deferred income taxes
44,546

49,963

Receivables under insured programs
39,532

52,923

Other
55,577

52,774

$
1,361,410

$
1,766,411

LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable
$
27,700

$
35,338

Accrued compensation and physician payable
201,998

228,362

Other accrued liabilities
128,749

119,996

Income tax payable
3,014

4,428

Current maturities of long-term debt
17,969

250,525

Deferred income taxes
39,063

38,013

Total current liabilities
418,493

676,662

Long-term debt, less current maturities
483,594

466,250

Other non-current liabilities
190,842

230,456

Shareholders equity:
Common stock, ($0.01 par value; 100,000 shares authorized, 70,016 and 70,967 shares issued and outstanding at December�31, 2013 and September 30, 2014, respectively)
700

710

Additional paid-in capital
642,633

683,972

Accumulated deficit
(376,593
)
(294,960
)
Accumulated other comprehensive earnings
447

1,675

Team Health Holdings, Inc. shareholders equity
267,187

391,397

Noncontrolling interests
1,294

1,646

Total shareholders' equity including noncontrolling interests
268,481

393,043

$
1,361,410

$
1,766,411

See accompanying notes to consolidated financial statements.

5


TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

Three Months Ended September 30,
2013
2014
(Unaudited)
(In�thousands,�except�per�share�data)
Net revenue before provision for uncollectibles
$
1,115,885

$
1,223,104

Provision for uncollectibles
509,758

510,863

Net revenue
606,127

712,241

Cost of services rendered (exclusive of depreciation and amortization shown separately below)
Professional service expenses
472,027

546,346

Professional liability costs
17,467

29,564

General and administrative expenses (includes contingent purchase and other acquisition compensation expense of $(1,602) and $3,086 in 2013 and 2014, respectively)
51,567

61,643

Other (income) expense, net
(1,384
)
292

Depreciation
4,281

5,826

Amortization
8,665

12,991

Interest expense, net
3,827

3,921

Transaction costs
1,017

3,107

Earnings before income taxes
48,660

48,551

Provision for income taxes
19,184

20,895

��Net earnings
29,476

27,656

Net earnings attributable to noncontrolling interests
49

70

Net earnings attributable to Team Health Holdings, Inc.
$
29,427

$
27,586

Net earnings per share of Team Health Holdings, Inc.
Basic
$
0.42

$
0.39

Diluted
$
0.41

$
0.38

Weighted average shares outstanding
Basic
69,384

70,627

Diluted
71,209

72,331

Other comprehensive (loss) earnings, net of tax:
Net change in fair value of investments, net of tax of $(34) and $89 for 2013 and 2014, respectively
(63
)
165

Comprehensive earnings
29,413

27,821

Comprehensive earnings attributable to noncontrolling interests
49

70

Comprehensive earnings attributable to Team Health Holdings, Inc.
$
29,364

$
27,751

See accompanying notes to consolidated financial statements.


6




TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Nine Months Ended September 30,
2013
2014
(Unaudited)
(In�thousands,�except�per�share�data)
Net revenue before provision for uncollectibles
$
3,185,040

$
3,493,892

Provision for uncollectibles
1,423,235

1,464,931

Net revenue
1,761,805

2,028,961

Cost of services rendered (exclusive of depreciation and amortization shown separately below)
Professional service expenses
1,379,568

1,557,696

Professional liability costs
55,199

73,482

General and administrative expenses (includes contingent purchase and other acquisition compensation expense of $18,568 and $22,483 in 2013 and 2014, respectively)
166,617

195,842

Other income
(2,848
)
(3,457
)
Depreciation
12,559

15,315

Amortization
27,033

35,203

Interest expense, net
11,363

10,758

Transaction costs
1,590

5,734

Earnings before income taxes
110,724

138,388

Provision for income taxes
44,646

56,542

��Net earnings
66,078

81,846

Net earnings attributable to noncontrolling interests
143

212

Net earnings attributable to Team Health Holdings, Inc.
$
65,935

$
81,634

Net earnings per share of Team Health Holdings, Inc.
Basic
$
0.96

$
1.16

Diluted
$
0.93

$
1.13

Weighted average shares outstanding
Basic
68,760

70,209

Diluted
70,841

71,955

Other comprehensive (loss) earnings, net of tax:
Net change in fair value of investments, net of tax of $(637) and $663 for 2013 and 2014, respectively
(1,181
)
1,228

Comprehensive earnings
64,897

83,074

Comprehensive earnings attributable to noncontrolling interests
143

212

Comprehensive earnings attributable to Team Health Holdings, Inc.
$
64,754

$
82,862

See accompanying notes to consolidated financial statements.


7


TEAM HEALTH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2013
2014
(Unaudited)
(In thousands)
Operating Activities
Net earnings
$
66,078

$
81,846

Adjustments to reconcile net earnings:
Depreciation
12,559

15,315

Amortization
27,033

35,203

Amortization of deferred financing costs
764

758

Equity based compensation expense
6,988

12,693

Provision for uncollectibles
1,423,235

1,464,931

Deferred income taxes
(8,101
)
(21,367
)
Loss (gain) on disposal or sale of assets
79

(2,349
)
Equity in joint venture income
(2,723
)
(3,124
)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(1,434,125
)
(1,515,378
)
Prepaids and other assets
(4,209
)
(1,467
)
Income tax accounts
959

1,414

Accounts payable
(4,934
)
7,831

Accrued compensation and physician payable
2,031

13,694

Contingent purchase liabilities
13,934

(1,283
)
Other accrued liabilities
(5,774
)
712

Professional liability reserves
12,654

17,287

Net cash provided by operating activities
106,448

106,716

Investing Activities
Purchases of property and equipment
(11,563
)
(16,783
)
Sale of property and equipment
125

2,776

Cash paid for acquisitions, net
(22,432
)
(347,154
)
Purchases of investments by insurance subsidiary
(68,612
)
(68,527
)
Proceeds from sale of investments by insurance subsidiary
59,082

61,314

Net cash used in investing activities
(43,400
)
(368,374
)
Financing Activities
Payments on notes payable
(12,188
)
(12,188
)
Proceeds from revolving credit facility


316,100

Payments on revolving credit facility


(88,700
)
Stock issuance costs
(519
)


Payments of financing costs
(1
)
(1,146
)
Contributions from noncontrolling interests
600

262

�Distributions to noncontrolling interests


(122
)
Proceeds from the issuance of common stock under stock purchase plans
1,443

1,903

Proceeds from exercise of stock options
26,363

15,510

Tax benefit from exercise of stock options
12,022

11,347

Net cash provided by financing activities
27,720

242,966

Net increase (decrease) in cash and cash equivalents
90,768

(18,692
)
Cash and cash equivalents, beginning of period
41,240

32,331

Cash and cash equivalents, end of period
$
132,008

$
13,639

Supplemental cash flow information:
Interest paid
$
11,669

$
11,708

Taxes paid
$
39,899

$
65,525

See accompanying notes to consolidated financial statements.

8


TEAM HEALTH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Team Health Holdings, Inc. (the Company) and its wholly owned subsidiaries and affiliated medical groups and have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial reporting, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet of the Company at December�31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements. These financial statements and the notes thereto should be read in conjunction with the December�31, 2013 audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for fiscal year 2013 filed with the Securities and Exchange Commission (the SEC).
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Certain amounts for the prior year have been reclassified to conform to the current years presentation.
Note 2. Recently Adopted and Recently Issued Accounting Guidance

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASBs Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under U.S. GAAP. We have not yet determined the effects, if any, that adoption of this new accounting standard may have on our consolidated financial statements.

In August 2014, the FASB issued ASU N0. 2014-15,�"Presentation of Financial StatementsGoing Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern,"�which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entitys ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The adoption of this standards update is not expected to impact our consolidated financial statements.


9


Note 3. Acquisitions and Contingent Purchase Obligations
Acquisitions
In March 2014, the Company completed the acquisition of an emergency medicine staffing business located in West Virginia and acquired certain assets of a medical staffing group that provides emergency medicine staffing services to a hospital located in California. In April 2014, the Company acquired certain assets of an emergency medicine staffing business located in South Carolina. In May 2014, the Company acquired certain assets of an emergency medicine staffing business located in Michigan. In June 2014, the Company acquired certain assets of an emergency medicine staffing business located in Tennessee. In August 2014, the Company acquired certain assets of an emergency medicine staffing business located in Missouri. In September 2014, the Company acquired certain assets of two emergency medicine staffing businesses located in New Jersey and South Carolina. In addition, the Company completed the acquisition of an emergency medicine staffing business located in Michigan. The Company also acquired certain assets of a medical staffing group that provides anesthesia staffing services located in Nebraska and completed the acquisition of an anesthesia staffing business located in Florida. These acquisitions have expanded the Companys presence in emergency medicine and anesthesia staffing in those respective markets. The results of operations of the acquired businesses have been included in the Companys consolidated financial statements beginning on the acquisition date.
The purchase price for these acquisitions was allocated, based on managements estimates, in accordance with ASC Topic 805, Business Combinations (ASC 805). The Companys purchase price allocation for business combinations completed during recent periods is preliminary and may be subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.The purchase price for these acquisitions completed during the nine months ended September�30, 2014 was allocated as shown in the table below (in thousands):
Accounts receivable, net
$
15,857

Prepaid expenses and other assets
440

Property and equipment, net
187

Other intangibles (consisting of physician and hospital agreements)
169,761

Goodwill (of which $124.8 million was tax deductible)
192,527

Accounts payable
(52
)
Accrued compensation and physician payable
(13,978
)
Other accrued liabilities
(3,350
)
Deferred income taxes
(14,238
)
Consideration paid, net of cash and cash equivalents of $407
$
347,154


10



The following unaudited pro forma information combines the consolidated results of operations of the Company and the acquisitions completed during 2013 and 2014 as if the transactions had occurred on January 1, 2013 (in thousands, except for per share data):
Nine Months Ended September 30,
2013

2014
Net revenues
$
1,936,417

$
2,151,685

Net earnings attributable to Team Health Holdings, Inc.
78,988

92,620

Net earnings per share of Team Health Holdings, Inc.
������Basic
$
1.15

$
1.32

������Diluted
$
1.12

$
1.29

Weighted average shares outstanding:
������Basic
68,760

70,209

������Diluted
70,841

71,955

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable and do not necessarily represent results that would have occurred if the acquisitions had taken place at the beginning of the periods, nor are they indicative of the future results of these combined operations.

During October 2014, the Company completed the acquisitions of the operations of an emergency medicine staffing business located in Ohio, an inpatient service staffing business located in California and a scribes services company located in Texas. These acquisitions have expanded the Company's presence in emergency medicine and inpatient service staffing in those respective markets as well as provided an entrance into the scribes services market. The Company is still in the process of completing the purchase price allocation for these acquisitions. Consideration paid for these October acquisitions was $194.3 million. In addition, the Company estimates it may have to pay $35.4 million in future contingent payments for these acquisitions. These payments will be made should each of the acquired operations achieve the financial targets or certain contract terms as agreed to in their respective acquisition agreements, including the requirements for continuing employment.
Contingent Purchase Obligations
In accordance with ASC 805, when contingent payments are tied to continuing employment, such amounts are recognized ratably over the defined performance period as compensation expense which is included as a component of general and administrative expense (and parenthetically disclosed with other acquisition-related compensation expense) in the results of the Companys operations. The payment of contingent purchase obligations is included as a component of operating cash flows.
As of September�30, 2014, the Company estimates it may have to pay $33.4 million (including $9.3 million related to transactions completed during 2014) in future contingent payments for acquisitions made prior to September�30, 2014 based upon the current projected performance of the acquired operations of which $18.3 million is recorded as a liability in other liabilities and other non-current liabilities on the Companys consolidated balance sheet. The remaining estimated liability of $15.1 million will be recorded as contingent purchase compensation expense over the remaining performance periods. The current estimate of future contingent payments could increase or decrease depending upon the actual performance of the acquisition over the respective performance periods. These payments will be made should the acquired operations achieve the financial targets or certain contract terms as agreed to in the respective acquisition agreements, including the requirements for continuing employment. When measured on a recurring basis, this liability is considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.
The changes to the Companys accumulated contingent purchase liability for the nine months ended September�30, 2014 are as follows (in thousands):
Contingent purchase liability at December 31, 2013
$
17,488

Payments
(21,940
)
Contingent purchase and other acquisition compensation expense recognized
20,657

Contingent purchase liability recognized at acquisition date
2,125

Contingent purchase liability at September 30, 2014
$
18,330



11


The changes to the Companys prepaid contingent purchase liability for the nine months ended September�30, 2014 are as follows (in thousands):
Prepaid contingent purchase liability at December 31, 2013
$
1,826

Contingent purchase compensation expense recognized
1,826

Prepaid contingent purchase liability at September 30, 2014
$


Estimated unrecognized contingent purchase compensation expense as of September�30, 2014 is as follows (in thousands):
For the remainder of the year ended December 31, 2014
$
3,291

For the year ended December 31, 2015
8,153

For the year ended December 31, 2016
3,433

For the year ended December 31, 2017
222

$
15,099

In the nine months ended September�30, 2013 and 2014, the Company recognized transaction costs of $1.6 million and $5.7 million, respectively, which related to external costs associated with due diligence and acquisition activity.
Note 4. Fair Value Measurements
The Company applies the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures, (ASC Topic 820), in determining the fair value of its financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
ASC Topic 820 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level�1
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level�2
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level�3
Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The following table provides information on those assets and liabilities the Company currently measures at fair value on a recurring basis as of December�31, 2013 and September�30, 2014 (in thousands):
Carrying Amount in Consolidated Balance Sheet December 31, 2013
Fair Value December 31, 2013
Fair�Value
Level 1
Fair�Value
Level�2
Fair�Value
Level�3
Investments of insurance subsidiary:
Money market funds
$
7,909

$
7,909

$
7,909

$


$


U. S. Treasury securities
1,001

1,001



1,001



Municipal bonds
74,663

74,663



74,663



Corporate bonds
508

508



508



Total investments of insurance subsidiary
$
84,081

$
84,081

$
7,909

$
76,172

$


Supplemental employee retirement plan investments:
Mutual funds
$
28,545

$
28,545

$


$
28,545

$



12


Carrying Amount in Consolidated Balance Sheet September 30, 2014
Fair Value September 30, 2014
Fair�Value
Level 1
Fair�Value
Level�2
Fair�Value
Level�3
Investments of insurance subsidiary:
Money market funds
$
10,190

$
10,190

$
10,190

$


$


U. S. Treasury securities
1,002

1,002



1,002



Municipal bonds
81,991

81,991



81,991



Total investments of insurance subsidiary
$
93,183

$
93,183

$
10,190

$
82,993

$


Supplemental employee retirement plan investments:
Mutual funds
$
32,364

$
32,364

$


$
32,364

$


The Companys insurance subsidiary investments are valued using market prices on both active markets (Level�1)�and less active markets (Level�2). Level�1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level�2 investment valuations are obtained from readily available pricing sources for comparable investment or identical investments in less active markets. The fair values of the Companys supplemental employee retirement investments are based on quoted prices. See Note 5 for more information regarding the Companys investments.
In addition to the preceding disclosures prescribed by the provisions of ASC Topic 820, ASC Topic 825 Financial Instruments requires the disclosure of the estimated fair value of financial instruments. The Companys short term financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.
The fair value of the Company's debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities (Level 2). At September�30, 2014, the estimated fair value of the Companys outstanding debt was $701.0 million compared to a carrying value of $716.8 million.
Note 5. Investments
Investments are comprised of securities held by the Companys captive insurance subsidiary and by the Company in connection with its participant directed supplemental employee retirement plan. Investments held by the Companys captive insurance subsidiary are classified as available-for-sale securities. The unrealized gains or losses of investments held by the Companys captive insurance subsidiary are included in accumulated other comprehensive earnings as a separate component of shareholders equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such securities until their full cost can be recovered, in which case such securities are written down to fair value and the loss is charged to current period earnings.

The investments held by the Company in connection with its participant directed supplemental employee retirement plan are classified as trading securities; therefore, changes in fair value associated with these investments are recognized as a component of earnings.

13


At December�31, 2013 and September�30, 2014, amortized cost basis and aggregate fair value of the Companys available-for-sale securities by investment type were as follows (in thousands):
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2013
Money market funds
$
7,909

$


$


$
7,909

U. S. Treasury securities
1,005



(4
)
1,001

Municipal bonds
73,981

1,560

(878
)
74,663

Corporate bonds
500

8



508

$
83,395

$
1,568

$
(882
)
$
84,081

September 30, 2014
Money market funds
$
10,190

$


$


$
10,190

U. S. Treasury securities
1,004



(2
)
1,002

Municipal bonds
79,415

2,651

(75
)
81,991

$
90,609

$
2,651

$
(77
)
$
93,183

During the first quarter of 2014, the Company identified an immaterial error in the presentation of amortized cost basis and aggregate fair value of the Companys available-for-sale securities by contractual maturities as of December 31, 2013. The effect of these immaterial adjustments, as previously reported, is as follows (in thousands):
Previously reported:
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2013
Due in less than one year
$
8,084

$
1

$


$
8,085

Due after one year through five years
40,465

1,093

(221
)
41,337

Due after five years through ten years
32,066

473

(505
)
32,034

Due after ten years
2,780

1

(156
)
2,625

Total
$
83,395

$
1,568

$
(882
)
$
84,081

Adjustments:
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2013
Due in less than one year
$
5,367

$
90

$


$
5,457

Due after one year through five years
6,082

273

(119
)
6,236

Due after five years through ten years
(10,596
)
(363
)
65

(10,894
)
Due after ten years
(853
)


54

(799
)
Total
$


$


$


$



14


At December�31, 2013, as adjusted, and September�30, 2014, the amortized cost basis and aggregate fair value of the Companys available-for-sale securities by contractual maturities were as follows (in thousands):
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2013
Due in less than one year
$
13,451

$
91

$


$
13,542

Due after one year through five years
46,547

1,366

(340
)
47,573

Due after five years through ten years
21,470

110

(440
)
21,140

Due after ten years
1,927

1

(102
)
1,826

Total
$
83,395

$
1,568

$
(882
)
$
84,081

September 30, 2014
Due in less than one year
$
16,217

$
57

$


$
16,274

Due after one year through five years
54,869

1,842

(55
)
56,656

Due after five years through ten years
17,601

716



18,317

Due after ten years
1,922

36

(22
)
1,936

Total
$
90,609

$
2,651

$
(77
)
$
93,183

A summary of the Companys temporarily impaired available-for-sale investment securities as of December�31, 2013 and September�30, 2014 follows (in thousands):
Impaired Less
Than 12 Months
Impaired
Over 12 Months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2013
U.S. Treasury securities
$
1,001

$
(4
)
$


$


$
1,001

$
(4
)
Municipal bonds
28,939

(756
)
4,532

(122
)
33,471

(878
)
Total investment
$
29,940

$
(760
)
$
4,532

$
(122
)
$
34,472

$
(882
)
September 30, 2014
U. S. Treasury securities
$
1,002

$
(2
)
$


$


$
1,002

$
(2
)
Municipal bonds
$
1,624

$
(8
)
$
3,762

$
(67
)
$
5,386

$
(75
)
Total investment
$
2,626

$
(10
)
$
3,762

$
(67
)
$
6,388

$
(77
)

The unrealized losses resulted from changes in market interest rates, not from changes in the probability of contractual cash flows. Because the Company has the ability and intent to hold the investments until a recovery of carrying value and full collection of the amounts due according to the contractual terms of the investments is expected, the Company does not consider these investments to be other-than-temporarily impaired at September�30, 2014.
During the nine months ended September�30, 2014, the Company recorded a gain of approximately $0.1 million on the sale of specifically identified investments.
As of September�30, 2014, and December�31, 2013, the investments related to the participant directed supplemental employee retirement plan totaled $32.4 million and $28.5 million, respectively, and are included in other assets in the accompanying consolidated balance sheets. The net trading gains on those investments for the nine months ended on September�30, 2014 and September�30, 2013 that were still held by the Company as of September�30, 2014 and September�30, 2013 are as follows (in thousands):

15


2013
2014
Net gains and losses recognized during the nine months ended September 30, 2013 and 2014, respectively on trading securities
$
1,322

$
(414
)
Less: Net gains and losses recognized during the period on trading securities sold during the nine months ended September 30, 2013 and 2014, respectively
123

19

Unrealized gains and losses recognized on trading securities still held at September 30, 2013 and 2014, respectively
$
1,199

$
(433
)
The Company has an investment in a variable interest entity that is a provider of hospital-based telemedicine consultations. The Company has determined that it is not the primary beneficiary of the entity, as it does not have the power to direct the activities that most significantly impact economic performance of the entity nor the responsibility to absorb a majority of the expected losses and therefore, the entity is not consolidated and the investment is accounted for under the cost method. The determination of whether the Company is the primary beneficiary was performed at the time of our initial investment and is performed at the date of each subsequent reporting period. This investment is accounted for as a cost method investment, which is classified in other assets in the accompanying consolidated balance sheets and measured at fair value on a nonrecurring basis. The fair value of the Company's cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. As of December�31, 2013 and September�30, 2014, the carrying amount and maximum exposure to loss of this investment was $2.0 million. When measured on a recurring basis, this investment is considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.

Note 6. Net Revenue
Net revenue consists of fee for service revenue, contract revenue and other revenue. The Companys net revenue is principally derived from the provision of healthcare staffing services to patients within healthcare facilities and is recorded in the period the services are rendered. Under the fee for service arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. Fee for service revenue reflects gross fee for service charges less contractual allowances and policy discounts, where applicable. Contractual adjustments represent the Companys estimate of discounts and other adjustments to be recognized from gross fee for service charges under contractual payment arrangements, primarily with commercial, managed care and governmental payment plans such as Medicare and Medicaid when the Companys providers participate in such plans. Contractual adjustments are not reflected in self-pay fee for service revenue. Contract revenue represents revenue generated under contracts in which the Company provides physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-to hourly rates, monthly contractual rates, or certain operational or financial metrics. Revenue in such cases is recognized as the hours are worked by the Companys affiliated staff and contractors or as metrics are realized. Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. The Company also records a provision for uncollectible accounts based primarily on historical collection experience to record accounts receivables at the estimated amounts expected to be collected.

16


Net revenue for the three and nine months ended September�30, 2013 and 2014 consisted of the following (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Medicare
$
115,162

19.0
�%
$
131,562

18.5
�%
$
345,213

19.6
�%
$
384,570

19.0
�%
Medicaid
101,406

16.7

130,368

18.3

276,932

15.7

356,043

17.5

Commercial and managed care
272,612

45.0

340,183

47.8

790,898

44.9

948,437

46.7

Self-pay
425,610

70.2

414,317

58.2

1,193,074

67.7

1,198,063

59.0

Other
24,285

4.0

21,703

3.0

68,440

3.9

63,813

3.1

Unbilled
4,249

0.7

14,140

2.0

2,826

0.2

23,231

1.1

Net fee for service revenue before provision for uncollectibles
943,324

155.6

1,052,273

147.7

2,677,383

152.0

2,974,157

146.6

Contract revenue before provision for uncollectibles
161,630

26.7

161,278

22.7

478,681

27.2

489,323

24.1

Other
10,931

1.8

9,553

1.3

28,976

1.6

30,412

1.5

Net revenue before provision for uncollectibles
1,115,885

184.1

1,223,104

171.7

3,185,040

180.8

3,493,892

172.2

Provision for uncollectibles
(509,758
)
(84.1
)
(510,863
)
(71.7
)
(1,423,235
)
(80.8
)
(1,464,931
)
(72.2
)
Net revenue
$
606,127

100.0
�%
$
712,241

100.0
�%
$
1,761,805

100.0
�%
$
2,028,961

100.0
�%
The Company employs several methodologies for determining its allowance for uncollectibles depending on the nature of the net revenue before provision for uncollectibles recognized. The Company initially determines gross revenue for its fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in estimated net revenue before provision for uncollectibles. Net revenue before provision for uncollectibles is then reduced for managements estimate of uncollectible amounts. Fee for service net revenue represents estimated cash to be collected from such patient visits and is net of managements estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately eleven million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each fee for service contract by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by the Companys billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contracts accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenue is billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances are prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon periodic reviews of specific accounts and invoices once it is concluded that such amounts are not likely to be collected. Approximately 98% of the Companys allowance for doubtful accounts is related to receivables for fee for service patient visits. The principal exposure for uncollectible fee for service visits is centered in self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance. While the Company does not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of September�30, 2014 was equal to approximately 92% of outstanding self-pay fee for service patient accounts. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2013 and 2014.

17


Note 7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill during the year ended December�31, 2013 and the nine months ended September�30, 2014 were as follows (in thousands):
Goodwill
$
482,179

Accumulated impairment loss
(144,579
)
Additions through 2013 acquisitions
90,711

Balance, December 31, 2013
$
428,311

Goodwill
$
572,890

Accumulated impairment loss
(144,579
)
Additions through 2014 acquisitions
192,527

Balance, September 30, 2014
$
620,838


The following is a summary of intangible assets and related amortization as of December�31, 2013 and September�30, 2014 (in thousands):

Gross�Carrying
Amount
Accumulated
Amortization
As of December 31, 2013:
Contracts
$
248,110

$
(83,441
)
Other
12,570

(4,061
)
Total
$
260,680

$
(87,502
)
As of September 30, 2014:
Contracts
$
403,688

$
(108,909
)
Other
19,185

(6,229
)
Total
$
422,873

$
(115,138
)
Aggregate amortization expense:
For the nine months ended September 30, 2014
$
35,203

Estimated amortization expense:
For the remainder of the year ended December 31, 2014
$
17,667

For the year ended December�31, 2015
68,624

For the year ended December�31, 2016
63,359

For the year ended December�31, 2017
57,522

For the year ended December�31, 2018
45,524

For the years ended December�31, 2019 and thereafter
55,039

Contract intangibles are amortized over their estimated life, which is approximately three to six years. As of September�30, 2014, the weighted average remaining amortization period for intangible assets was 4.3 years.

18


Note 8. Long-Term Debt
Long-term debt as of September�30, 2014 consisted of the following (in thousands):
Term Loan A Facility
$
247,500

Term Loan B Facility
241,875

Revolving Credit Facility
227,400

Interim Revolving Credit Facility


716,775

Less current portion
(250,525
)
$
466,250

As of September�30, 2014, the Company's senior secured credit facilities consist of a $275.0 million Term Loan A Facility, a $250.0 million Term Loan B Facility, a $250.0 million Revolving Credit Facility, and a $100.0 million Interim Revolving Credit Facility (the Credit Facility).
For the nine months ended September�30, 2014, the interest rate on Term Loan A Facility, any outstanding Revolving Credit Facility borrowings and the commitment fee applicable to undrawn revolving commitments was priced off a grid based upon the Companys first lien net leverage ratio. In the case of the Term Loan A Facility it was LIBOR +1.50% at September�30, 2014 and +1.75% at September�30, 2013. The interest rate on the Term Loan B Facility was LIBOR +2.75%, subject to a 1% LIBOR floor. The weighted average interest rate for the nine months ended September�30, 2014 was 1.75% for amounts outstanding under the Term A Loan Facility and 3.75% for the Term B Loan Facility. The interest rate for borrowings under the Revolving Credit Facility during the nine months ended September�30, 2014 was 3.75% and 0.35% in the case of unused revolving commitments.
The Company had $227.4 million of borrowings outstanding under the Revolving Credit Facility as of September�30, 2014, and the Company had $6.7 million of standby letters of credit outstanding against the Revolving Credit Facility commitment. There were no amounts outstanding under the Interim Revolving Credit Facility as of September�30, 2014.

On October 2, 2014, the Company entered into an amendment and restatement (the Amendment) to its senior secured credit facilities, which, among other things, (1) increased the existing Term Loan A Facility from $275.0 million to $600.0 million, (2) increased the Companys existing Revolving Credit Facility to $650.0 million, (3) extended the maturities of the Term Loan A Facility and the Revolving Credit Facility from November�1, 2017 to October�2, 2019, and (4) terminated the existing $100.0 million Interim Revolving Credit Facility. The maturity dates under the Credit Facility are subject to extension with lender consent according to the terms of the agreement. The Company used proceeds from borrowings under the Term Loan A Facility and the Revolving Credit Facility to repay in full the existing $250.0 million Term Loan B Facility and pay customary fees and expenses associated with the Amendment and Restatement Agreement, with remaining proceeds retained for other future general corporate purposes. The Company estimates it will recognize a $3.6 million loss on refinancing of debt in connection with this transaction during the fourth quarter of 2014.
The Credit Facility agreement contains both affirmative and negative covenants, including limitations on the Companys ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business and pay dividends, and requires the Company to comply with a maximum total leverage ratio, tested quarterly. At September�30, 2014, the Company was in compliance with all covenants under the senior credit facility agreement. The Credit Facility is secured by substantially all of the Companys U. S. subsidiaries assets.
Aggregate annual maturities of long-term debt as of September�30, 2014 are as follows (in thousands):
2014
$
250,525

2015
30,000

2016
23,125

2017 and thereafter
413,125



19


Note 9. Professional Liability Insurance
The Companys professional liability loss reserves included in other accrued liabilities and other non-current liabilities in the accompanying consolidated balance sheets consisted of the following (in thousands):
December�31,
2013
September�30,
2014
Estimated losses under self-insured programs
$
166,168

$
183,455

Estimated losses under commercial insurance programs
62,493

69,900

228,661

253,355

Less estimated payable within one year
75,785

64,789

$
152,876

$
188,566

The changes to the Companys estimated losses under self-insured programs as of September�30, 2014 were as follows (in thousands):
Balance, December 31, 2013
$
166,168

Reserves related to current period
40,214

Changes related to prior year reserves
7,088

Payments for current period reserves
(709
)
Payments for prior period reserves
(29,306
)
Balance, September 30, 2014
$
183,455

The Company provides for its estimated professional liability losses through a combination of self-insurance and commercial insurance programs. Losses under commercial insurance programs in excess of the limit of coverage remain as a self-insured obligation of the Company. A portion of the professional liability loss risks being provided for through self-insurance (claims-made basis) are transferred to and funded into a captive insurance company. The accounts of the captive insurance company are fully consolidated with those of the other operations of the Company in the accompanying consolidated financial statements.
The self-insurance components of our risk management program include reserves for future claims incurred but not reported (IBNR). As of December�31, 2013, of the $166.2 million of estimated losses under self-insured programs, approximately $100.2 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $66.0 million representing specific case reserves. Of the specific case reserves as of December�31, 2013, $2.4 million represented case reserves that had settled but not yet funded, and $63.6 million reflected unsettled case reserves.
As of September�30, 2014, of the $183.5 million of estimated losses under self-insurance programs, approximately $111.8 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $71.7 million representing specific case reserves. Of the specific case reserves as of September�30, 2014, $0.9 million represented case reserves that had been settled but not yet funded, and $70.8 million reflected unsettled case reserves.
The Companys provisions for losses under its self-insurance components are estimated using the results of periodic actuarial studies. Such actuarial studies include numerous underlying estimates and assumptions, including assumptions as to future claim losses, the severity and frequency of such projected losses, loss development factors and others. The Companys provisions for losses under its self-insured components are subject to subsequent adjustment should future actuarial projected results for such periods indicate projected losses greater or less than previously projected.
The Companys most recent actuarial valuation was completed in October 2014. The Company recorded an unfavorable adjustment to prior year professional liability reserves of $7.1 million during the third quarter of 2014 primarily as a result of the settlement of an excess medical malpractice verdict, a decline in the discount factor applied to professional liability reserves due to the lower interest rate environment in the quarter, and an increase in revised loss estimates for certain older years as reflected in the most recent actuarial report. The discount rate on professional liability reserves declined to 1.1% at September�30, 2014 from 1.4% at December�31, 2013.


20


Note 10. Contingencies
Litigation
We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.
On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Companys services at hospitals that are affiliated with Health Management Associates, Inc. (HMA) and any of HMAs affiliates. The Company is cooperating with the government in its investigation.
Healthcare Regulatory Matters
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action. From time to time, governmental regulatory agencies conduct inquiries and audits of the Companys practices. It is the Companys current practice and future intent to cooperate fully with such inquiries.
In addition to laws and regulations governing the Medicare and Medicaid programs, there are a number of federal and state laws and regulations governing such matters as the corporate practice of medicine and fee splitting arrangements, anti-kickback statutes, physician self-referral laws, false or fraudulent claims filing and patient privacy requirements. The failure to comply with any of such laws or regulations could have an adverse impact on our operations and financial results. It is managements belief that the Company is in substantial compliance in all material respects with such laws and regulations.
Healthcare Reform
The Patient Protection and Affordable Care Act (the PPACA), signed into law on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, collectively referred to as the Healthcare Reform Laws, significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court (the Supreme Court) upheld the constitutionality of the requirement in PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. The Supreme Court upheld the PPACA provision expanding Medicaid eligibility to new populations as constitutional, but only so long as the expansion of the Medicaid program is optional for the states. States that choose not to expand their Medicaid programs to newly eligible populations in PPACA can only lose the new federal Medicaid funding in PPACA but not their eligibility for existing federal Medicaid matching payments. While the ultimate impact of these laws and implementing regulations will not be known until all provisions are fully implemented, the Company believes that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. For the first nine months of 2014, we have realized a decline in the percentage of self-pay visits by our consolidated fee for service volume and an increase in the percentage of Medicaid visits that we believe is a result of healthcare reform. Other provisions, however, such as Medicare payment reforms and reductions that could reduce provider payments, may have an adverse effect on the reimbursement rates the Company receives for services provided by affiliated healthcare professionals.
Note 11. Share-based Compensation
Stock Incentive Plan
In May 2013 the Company's shareholders approved the Team Health Holdings, Inc. Amended and Restated 2009 Stock Incentive Plan (the Stock Plan) that amended the 2009 Stock Incentive Plan.
Purpose. The purpose of the Stock Plan is to aid in recruiting and retaining key employees, directors, consultants, and other service providers of outstanding ability and to motivate those employees, directors, consultants, and other service providers to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of options, stock appreciation rights and other stock-based awards.

21


Shares Subject to the Plan. The Stock Plan provides that the total number of shares of common stock that may be issued is 15,100,000, of which approximately 3,090,000 are available to grant as of September�30, 2014. Shares of the Companys common stock covered by awards that terminate or lapse without the payment of consideration may be granted again under the Stock Plan.

The following table summarizes the status of options under the Stock Plan as of September�30, 2014:
Shares
(in�thousands)
Weighted�Average
Exercise Price
Aggregate
Intrinsic�Value
(in thousands)
Weighted�Average
Remaining Life
in Years
Outstanding at beginning of year
5,062

$
20.33

$
127,681

7.1
Granted
501

47.58

Exercised
(922
)
16.70

15,406

Expired or forfeited
(91
)
23.41

Outstanding at end of period
4,550

$
24.00

$
154,638

6.6
Exercisable at end of period
2,701

$
18.29

$
107,250

6.1
Intrinsic value is the amount by which the stock price as of September�30, 2014 exceeds the exercise price of the options. The Company granted approximately 0.5 million options during the nine months ended September�30, 2014. The Company recorded stock option expense of approximately $8.6 million and $5.9 million during the nine months ended September�30, 2014 and September�30, 2013, respectively. As of September�30, 2014, the Company had approximately $16.5 million of unrecognized compensation expense, net of estimated forfeitures related to unvested options, which will be recognized over the remaining requisite service period. Fair value of the options granted in 2014 was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 1.6%, implied volatility of 35.1% and an expected life of the options of 5.25 years. The weighted average estimated fair value of options granted during 2014 was $16.27.
Restricted stock awards are grants of restricted stock and grants of restricted stock units that are not vested (Restricted Awards). During the nine months ended September�30, 2014, the Company granted only restricted stock units. The Company granted approximately 0.3 million shares of restricted awards under the Stock Plan to independent board members and certain members of management in 2014. The Company recorded restricted award expense of approximately $4.0 million and $1.0 million during the nine months ended September�30, 2014 and September�30, 2013, respectively. The Company had $14.0 million of expense remaining to be recognized over the requisite service period for these awards at September�30, 2014. The restricted awards generally vest annually over a three to four-year period for the grants made to the independent board members and management from the initial grant date.
A summary of changes in total outstanding unvested restricted stock awards for the nine months ended September�30, 2014 is as follows:
Shares
(in�thousands)
Outstanding at beginning of year
238

Granted


Vested
(67
)
Forfeited and expired
(4
)
Outstanding at September 30, 2014
167

Stock Purchase Plans
In May 2010, the Companys Board of Directors (the Board) adopted the 2010 Employee Stock Purchase Plan (ESPP) and the 2010 Nonqualified Stock Purchase Plan (NQSPP).
The ESPP provides for the issuance of up to 600,000 shares to the Companys employees. All eligible employees are granted identical rights to purchase common stock in each Board authorized offering under the ESPP. Rights granted pursuant to any offering under the ESPP terminate immediately upon cessation of an employees employment for any reason. In general, an employee may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 5% discount on shares purchased under the ESPP. Rights granted under the plan

22


are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in October�and April. As of September�30, 2014, contributions under the ESPP totaled $1.5 million. In October 2014, approximately 27,000 shares of the Companys common stock were issued to plan participants.
The NQSPP provides for the issuance of up to 800,000 shares to our independent contractors. All eligible contractors are granted identical rights to purchase common stock in each Board authorized offering under the NQSPP. Rights granted pursuant to any offering under the NQSPP terminate immediately upon cessation of a contractors relationship with the Company for any reason. In general, a contractor may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Contractors receive a 5% discount on shares purchased under the NQSPP. Rights granted under the NQSPP are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in October�and April. As of September�30, 2014, contributions under the NQSPP totaled $0.6 million. In October 2014, approximately 11,000 shares of the Companys common stock were issued to plan participants.
Note 12. Earnings Per Share
The Company computes basic earnings per share using the weighted average number of shares outstanding. The Company computes diluted earnings per share using the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options, restricted awards, and stock purchase plans. The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September�30, 2013 and 2014 (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Net earnings attributable to Team Health Holdings, Inc. (numerator for basic and diluted earnings per share)
$
29,427

$
27,586

$
65,935

$
81,634

Denominator:
Weighted average shares outstanding
69,384

70,627

68,760

70,209

Effect of dilutive securities:
Stock options
1,784

1,524

1,948

1,517

Restricted awards
39

178

131

227

Stock purchase plans
2

2

2

2

Shares used for diluted earnings per share
71,209

72,331

70,841

71,955

Basic net earnings per share of Team Health Holdings, Inc.
$
0.42

$
0.39

$
0.96

$
1.16

Diluted net earnings per share of Team Health Holdings, Inc.
$
0.41

$
0.38

$
0.93

$
1.13

Securities excluded from diluted earnings per share of Team Health Holdings, Inc. because they were antidilutive:
Stock options
565

488

278

793

Restricted awards
11







Note 13. Noncontrolling Interests in Consolidated Entity
In November 2012, the Company entered into a joint venture to provide administrative management and billing services to certain existing urgent care clinics the Company operates. The joint venture partner contributed $0.5 million in November 2012, $0.6 million in August 2013, and $0.2 million in May 2014 to the Company for its interest. In May 2014, in accordance with the joint venture agreement, the Company distributed proceeds of $0.1 million to the joint venture partner. The consolidated financial statements include all assets, liabilities, revenues and expenses of the less than 100% owned entity that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of this entity.
In June 2014, the Company entered into a joint venture to provide administrative management and billing services to certain existing and planned urgent care clinics that the joint venture partner operates. The joint venture partner contributed $0.1 million in September 2014. The consolidated financial statements include all assets, liabilities, revenues and expenses of the less than 100% owned entity that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of this entity.

23


Note 14. Accumulated Other Comprehensive Earnings (Loss)
The changes in accumulated other comprehensive earnings related to available-for-sale securities were as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Balance at beginning of period
��
$
583

$
1,510

$
1,701

$
447

Other comprehensive earnings:
��
�����Net unrealized (loss) gain
��
(20
)
317

(1,728
)
2,024

�����Tax benefit (expense)
��
34

(89
)
637

(663
)
Total other comprehensive earnings (loss) before reclassifications, net of tax
��
14

228

(1,091
)
1,361

�����Net amount reclassified to earnings(1)
��
(77
)
(63
)
(90
)
(133
)
�����Tax expense(2)
��








Total amount reclassified from accumulated other comprehensive earnings, net of tax(3)
��
(77
)
(63
)
(90
)
(133
)
Total other comprehensive (loss) earnings
��
(63
)
165

(1,181
)
1,228

Balance at end of period
��
$
520

$
1,675

$
520

$
1,675


(1)
This amount was included in Other income on the accompanying Consolidated Statement of Comprehensive Earnings.
(2)
These amounts were included in Provision for income taxes on the accompanying Consolidated Statement of Comprehensive Earnings.
(3)
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
Note 15. Segment Reporting
The Company provides services through ten operating segments which are aggregated into two reportable segments, Healthcare Staffing and Other Services. The Healthcare Staffing segment, which is an aggregation of emergency medicine, anesthesia, specialty surgery and locums staffing, provides comprehensive healthcare service programs to users and providers of healthcare services on a fee for service as well as a cost plus or contract basis. The Other Services segment, is an aggregation of hospital medicine, military and government healthcare staffing, clinical services, nurse call center operations, After Hours Pediatrics as well as billing, collection and consulting services that provides a range of other comprehensive healthcare services. The operating segments included in the Other Services reportable segment, while similar in the types of services provided by those operating segments included in the Healthcare Staffing segment, do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation.
During the first quarter of 2014, the Company completed certain changes to its management reporting structure to better align its businesses with the Company objectives and operating strategies. These changes resulted in changes between the Company's existing operating segments.There were no changes made to the operating or reportable segments. The 2013 segment results have been reclassified to conform to the current year reporting of these businesses.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenue, where intercompany charges have been eliminated. Certain corporate expenses are not allocated to the segments. These unallocated expenses are corporate expenses, net interest expense, depreciation and amortization, transaction costs and income taxes. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.

24


The following table presents financial information for each reportable segment. Depreciation, amortization, management fee and other expenses separately identified in the consolidated statements of operations are included as a reduction to the respective segments operating earnings for each year below (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Net Revenue:
Healthcare Services
$
496,141

$
596,205

$
1,431,364

$
1,681,463

Other Services
109,986

116,036

330,441

347,498

$
606,127

$
712,241

$
1,761,805

$
2,028,961

Operating Earnings:
Healthcare Services
$
35,226

$
34,104

$
59,577

$
90,916

Other Services
4,086

6,350

22,109

22,017

General Corporate
13,175

12,018

40,401

36,213

$
52,487

$
52,472

$
122,087

$
149,146

Reconciliation of Operating Earnings to Net Earnings:
Operating earnings
$
52,487

$
52,472

$
122,087

$
149,146

Interest expense, net
3,827

3,921

11,363

10,758

Provision for income taxes
19,184

20,895

44,646

56,542

Net earnings
$
29,476

$
27,656

$
66,078

$
81,846


25


Item�2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States, based upon revenues and patient visits. Our regional operating models also include comprehensive programs for inpatient care, anesthesiology, inpatient specialty care, pediatrics and other healthcare services, principally within hospital departments and other healthcare treatment facilities. We have historically focused, however, primarily on providing outsourced services to hospital emergency departments, or EDs, which accounts for the majority of our net revenue.
Factors and Trends that Affect Our Results of Operations
In reading our financial statements, you should be aware of the following factors and trends we believe are important in understanding our financial performance.
General Economic Conditions
The lingering effects of the recent economic conditions may adversely impact our ability to collect for the services we provide as higher unemployment and reductions in commercial managed care and governmental healthcare enrollment may increase the number of uninsured and underinsured patients seeking healthcare at one of our staffed EDs or other clinical facilities. We could be negatively affected if the federal government or the states reduce funding of Medicare, Medicaid and other federal and state healthcare programs in response to increasing deficits in their budgets. Also, patient volume trends in our staffed hospital clinical departments could be adversely affected as individuals potentially defer or forgo seeking care in such departments due to the loss or reduction of coverage previously available to such individuals under commercial insurance or governmental healthcare programs.
Healthcare Reform
In 2010, the President of the United States and the U.S. Congress enacted significant reforms to the U.S. healthcare system. The Patient Protection and Affordable Care Act (PPACA) signed into law on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, collectively referred to as the Healthcare Reform Laws, significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court, responding to legal challenges by private citizens and 26 states, upheld the constitutionality of the requirement in PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power.
The Healthcare Reform Laws triggered numerous changes to the U.S. healthcare system, some of which have already gone into effect, including the individual mandate that went into effect on January 1, 2014, and some of which have been delayed until 2015 and beyond, including the requirement that employers provide health insurance to their employees or pay a per employee fine (the employer mandate).
While the ultimate impact of these laws and implementing regulations will not be known until all provisions are fully implemented, we believe that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. For the first nine months of 2014, we have realized a decline in the percentage of self-pay visits by our consolidated fee for service volume and an increase in the percentage of Medicaid visits that we believe is a result of healthcare reform. Other provisions, however, such as Medicare payment reforms and reductions that could reduce provider payments, may have an adverse effect on the reimbursement rates we receive for services provided by affiliated healthcare professionals.
Medicaid to Medicare Payment Parity
In November 2012, the Centers for Medicare and Medicaid Services (CMS) released final rule CMS-2370-F to implement the Healthcare Reform Laws' provision increasing Medicaid payments for primary care services furnished by certain physicians to the Medicare rates in 2013 and 2014. In December 2012, CMS released technical corrections to the final rule. Additionally, CMS has issued multiple FAQ documents since publication of the final rule. Furthermore, CMS has advised that, under the final rule, physicians may be eligible to receive increased Medicaid payments if they maintain a current board certification in internal medicine, family medicine, or pediatric medicine and greater than 60% of their billings are qualifying primary care evaluation and management codes. Certain states have imposed additional requirements that affect a physician's eligibility for the increased Medicaid payments even for those physicians who maintain an appropriate board certification,

26


including site of service restrictions that exclude primary care services rendered in a hospital emergency department.� We have received confirmation that a limited number of our providers qualify for the increased Medicaid rates in certain states and have received payments under this program. For the nine months ended September�30, 2014, we have recognized $27.7 million of net revenue from the Medicaid-Medicare parity program. There was $12.9 million of net revenue recognized in the nine months ended September�30, 2013 under this program. Absent legislative action by Congress, federal funding for the enhanced Medicaid payments will expire on December 31, 2014.
2014 Medicare Fee Schedule Changes
CMS reimburses for our affiliated physicians' services to Medicare beneficiaries based upon the rates in its Medicare Physician Fee Schedule (MPFS), which are updated each year based on a formula enacted under the Balanced Budget Act of 1997. Many private payors use the Medicare fee schedule to determine their own reimbursement rates. CMS's updating of the MPFS includes application of the Sustainable Growth Rate (SGR). This formula has yielded negative updates every year beginning in 2002, although CMS was able to take administrative steps to avoid a reduction in 2003 and Congress took a series of legislative actions to prevent reductions each year from 2004 through 2013. Congress has taken additional legislative actions to avoid a 24% reduction in Medicare payments to physicians in 2014 due to application of the SGR. Congress passed a three-month 0.5% increase in Medicare physician payments for January 1, 2014 through March 31, 2014, and then passed another bill that extends the 0.5% increase through December 31, 2014 and enacts no further increase for January 1, 2015 through March 31, 2015.
In November 2013, CMS released the 2014 MPFS Final Rule. Included in the final rule are changes in reimbursement that are overall budget neutral, but redistribute payments between different medical specialties. The final rule increased 2014 reimbursement rates to emergency medicine providers by approximately 2% and increased 2014 reimbursement rates to anesthesiologists by approximately 1%.
In November 2014, CMS released the 2015 MPFS Final Rule. Included in the rule are changes in reimbursement that are overall budget neutral, but redistribute payments between different medical specialties. We estimate that the rule will increase 2015 reimbursement rates to emergency medicine providers by approximately 1% and will not change reimbursement to anesthesia providers. These reimbursement rates do not take into account any reduction in payments associated with the application of the current SGR formula in 2015.
Any future reductions in amounts paid by government programs for physician services or changes in methods or regulations governing payment amounts or practices could cause our revenues to decline and we may not be able to offset reduced operating margins through cost reductions, increased volume or otherwise.
Budget Control Act's Medicare Sequestration
In August 2011, Congress enacted the Budget Control Act, which committed the U.S. government to significantly reduce the federal deficit over ten years. The Budget Control Act established caps on discretionary spending through 2021. It also established a Joint Committee of Congress (the Joint Committee) that was responsible for identifying an additional $1.5 trillion in deficit reductions. The Joint Committee was unable to identify the additional deficit reductions by the deadline, thereby triggering a second provision of the Budget Control Act called sequestration. Sequestration calls for automatic spending cuts of $1.2 trillion over a nine-year period, beginning January 2, 2013, split between defense and non-defense programs, including spending cuts to Medicare programs averaging 2%.
On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law. This legislation delayed the sequestration cuts that would have reduced Medicare payments by 2% until March 1, 2013. Since Congress and the White House failed to act by March 1, 2013, across-the-board cuts to Medicare payments took effect for Medicare services furnished on or after April 1, 2013. The Bipartisan Budget Act of 2013, passed in December 2013, extended the Medicare provider payment cuts under existing sequestration authority for two years, and Congressional action in February 2014 extended the sequestration cuts for an additional year. Unless Congress takes action to change the law, federal spending will be subject to sequestration until 2025.
Military and Government Healthcare Staffing
We are a provider of healthcare professionals serving patients eligible to receive care in government treatment facilities nationwide administered by the Department of Defense and beneficiaries of other government agencies in their respective clinical locations. Our revenues derived from military and government facility healthcare staffing totaled $92.3 million and $87.9 million for the nine months ended September�30, 2013 and 2014, respectively. These revenues are generated from

27


contracts that are subject to a competitive bidding process which primarily takes place during the third quarter of each year. A portion of the contracts awarded during the third quarter of 2013 have or will expire during 2014 and were subject to a competitive rebidding and award process. We were successful in retaining existing business and winning new bids in the estimated annualized amount of $110.9 million following the completion of the bidding process as of October 1, 2014. The estimated annualized amount of $110.9 million included $15.5 million awarded under one-year contracts. All contracts, including contracts with renewal options, can be terminated by the government at any time without notice. The outcome of any rebidding and award process is uncertain and we may not be awarded new contracts. Our contracts with renewal options may not be so renewed and the government may exercise its rights to terminate the contracts.
In addition, over the last several years the process of awarding military and government facility healthcare staffing contracts has developed a bias toward intentionally awarding certain contracts to qualified small and minority owned businesses. Although we participate in such small and minority owned business awards to the extent we can serve as a sub-contractor, our revenues from these arrangements are limited compared to a contract award we retain through the regular competitive bidding process. Approximately 26.3% and 27.6% of our military staffing revenue for each of the nine months ended September�30, 2013 and 2014, respectively, was derived through sub-contracting agreements with small business prime contractors.
2014 Acquisition Activity
In 2014, the Company realized an increase in the number of acquisitions and the total expenditures in support of acquisitions when compared to prior years. As of September�30, 2014, year to date acquisitions numbered 11, and the total aggregate paid, excluding any contingent payments, was $347.2 million. If appropriate acquisition opportunities continue to present themselves to the Company it will be able to sustain its current pace of acquisitions. However, given the inherent uncertainty in being presented appropriate acquisition opportunities, the Company might not continue acquisitions at the same pace.

Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and assumptions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Companys consolidated financial statements.
There have been no material changes to these critical accounting policies or their application during the nine months ended September�30, 2014.
Revenue Recognition
Net Revenues Before Provision for Uncollectibles. Net revenues before provision for uncollectibles consist of fee for service revenue, contract revenue and other revenue. Net revenues before provision for uncollectibles are recorded in the period services are rendered. Our net revenues before provision for uncollectibles are principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of our billing arrangements and how net revenues before provision for uncollectibles are recognized for each.
A significant portion (approximately 85% of our net revenue before provision for uncollectibles for the nine months ended September�30, 2014 and 84% for the year ended December�31, 2013) resulted from fee for service patient visits. Fee for service revenue represents revenue earned under contracts in which we bill and collect the professional component of charges for medical services rendered by our contracted and employed physicians. Under the fee for service arrangements, we bill patients for services provided and receive payment from patients or their third-party payors. Fee for service revenue is reported net of contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as net revenues before provision for uncollectibles in the financial statements. Fee for service revenue is recognized in the period that the services are rendered to specific patients and reduced immediately for the estimated impact of contractual allowances in the case of those patients having third-party payor coverage. The recognition of net revenue before provision for uncollectibles (gross charges less contractual allowances) from such visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to one of our billing centers for medical coding and entering into our billing systems and the verification of each patients submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Net revenue before provision for uncollectibles is recorded based on the information known at the time of entering such information into our billing systems as well as an estimate of the net revenue before provision for uncollectibles associated with medical charts for a given service period that

28


have not yet been processed into our billing systems. The above factors and estimates are subject to change. For example, patient payor information may change following an initial attempt to bill for services due to a change in payor status. Such changes in payor status have an impact on recorded net revenue before provision for uncollectibles due to differing payors being subject to different contractual allowance amounts. Such changes in net revenue before provision for uncollectibles are recognized in the period that such changes in the payor become known. Similarly, the actual volume of medical charts not processed into our billing systems may be different from the amounts estimated. Such differences in net revenue before provision for uncollectibles are adjusted the following month based on actual chart volumes processed.
Contract revenue represents revenue generated under contracts in which we provide physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. In these contractual arrangements we are the principal in the transaction and therefore recognize contract revenue on a gross basis. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed upon hourly rates. Revenue in such cases is recognized as the hours worked by our staff and contractors. Additionally, contract revenue includes supplemental revenue from hospitals where we may have a fee for service contract arrangement. Contract revenue for the supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either provide for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed, patient visits or actual patient collections compared to a minimum activity threshold. Such supplemental revenues based on variable arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors negotiated in each such arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement.
Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. Generally, such contracts consist of fixed monthly amounts with revenue recognized in the month services are rendered or as hourly consulting fees recognized as revenue as hours worked in accordance with such arrangements. Additionally, we derive a portion of our revenues from providing billing services that are contingent upon the collection of third-party physician billings by us on behalf of such customers. Revenues are not considered earned and therefore not recognized as revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.
Net Revenue. Net revenue reflects managements estimate of billed amounts to be ultimately collected. Management, in estimating the amounts to be collected resulting from approximately eleven million annual fee for service patient visits and procedures, considers such factors as prior contract collection experience, current period changes in payor mix and patient acuity indicators, reimbursement rate trends in governmental and private sector insurance programs, resolution of overprovision account balances, the estimated impact of billing system effectiveness improvement initiatives, and trends in collections from self-pay patients and external collection agencies. In developing our estimate of collections per visit or procedure, we consider the amount of outstanding gross accounts receivable by period of service and by payor class, but do not use an accounts receivable aging schedule to establish estimated collection valuations. Individual estimates of net revenues by contractual location are monitored and refreshed each month as cash receipts are applied to existing accounts receivable and other current trends that have an impact upon the estimated collections per visit are observed. Such estimates are substantially formulaic in nature. In the ordinary course of business we experience changes in our initial estimates of net revenues during the year following commencement of services. Such provisions and any subsequent changes in estimates may result in adjustments to our operating results with a corresponding adjustment to our accounts receivable allowance for uncollectibles on our balance sheet. Differences between amounts ultimately realized and the initial estimates of net revenues have historically not been material.
The table below summarizes our approximate payor mix as a percentage of consolidated fee for service volume for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Payor:
Medicare
24.4
%
24.7
%
24.4
%
24.9
%
Medicaid
25.1

29.6

25.7

28.7

Commercial and managed care
26.2

26.6

26.5

26.6

Self-pay
22.0

17.3

21.4

18.0

Other
2.3

1.8

2.0

1.8

Total
100.0
%
100.0
%
100.0
%
100.0
%

29



Estimated net revenue derived from commercial and managed care plans was approximately 39% in the nine months ended September�30, 2014 and 38% in 2013. Estimated net revenue derived from the Medicare program was approximately 17% of total net revenue in both the nine months ended September�30, 2014 and 2013. Estimated net revenue derived from the Medicaid program was approximately 11% and 10%, respectively, of total net revenue in the nine months ended September�30, 2014 and 2013. In addition, net revenue derived from within the Military Health System (the MHS), which is the U.S. militarys dependent healthcare program, and other government agencies was approximately 4% in the nine months ended September�30, 2014 and 5% in 2013.
Accounts Receivable. As described above and below, we determine the estimated value of our accounts receivable based on estimated cash collection run rates of estimated future collections by contract for patient visits under our fee for service revenue. Accordingly, we are unable to report the payor mix composition on a dollar basis of its outstanding net accounts receivable. However, a 1% change in the estimated carrying value of our net fee for service patient accounts receivable before consideration of the allowance for uncollectible accounts at September�30, 2014 could have an after tax effect of approximately $4.7 million on our financial position and results of operations. Our days revenue outstanding at December�31, 2013 and September�30, 2014 were 58.2 days and 59.9 days, respectively. The number of days outstanding will fluctuate over time due to a number of factors including the timing of cash collections and valuation adjustments recorded during the period and increases in average revenue per day that are primarily attributed to an increase in gross charges and patient volumes and increased pricing with managed care plans. Our allowance for doubtful accounts totaled $394.0 million as of September�30, 2014.

Approximately 98% of our allowance for doubtful accounts is related to gross fees for fee for service patient visits. Our principal exposure for uncollectible fee for service visits is centered in self-pay patients and in co-payments and deductibles from patients with insurance. While we do not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of September�30, 2014 was equal to approximately 92% of outstanding self-pay fee for service patient accounts.
The majority of our fee for service patient visits are for the provision of emergency care in hospital settings. Due to federal government regulations governing the provision of such care, we are obligated to provide emergency care regardless of the patients ability to pay or whether or not the patient has insurance or other third-party coverage for the costs of the services rendered. While we attempt to obtain all relevant billing information at the time emergency care services are rendered, there are numerous patient encounters where such information is not available at time of discharge. In such cases where detailed billing information relative to insurance or other third-party coverage is not available at discharge, we attempt to obtain such information from the patient or client hospital billing record information subsequent to discharge to facilitate the collections process. Collections at the time of rendering such services (emergency room discharge as an example) are not significant. Primary responsibility for collection of fee for service accounts receivable resides within our internal billing operations. Once a claim has been submitted to a payor or an individual patient, employees within our billing operations are responsible for the follow-up collection efforts. The protocol for follow-up differs by payor classification. For self-pay patients, our billing system will automatically send a series of dunning letters on a prescribed time frame requesting payment or the provision of information reflecting that the balance due is covered by another payor, such as Medicare or a third-party insurance plan. Generally, the dunning cycle on a self-pay account will run from 90 to 120 days. At the end of this period, if no collections or additional information is obtained from the patient, the account is no longer considered an active account and is transferred to a collection agency. Upon transfer to a collection agency, the patient account is written-off as a bad debt. Any subsequent cash receipts on accounts previously written-off are recorded as a recovery. For non-self-pay accounts, billing personnel will follow-up and respond to any communication from payors such as requests for additional information or denials until collection of the account is obtained or other resolution has occurred. At the completion of our collection cycle, selected accounts may be transferred to collection agencies under a contingent collection basis. The projected value of future contingent collection proceeds expected to be collected over a multi-year period are considered in the estimation of our overall accounts receivable valuation. For contract accounts receivable, invoices for services are prepared in our various operating locations and mailed to our customers, generally on a monthly basis. Contract terms under such arrangements generally require payment within 30 days of receipt of the invoice. Outstanding invoices are periodically reviewed and operations personnel with responsibility for the customer relationship will contact the customer to follow-up on any delinquent invoices. Contract accounts receivable will be considered as bad debt and written-off based upon the individual circumstances of the customer situation after all collection efforts have been exhausted, including legal action if warranted, and it is the judgment of management that the account is not expected to be collected.
Methodology for Computing Allowance for Doubtful Accounts. We employ several methodologies for determining our allowance for doubtful accounts depending on the nature of the net revenue before provision for uncollectibles recognized. We initially determine gross revenues for our fee for service patient visits based upon established fee schedule prices. Such gross revenues are reduced for estimated contractual allowances for those patient visits covered by contractual insurance

30


arrangements to result in net revenues before provision for uncollectibles. Net revenues before provision for uncollectibles are then reduced for our estimate of uncollectible amounts. Fee for service net revenue represents our estimated cash to be collected from such patient visits and is net of our estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately eleven million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each of our fee for service contracts by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by our billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contracts accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenue is billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon specific accounts and invoice periodic reviews once it is concluded that such amounts are not likely to be collected. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2013 and 2014.
Insurance Reserves
The nature of our business is such that it is subject to professional liability claims and lawsuits. Historically, to mitigate a portion of this risk, we have maintained insurance for individual professional liability claims with per incident and annual aggregate limits per physician for all incidents. Prior to March�12, 2003, we obtained such insurance coverage from commercial insurance providers. Subsequent to March�11, 2003, we have provided for a significant portion of our professional liability loss exposures through the use of a captive insurance subsidiary and through greater utilization of self-insurance reserves. Since March�12, 2003, the most significant cost element within our professional liability program has consisted of the actuarial estimates of losses by occurrence period. In addition to the estimated actuarial losses, other costs that are considered by management in the estimation of professional liability costs include program costs such as brokerage fees, claims management expenses, program premiums and taxes, and other administrative costs of operating the program, such as the costs to operate the captive insurance subsidiary. Net costs in any period reflect our estimate of net losses to be incurred in that period as well as any changes to our estimates of the reserves established for net losses of prior periods.
Our commercial insurance policy for professional liability losses for the period March�12, 1999 through March�11, 2003 included insured limits applicable to such coverage in the period. Under the terms of the agreement, we will make periodic premium payments to the commercial insurance company and the total aggregate limit of coverage under the policy will be increased by a portion of the premiums paid. We have agreed to fund additional payments which will be based upon the level of incurred losses relative to the aggregate limit of coverage at that time.
The accounts of the captive insurance subsidiary are fully consolidated with those of our other operations in the accompanying financial statements.
The estimation of medical professional liability losses is inherently complex. Medical professional liability claims are typically resolved over an extended period of time, often as long as ten years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. A report of actuarial loss estimates is prepared at least semi-annually. Managements estimate of our professional liability costs resulting from such actuarial studies is significantly influenced by assumptions and assessments regarding expectations of several factors. These factors include, but are not limited to: historical paid and incurred loss development trends; hours of exposure as measured by hours of physician and related professional staff services; trends in the frequency and severity of claims, which can differ significantly by jurisdiction due to the legislative and judicial climate in such jurisdictions; coverage limits of third-party insurance; the effectiveness of our claims management process; and the outcome of litigation. As a result of the variety of factors that must be considered by management, there is a risk that actual incurred losses may develop differently from estimates.
The underlying information that serves as the foundational basis for making our actuarial estimates of professional liability losses is our internal database of incurred professional liability losses. We have captured extensive professional liability loss data going back, in some cases, over twenty years, that is maintained and updated on an ongoing basis by our internal claims management personnel. Our database contains comprehensive incurred loss information for our existing operations as far back as fiscal year 1997 (reflecting the initial timeframe in which we migrated to a consolidated professional liability program concurrent with the consummation of several significant acquisitions), and, in addition, we possess additional loss data

31


that predates 1997 dates of occurrence for certain of our operations. Loss information reflects both paid and reserved losses incurred when we were covered by outside commercial insurance programs as well as paid and reserved losses incurred under our self-insurance program. Because of the comprehensive nature of the loss data and our comfort with the completeness and reliability of the loss data, this is the information that is used in the development of our actuarial loss estimates. We believe this database is one of the largest repositories of physician professional liability loss information available in our industry and provides us and our actuarial consultants with sufficient data to develop reasonable estimates of the ultimate losses under our self-insurance program. In addition to the estimated losses, as part of the actuarial process, we obtain revised payment pattern assumptions that are based upon our historical loss and related claims payment experience. Such payment patterns reflect estimated cash outflows for aggregate incurred losses by period based upon the occurrence date of the loss as well as the report date of the loss. Although variances have been observed in the actuarial estimate of ultimate losses by occurrence period between actuarial studies, the estimated payment patterns have shown much more limited variability. We use these payment patterns to develop our estimate of the discounted reserve amounts. The relative consistency of the payment pattern estimates provides us with a foundation in which to develop a reasonable estimate of the discount value of the professional liability reserves based upon the most current estimate of ultimate losses to be paid and the reasonable likelihood of the related cash flows over the payment period. Our estimated loss reserves were discounted at 1.4% as of December�31, 2013 and 1.1% as of September�30, 2014, which was the current weighted average Treasury rate, over a 10 year period at December�31, 2013 and September�30, 2014, which reflects the risk free interest rate over the expected period of claims payments.
In establishing our initial reserves for a given loss period, management considers the results of the actuarial loss estimates for such periods as well as assumptions regarding loss retention levels and other program costs to be incurred. On a semi-annual basis, we will review our professional liability reserves considering not only the reserves and loss estimates associated with the current period, but also the reserves established in prior periods based upon revised actuarial loss estimates. The actuarial estimation process employed utilizes a frequency severity simulation model to estimate the ultimate cost of claims for each loss period. The results of the simulation model are then validated by a comparison to the results from several different actuarial methods (paid loss development, incurred loss development, incurred Bornhuetter-Ferguson method, paid Bornhuetter-Ferguson method) for reasonableness. Each method contains assumptions regarding the underlying claims process. Actuarial loss estimates at various confidence levels capture the variability in the loss estimates for process risk but assume that the underlying model and assumptions are correct. Adjustments to professional liability loss reserves will be made as needed to reflect revised assumptions and emerging trends and data. Any adjustments to reserves are reflected in the current operations. Due to the size of our reserve for professional liability losses, even a small percentage adjustment to these estimates can have a material effect on the results of operations for the period in which the adjustment is made. Given the number of factors considered in establishing the reserves for professional liability losses, it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item. The actuarial reports provide a variety of loss estimates based upon statistical confidence levels reflecting the inherent uncertainty of the medical professional liability claims environment in which we operate. Initial year loss estimates are generally recorded using the actuarial expected loss estimate, but aggregate professional liability loss reserves may be carried at amounts in excess of the expected loss estimates provided by the actuarial reports due to the relatively short time period in which we have provided for our losses on a self-insured basis and the expectation that we believe additional adjustments to prior year estimates may occur as our reporting history and loss portfolio matures. In addition, we are subject to the risk of claims in excess of insured limits as well as unlimited aggregate risk of loss in certain loss periods. As our self-insurance program continues to mature and additional stability is noted in the loss development trends in the initial years of the program, we expect to continue to review and evaluate the carried level of reserves and make adjustments as needed.
Our most recent actuarial valuation was completed in October 2014. We recorded an unfavorable adjustment to prior year professional liability reserves of $7.1 million during the third quarter of 2014 primarily as a result of the settlement of an excess medical malpractice verdict, a decline in the discount factor applied to professional liability reserves due to the lower interest rate environment in the quarter, and an increase in revised loss estimates for certain older years as reflected in the most recent actuarial report. The discount rate on professional liability reserves declined to 1.1% at September�30, 2014 from 1.4% at December�31, 2013.

32


The following reflects the current reserves for professional liability costs as of September�30, 2014 (in millions) as well as the sensitivity of the reserve estimates at a 65%, 75% and 90% confidence level:
As reported
$
183.5

At 65% confidence level
$
184.0

At 75% confidence level
$
190.0

At 90% confidence level
$
203.8

It is not possible to quantify the amount of the change in our estimate of prior year losses by individual fiscal period due to the nature of the professional liability loss estimates that are provided to us on an occurrence period basis and the nature of the coverage that is obtained in the commercial insurance market which is generally underwritten on a claims made or report period basis. Even though we are self-insured for a significant portion of our risk, due to customer contracting requirements and state insurance regulations, we still, at times, must place coverage on a claims made or report period basis with commercial insurance carriers. In a limited number of markets, commercial coverage may be obtained on an occurrence basis. When evaluating the appropriate carrying level of our self-insured professional liability reserves, management considers the current estimates of occurrence period loss estimates as well as how such loss estimates and related future claims will interact with previous or current commercial insurance programs when projecting future cash flows. However, the complexity that is associated with multiple occurrence periods interacting with multiple report periods that contain risks and related reserves retained by us, as well as transferred to commercial insurance carriers, makes it impossible to allocate the change in prior year loss estimates to individual occurrence periods. Instead, we evaluate the future expected cash flows for all historical loss periods in the aggregate and compare such estimates to the current carrying value of our professional liability reserves. This process provides the basis for us to conclude that our reserves for professional liability losses are reasonable and properly stated. Management considers the results of actuarial studies when estimating the appropriate level of professional liability reserves and no adjustments to prior year loss estimates were made in periods where updated actuarial loss estimates were not available.
Due to the complexity of the actuarial estimation process, there are many factors, trends and assumptions that must be considered in the development of the actuarial loss estimates, and we are not able to quantify and disclose which specific elements are primarily contributing to changes in the revised loss estimates of historical occurrence periods when such adjustments may be recorded. However, we believe that our internal investments in enhanced risk management and claims management resources and initiatives, such as the employment of additional claims and litigation management personnel and practices, and an expansion of programs such as root cause loss analysis, early claim evaluation, and litigation support for insured providers have contributed to the generally stable trends in loss development estimates noted during the most recent periods.
Impairment of Intangible Assets
In assessing the recoverability of our intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

33


Results of Operations
The following discussion provides an analysis of our results of operations and should be read in conjunction with our unaudited consolidated financial statements. Net revenue is an estimate of future cash collections and as such it is a key measurement by which management evaluates performance of individual contracts as well as the Company as a whole. The following table sets forth the components of net earnings as a percentage of net revenue for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
Net revenue
100.0
�%
100.0
%
100.0
�%
100.0
�%
Professional service expenses
77.9

76.7

78.3

76.8

Professional liability costs
2.9

4.2

3.1

3.6

General and administrative expenses
8.5

8.7

9.5

9.7

Other (income) expense
(0.2
)


(0.2
)
(0.2
)
Depreciation
0.7

0.8

0.7

0.8

Amortization
1.4

1.8

1.5

1.7

Interest expense, net
0.6

0.6

0.6

0.5

Transaction costs
0.2

0.4

0.1

0.3

Earnings before income taxes
8.0

6.8

6.3

6.8

Provision for income taxes
3.2

2.9

2.5

2.8

Net earnings
4.9
�%
3.9
%
3.8
�%
4.0
�%
Net earnings attributable to noncontrolling interests

�%

%

�%

�%
Net earnings attributable to Team Health Holdings, Inc.
4.9
�%
3.9
%
3.7
�%
4.0
�%

Three Months Ended September�30, 2014 Compared to the Three Months Ended September�30, 2013
Net Revenue Before Provision for Uncollectibles. Net revenue before provision for uncollectibles in the three months ended September�30, 2014 increased $107.2 million, or 9.6%, to $1.22 billion from $1.12 billion in the three months ended September�30, 2013. The increase in net revenue before provision for uncollectibles resulted primarily from an increase in fee for service revenue of $108.9 million, partially offset by decreases in contract revenue of $0.4 million and other revenue of $1.4 million. In the three months ended September�30, 2014, fee for service revenue was 86.0% of net revenue before provision for uncollectibles compared to 84.5% in the same period of 2013, contract revenue was 13.2% of net revenue before provision before uncollectibles compared to 14.5% in the same period of 2013 and other revenue was 0.8% and 1.0% in 2014 and 2013, respectively. The increase in fee for service revenue before provision for uncollectibles was primarily a result of a 16.4% increase in total fee for service visits and procedures partially offset by a decrease in the rate per visit and procedure attributable to an increase in contractual adjustments related to changes in payor mix.
Provision for Uncollectibles. The provision for uncollectibles increased $1.1 million, or 0.2%, to $510.9 million in the three months ended September�30, 2014 from $509.8 million in the corresponding quarter in 2013. The provision for uncollectibles as a percentage of net revenue before provision for uncollectibles declined to 41.8% in the three months ended September�30, 2014 compared with 45.7% in the corresponding quarter of 2013. The provision for uncollectibles is primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The quarter over quarter increase in the provision for uncollectibles was due primarily to annual increases in gross fee schedules and increases in patient volumes and procedures. Changes in payor mix, particularly the level of self-pay fee for service visits, also have an impact on the provision for uncollectibles. For the three months ended September�30, 2014, self-pay fee for service visits were approximately 17.3% of the total fee for service visits compared to approximately 22.0% in the same quarter of 2013 which constrained the growth in the provision for uncollectibles between quarters.

Net Revenue. Net revenue in the three months ended September�30, 2014 increased $106.1 million, or 17.5%, to $712.2 million from $606.1 million in the three months ended September�30, 2013. Acquisitions contributed 10.1%, same contract revenue contributed 7.1%, and net sales growth contributed 0.3% of the increase in quarter over quarter growth in net revenue. Within the acquisitions category, new hospital contracting opportunities that were initially developed by our sales and marketing process contributed 2.9% of overall net revenue growth between quarters.

34


Total same contract revenue, which consists of contracts under management in both quarters, increased $43.2 million, or 7.9%, to $589.7 million in the three months ended September�30, 2014 compared to $546.5 million in the three months ended September�30, 2013. Increases in same contract estimated collections on fee for service visits of 5.3% provided a 4.3% increase in same contract revenue growth. Fee for service volume increased 5.6%, which contributed 3.9% of same contract revenue growth between quarters. The increase in the estimated collections per visit was primarily attributable to increased managed care and Medicare reimbursement rates and favorable changes in payor mix. Contract and other revenue constrained same contract revenue growth by 0.3%. Acquisitions contributed $61.1 million of growth in net revenue and net new contract revenue increased $1.8 million between quarters. The benefit from Medicaid parity revenue recognized in the third quarter of 2014 was $10.4 million, of which $8.5 million was same contract revenue. Because of the deferred recognition of parity revenue in 2013, the third quarter of 2013 reflects a year to date cumulative estimate of Medicaid parity revenue of $12.9 million, of which $12.2 million is same contract. The decline in total parity revenue between periods of $2.6 million constrained consolidated revenue growth by 0.4% while the decline in same contract Medicaid parity revenue of $3.7 million constrained same contract revenue growth by 0.7% between quarters.
We typically gain new contracts by replacing competitors at hospitals that currently outsource such services, obtaining new contracts from facilities that do not currently outsource and responding to contracting opportunities within the military healthcare system. Factors influencing new contracting opportunities include the depth and breadth of our service offerings, our reputation and experience, our ability to recruit and retain qualified clinicians, and pricing considerations when a subsidy or contract payment is required. Contracts are typically terminated due to economic considerations, a change in hospital administration or ownership, dissatisfaction with our service offerings or, primarily relating to our military staffing arrangements, at the end of the contract term.
The components of net revenue include revenue from contracts that have been in effect for prior periods (same contracts) and from net, new and acquired contracts during the periods, as set forth in the table below:
Three Months Ended September 30,
2013
2014
(in thousands)
Same contracts:
Fee for service revenue
$
399,411

$
444,216

Contract and other revenue
147,056

145,498

Total same contracts
546,467

589,714

New contracts, net of terminations:
Fee for service revenue
28,410

37,867

Contract and other revenue
24,152

16,507

Total new contracts, net of terminations
52,562

54,374

Acquired contracts:
Fee for service revenue
6,772

60,527

Contract and other revenue
326

7,626

Total acquired contracts
7,098

68,153

Consolidated:
Fee for service revenue
434,593

542,610

Contract and other revenue
171,534

169,631

Total net revenue
$
606,127

$
712,241


35


The following table reflects the visits and procedures included within fee for service revenues described in the table above:
Three Months Ended September 30,
2013
2014
(in thousands)
Fee for service visits and procedures:
Same contracts
2,430

2,566

New and acquired contracts, net of terminations
251

556

Total fee for service visits and procedures
2,681

3,122

Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $546.3 million in the three months ended September�30, 2014 compared to $472.0 million in the three months ended September�30, 2013, a increase of $74.3 million, or 15.7%. This increase between quarters is primarily related to our acquisitions and a 4.5% increase in same contract professional service expenses primarily associated with increases in provider compensation. Professional service expenses as a percentage of net revenue declined to 76.7% in the three months ended September�30, 2014 from 77.9% in the three months ended September�30, 2013.
Professional Liability Costs. Professional liability costs were $29.6 million in the three months ended September�30, 2014 compared to $17.5 million in the three months ended September�30, 2013, a increase of $12.1 million or 69.3%. Professional liability costs for the three months ended September 30, 2014 included an increase in prior year professional liability loss reserves of $7.1 million. Excluding the prior year reserve adjustment in the three months ended September 30, 2014, professional liability costs increased $5.0 million, or 28.7%. The increase was primarily attributed to an increase in provider hours including increases from acquisitions and an increase in allocation rates between periods. Excluding the prior year reserve adjustment in the three months ended September�30, 2014, professional liability costs as a percentage of net revenue were 3.2% and 2.9% in the third quarters of 2014 and 2013, respectively.
General and Administrative Expenses. General and administrative expenses increased $10.1 million, or 19.5%, to $61.6 million for the three months ended September�30, 2014 from $51.6 million in the three months ended September�30, 2013. General and administrative expenses included contingent purchase compensation expense of $3.1 million for the three months ended September�30, 2014 compared to a credit of $1.6 million of expense for the three months ended September�30, 2013. The credit in contingent purchase expense in the third quarter of 2013 was related to changes in our future contingent payment estimates. Excluding the contingent purchase compensation expense, general and administrative expense increased $5.4 million or 10.1%, to $58.6 million for the three months ended September�30, 2014 from $53.2 million in the three months ended September�30, 2013. The increase in general and administrative expenses was due primarily to the inflationary growth in salaries and new positions, increases in incentive and equity based compensation, recruiting costs and legal fees between periods. Total general and administrative expenses as a percentage of net revenue were 8.7% in the third quarter of 2014 and 8.5% in the same quarter in 2013. Excluding contingent purchase compensation expense, general and administrative expenses as a percentage of net revenue were 8.2% in the third quarter of 2014 compared to 8.8% in the third quarter of 2013.
Other (Expense) Income. In the three months ended September�30, 2014, we recognized other expense of $0.3 million compared to income of $1.4 million in the same quarter in 2013. The amounts recognized in 2014 and 2013 are primarily related to the change in the fair value of assets related to our non-qualified deferred compensation plan.
Depreciation. Depreciation expense was $5.8 million in the three months ended September�30, 2014 compared to $4.3 million for the three months ended September�30, 2013. The increase of $1.5 million was primarily due to capital expenditures in 2014 and 2013.
Amortization. Amortization expense was $13.0 million in the three months ended September�30, 2014 compared to $8.7 million for the three months ended September�30, 2013. The increase of $4.3 million was primarily a result of an increase in other intangibles recognized in connection with our acquisitions in 2014 and 2013.
Net Interest Expense. Net interest expense increased $0.1 million to $3.9 million in the three months ended September�30, 2014, compared to $3.8 million in the corresponding quarter in 2013, primarily due to an increase in revolver borrowings partially offset by lower outstanding term loan debt levels and related interest rates between quarters.

36


Transaction Costs. Transaction costs were $3.1 million for the three months ended September�30, 2014 and $1.0 million for the three months ended September�30, 2013. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the respective quarters.
Earnings before Income Taxes. Earnings before income taxes in the three months ended September�30, 2014 were $48.6 million compared to $48.7 million in the three months ended September�30, 2013.
Provision for Income Taxes. The provision for income taxes was $20.9 million in the three months ended September�30, 2014 compared to $19.2 million in the three months ended September�30, 2013.
Net Earnings. Net earnings were $27.7 million in the three months ended September�30, 2014 compared to $29.5 million in the three months ended September�30, 2013.
Net Earnings Attributable to Noncontrolling Interests. Earnings attributable to noncontrolling interests were $70,000 for the three months ended September�30, 2014 compared to $49,000 for the three months ended September�30, 2013.
Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $27.6 million and $29.4 million for the three months ended September�30, 2014 and September�30, 2013, respectively.
Nine Months Ended September�30, 2014 Compared to the Nine Months Ended September�30, 2013
Net Revenue Before Provision for Uncollectibles. Net revenue before provision for uncollectibles in the nine months ended September�30, 2014 increased $308.9 million, or 9.7%, to $3.49 billion from $3.19 billion in the nine months ended September�30, 2013. The increase in net revenue before provision for uncollectibles resulted primarily from increases in fee for service revenue of $296.8 million, contract revenue of $10.6 million and other revenue of $1.4 million. In the nine months ended September�30, 2014, fee for service revenue was 85.1% of net revenue before provision for uncollectibles compared to 84.1% in the same period of 2013, contract revenue was 14.0% of net revenue before provision before uncollectibles compared to 15.0% in the same period of 2013 and other revenue was 0.9% in 2014 and 0.9% in 2013. The increase in fee for service revenue before provision for uncollectibles was primarily a result of a 10.8% increase in total fee for service visits and procedures partially offset by a decrease in the rate per visit and procedure attributable to an increase in contractual adjustments related to changes in payor mix. The increase in contract revenue was due primarily to the impact of new and acquired contracts.
Provision for Uncollectibles. The provision for uncollectibles increased $41.7 million or 2.9%, to $1.46 billion in the nine months ended September�30, 2014 from $1.42 billion in the corresponding period in 2013. The provision for uncollectibles as a percentage of net revenue before provision for uncollectibles declined to 41.9% in the nine months ended September�30, 2014 compared with 44.7% in the corresponding period of 2013. The provision for uncollectibles is primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The period-over-period increase in the provision for uncollectibles was due primarily to annual increases in gross fee schedules and increases in patient volumes and procedures. Changes in payor mix, particularly the level of self-pay fee for service visits, also have an impact on the provision for uncollectibles. For the nine months ended September�30, 2014, self-pay fee for service visits were approximately 18.0% of the total fee for service visits compared to approximately 21.4% in the same period of 2013 which constrained the growth in the provision for uncollectibles between periods.

Net Revenue. Net revenue in the nine months ended September�30, 2014 increased $267.2 million or 15.2%, to $2.03 billion from $1.76 billion in the nine months ended September�30, 2013. Acquisitions contributed 8.9%, same contract revenue contributed 4.9%, and net sales growth contributed 1.4% of the increase in period-over-period growth in net revenue. Within the acquisitions category, new hospital contracting opportunities that were initially developed by our sales and marketing process contributed 2.1% of overall net revenue growth between years.
Total same contract revenue, which consists of contracts under management in both periods, increased $86.3 million, or 5.8%, to $1.58 billion in the nine months ended September�30, 2014 compared to $1.49 billion in the nine months ended September�30, 2013. Increases in same contract estimated collections on fee for service visits of 7.1% provided a 5.2% increase in same contract revenue growth, while fee for service volume increases of 1.5% increased same contract revenue growth by 1.1% between periods. The increase in the estimated collections per visit was primarily attributable to increased managed care and Medicare reimbursement rates, an increase in average patient acuity levels, favorable changes in payor mix and Medicaid parity revenue. Contract and other revenue constrained same contract revenue growth by 0.5%. Acquisitions contributed $156.7 million of growth in net revenue and net new contract revenue increased $24.2 million between periods. The 2014 year to date benefit for Medicaid parity revenue recognized is $27.7 million, of which $22.8 million is same contract revenue. Medicaid parity contributed 0.8% of consolidated revenue growth and 0.7% of same contract revenue growth between periods.

37


$12.9 million of Medicaid parity revenue was recognized in the nine months ended September�30, 2013, $11.8 million of which was same contract.
We typically gain new contracts by replacing competitors at hospitals that currently outsource such services, obtaining new contracts from facilities that do not currently outsource and responding to contracting opportunities within the military healthcare system. Factors influencing new contracting opportunities include the depth and breadth of our service offerings, our reputation and experience, our ability to recruit and retain qualified clinicians, and pricing considerations when a subsidy or contract payment is required. Contracts are typically terminated due to economic considerations, a change in hospital administration or ownership, dissatisfaction with our service offerings or, primarily relating to our military staffing arrangements, at the end of the contract term.
The components of net revenue include revenue from contracts that have been in effect for prior periods (same contracts) and from net, new and acquired contracts during the periods, as set forth in the table below:
Nine Months Ended September 30,
2013
2014
(in thousands)
Same contracts:
Fee for service revenue
$
1,078,500

$
1,172,550

Contract and other revenue
412,832

405,044

Total same contracts
1,491,332

1,577,594

New contracts, net of terminations:
Fee for service revenue
148,640

177,552

Contract and other revenue
91,492

86,760

Total new contracts, net of terminations
240,132

264,312

Acquired contracts:
Fee for service revenue
29,936

164,023

Contract and other revenue
405

23,032

Total acquired contracts
30,341

187,055

Consolidated:
Fee for service revenue
1,257,076

1,514,125

Contract and other revenue
504,729

514,836

Total net revenue
$
1,761,805

$
2,028,961

The following table reflects the visits and procedures included within fee for service revenues described in the table above:
Nine Months Ended September 30,
2013
2014
(in thousands)
Fee for service visits and procedures:
Same contracts
6,777

6,878

New and acquired contracts, net of terminations
1,230

1,997

Total fee for service visits and procedures
8,007

8,875

Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $1.56 billion in the nine months ended September�30, 2014 compared to $1.38 billion in the nine months ended September�30, 2013, an increase of $178.1 million, or 12.9%. This increase between periods is primarily related to our acquisitions and net new contract growth and a 3.3% increase in same contract professional service expenses primarily associated with increases in provider compensation. Professional service

38


expenses as a percentage of net revenue declined to 76.8% in the nine months ended September�30, 2014 from 78.3% in the nine months ended September�30, 2013.
Professional Liability Costs. Professional liability costs were $73.5 million in the nine months ended September�30, 2014 compared to $55.2 million in the nine months ended September�30, 2013, a increase of $18.3 million or 33.1%. Professional liability costs for the nine months ended September�30, 2014 included an increase in prior year professional liability loss reserves of $7.1 million. Excluding the prior year reserve adjustment in 2014, professional liability costs increased $11.2 million, or 20.3%, between periods. The increase was primarily attributed to an increase in provider hours including increases from acquisitions and an increase in allocation rates between periods. Excluding the prior year revenue adjustments in 2014, professional liability costs as a percentage of net revenue were 3.3% in the nine months ended September�30, 2014 and 3.1% in the nine months ended September�30, 2013.
General and Administrative Expenses. General and administrative expenses increased $29.2 million or 17.5% to $195.8 million for the nine months ended September�30, 2014 from $166.6 million in the nine months ended September�30, 2013. General and administrative expenses included contingent purchase compensation expense of $22.5 million for the nine months ended September�30, 2014 compared to $18.6 million of expense for the nine months ended September�30, 2013. Excluding the contingent purchase compensation expense, general and administrative expense increased $25.3 million or 17.1%, to $173.4 million for the nine months ended September�30, 2014 from $148.0 million in the nine months ended September�30, 2013. The increase in general and administrative expenses was due primarily to the inflationary growth in salaries and new positions, increases in incentive and equity based compensation, recruiting costs and legal fees between periods. Included in the increase in general and administrative costs between periods is accelerated recognition of equity compensation expense associated with changes in the vesting requirements on equity awards, primarily related to an amendment to the employment agreement of our Executive Chairman. Total general and administrative expenses as a percentage of net revenue were 9.7% in the nine months ended September�30, 2014 and 9.5% in the nine months ended September�30, 2013. Excluding contingent purchase compensation expense, general and administrative expenses as a percentage of net revenue were 8.5% in the nine months ended September�30, 2014 compared to 8.4% in the nine months ended September�30, 2013.
Other Income. In the nine months ended September�30, 2014, we recognized other income of $3.5 million compared to $2.8 million in the same period in 2013. The income recognized in 2014 includes a $2.3 million net gain on the sale and disposal of assets, including the sale of certain assets associated with our clinic operations and income related to the change in the fair value of assets related to our non-qualified deferred compensation plan. In 2013 the income recognized was primarily related to the change in the fair value of assets related to our non-qualified deferred compensation plan.
Depreciation. Depreciation expense was $15.3 million in the nine months ended September�30, 2014 compared to $12.6 million for the nine months ended September�30, 2013. The increase of $2.8 million was primarily due to capital expenditures in 2014 and 2013.
Amortization. Amortization expense was $35.2 million in the nine months ended September�30, 2014 compared to $27.0 million for the nine months ended September�30, 2013. The increase of $8.2 million was primarily a result of an increase in other intangibles recognized in connection with our acquisitions in 2014 and 2013.
Net Interest Expense. Net interest expense decreased $0.6 million to $10.8 million in the nine months ended September�30, 2014, compared to $11.4 million in the corresponding period in 2013, primarily due to lower outstanding term debt levels and related interest rates partially offset by increased revolver borrowings between periods.
Transaction Costs. Transaction costs were $5.7 million for the nine months ended September�30, 2014 and $1.6 million for the nine months ended September�30, 2013. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the respective periods.
Earnings before Income Taxes. Earnings before income taxes in the nine months ended September�30, 2014 were $138.4 million compared to $110.7 million in the nine months ended September�30, 2013.
Provision for Income Taxes. The provision for income taxes was $56.5 million in the nine months ended September�30, 2014 compared to $44.6 million in the nine months ended September�30, 2013.
Net Earnings. Net earnings were $81.8 million in the nine months ended September�30, 2014 compared to $66.1 million in the nine months ended September�30, 2013.
Net Earnings Attributable to Noncontrolling Interests. Earnings attributable to noncontrolling interests were $0.2 million for the nine months ended September�30, 2014 and $0.1 million in the nine months ended September�30, 2013.

39


Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $81.6 million and $65.9 million for the nine months ended September�30, 2014 and September�30, 2013, respectively.
Liquidity and Capital Resources
Our principal ongoing uses of cash are to meet working capital requirements, fund debt obligations and to finance our capital expenditures and acquisitions. We believe that our cash needs, other than for significant acquisitions, will continue to be met through the use of existing available cash, cash flows derived from future operating results and borrowings under our senior secured revolving credit facility.
Cash flow provided by operations for the nine months ended September�30, 2014 was $106.7 million compared to $106.4 million in the same period in 2013. There were $21.9 million contingent purchase price payments in the nine months ended September�30, 2014 and $0.5 million contingent purchase price payments in the same period in 2013. Excluding the impact of the contingent purchase payments, the operating cash flows in 2014 reflected an increase of $21.7 million, period over period, principally due to an increase in profitability. Cash used in investing activities in the nine months ended September�30, 2014 was $368.4 million compared to $43.4 million in the same period of 2013. The $325.0 million increase in cash used in investing activities was principally due to an increase in cash used for acquisitions between periods. Cash provided by financing activities in the nine months ended September�30, 2014 was $243.0 million compared to $27.7 million in the nine months ended September�30, 2013. The change in financing activities between periods was primarily related to net revolver drawings, partially offset by a decrease in proceeds from stock option exercises and the related tax benefit.
We spent $16.8 million in the first nine months of 2014 and $11.6 million in the first nine months of 2013 on capital expenditures. These expenditures were primarily for billing and information technology investments and related development projects along with projects in support of operational initiatives.
As of September�30, 2014, we had cash and cash equivalents of approximately $13.6 million and total outstanding debt of $716.8 million. There were no known liquidity restrictions or impairments on our cash and cash equivalents as of September�30, 2014. The outstanding debt as of September�30, 2014 includes borrowings under our revolving credit facility in the amount of $227.4 million incurred to fund our recently completed acquisitions. In September, we expanded our revolving credit facility by $100.0 million to $350.0 million and as of September 30, 2014 had $122.6 million of available borrowings under our revolving credit facilities (without giving effect to $6.7 million of undrawn letters of credit).
On�October 2, 2014, the Company amended and restated its existing credit facility. The Amendment and Restatement Agreement, among other things, (1) replaced and upsized the existing $275 million Tranche A Term Facility, (2) replaced and upsized the existing $250 million Revolving Credit Facility, (3) extended the maturities of the Tranche A Term Facility and the Revolving Credit Facility from November�1, 2017 to October�2, 2019 and (4) terminated the existing $100 million Interim Revolving Credit Facility. The Company used proceeds from borrowings under the Tranche A Term Facility and the Revolving Credit Facility to repay in full the existing $250 million Tranche B Term Facility , and pay customary fees and expenses associated with the Amendment and Restatement Agreement, with remaining proceeds retained for other future general corporate purposes. After giving effect to the Amendment and Restatement Agreement, the Tranche A Term Facility was increased to $600 million and the Revolving Credit Facility was increased to $650 million. See Note 8 of the accompanying consolidated financial statements for a discussion of our indebtedness.
The senior credit facility agreement contains both affirmative and negative covenants, including limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business and pay dividends, and requires us to comply with a maximum first lien net leverage ratio, tested quarterly. At September�30, 2014, we were in compliance with all covenants under the senior credit facility agreement. The senior credit facility is secured by substantially all of our U. S. subsidiaries assets.
Subject to any contractual restrictions, the Company and its subsidiaries, affiliates or significant shareholders may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Companys outstanding equity securities in privately negotiated or open market transactions, by tender offer or otherwise.

We have historically been an acquirer of other physician staffing businesses and related interests. For the nine months ended September�30, 2014, total net cash used in acquisitions, including contingent payments, was $369.1 million. As of September�30, 2014, we estimate future contingent payment obligations to be approximately $33.4 million for acquisitions made prior to September�30, 2014, which we expect to fund over a period of three years. $18.3 million was recorded as a liability on our balance sheet as of September�30, 2014, while the remaining estimated liability of $15.1 million will be recorded as contingent purchase and other acquisition compensation expense over the remaining performance period. See Note 3 of the accompanying consolidated financial statements for a discussion of our acquisitions and related contingent obligations.

40


We are currently in discussions with certain physician staffing businesses regarding potential acquisition opportunities. If we consummate any of these potential acquisitions, we would expect to fund such acquisitions using our existing cash, through borrowings under our revolving credit facility, or through the issuance of additional debt or equity.
Effective March�12, 2003, we began providing for professional liability risks in part through a captive insurance company. Prior to such date, we insured such risks principally through the commercial insurance market. The change in the professional liability insurance program initially resulted in increased cash flow due to the retention of cash formerly paid out in the form of insurance premiums to a commercial insurance company coupled with a long period (typically 2-4 years or longer on average) before cash payout of such losses occurs. A portion of such cash retained is retained within our captive insurance company and therefore is not immediately available for general corporate purposes. As of September�30, 2014, the current value of cash or cash equivalents and related investments held within the captive insurance subsidiary totaled approximately $93.2 million. Investments of the captive insurance subsidiary are carried at fair market value and as of September�30, 2014 reflected $2.6 million of net unrealized gains. See Note 5 of the accompanying consolidated financial statements for a discussion of the investments held by our captive insurance subsidiary.
Effective June�1, 2014, we renewed our fronting carrier program with a commercial insurance carrier through May�31, 2015. In connection with this renewal, we have paid cash premiums of approximately $14.3 million to the commercial insurance carrier. For the nine months ended September�30, 2014, we funded approximately $29.4 million of premiums to our captive insurance subsidiary.
We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings attributable to Team Health Holdings, Inc. before interest expense, taxes, depreciation and amortization, as further adjusted to exclude the non-cash items and the other adjustments shown in the table below. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.
Adjusted EBITDA is not a measurement of financial performance or liquidity under generally accepted accounting principles. In evaluating our performance as measured by Adjusted EBITDA, management recognizes and considers the limitations of this measure. Adjusted EBITDA does not reflect certain cash expenses that we are obligated to make, and although depreciation and amortizations are non-cash charges, assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net earnings, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles.


41


The following table sets forth a reconciliation of net earnings attributable to Team Health Holdings, Inc. to Adjusted EBITDA:
Three Months Ended September 30,
Nine Months Ended September 30,
2013
2014
2013
2014
(in thousands)
Net earnings attributable to Team Health Holdings, Inc.
$
29,427


$
27,586

$
65,935

$
81,634

Interest expense, net
3,827


3,921

11,363

10,758

Provision for income taxes
19,184


20,895

44,646

56,542

Depreciation
4,281


5,826

12,559

15,315

Amortization
8,665


12,991

27,033

35,203

Other (income) expense(a)
(1,384
)

292

(2,848
)
(3,457
)
Contingent purchase and other acquisition compensation expense(b)
(1,602
)

3,086

18,568

22,483

Transaction costs(c)
1,017


3,107

1,590

5,734

Equity based compensation expense(d)
2,906


3,345

6,988

12,693

Insurance subsidiary interest income
444


503

1,308

1,501

Professional liability loss reserve adjustments associated with prior years



7,088



7,088

Severance and other charges
1,293


381

2,263

1,563

Adjusted EBITDA
$
68,058

$
89,021

$
189,405

$
247,057

(a)
Reflects gain or loss on sale of assets, realized gains on investments, and changes in fair value of investments associated with the Companys non-qualified retirement plan.
(b)
Reflects expense recognized for historical and estimated future contingent payments and other compensation expense associated with acquisitions.
(c)
Reflects expenses associated with accounting, legal, due diligence and other transaction fees related to acquisition activity.
(d)
Reflects costs related to equity awards granted under the Team Health Holdings, Inc. 2009 Amended and Restated Stock Incentive Plan.
Inflation
We do not believe that general inflation in the U.S. economy has had a material impact on our financial position or results of operations.
Seasonality
Historically, our revenues and operating results have reflected minimal seasonal variation due to the significance of revenues derived from patient visits to emergency departments, which are generally open on a year-round basis, and also due to our geographic diversification. Revenue from our non-emergency department staffing lines is dependent on a healthcare facility being open during selected time periods. Revenue in such instances will fluctuate depending upon such factors as the number of holidays in the period.
Recently Issued Accounting Standards
See Note 2 of the notes to the consolidated financial statements for a discussion of recently issued accounting standards.
Item�3.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes.
The Companys earnings are affected by changes in short-term interest rates as a result of its borrowings under its term loan facility.

42


At September�30, 2014, the fair value of the Companys total debt, which had a carrying value of $716.8 million, was approximately $701.0 million. The Company had $716.8 million of variable debt outstanding at September�30, 2014, with $241.9 million subject to a 1.0% LIBOR floor. If the market interest rates for the Companys variable rate borrowings had averaged 1% more subsequent to December�31, 2013, the Companys interest expense would have increased, and earnings before income taxes would have decreased, by approximately $3.0 million for the nine months ended September�30, 2014. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could take actions in an attempt to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Companys financial structure.
Item�4.
Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules�13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired objectives. As of September�30, 2014, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September�30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting: There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September�30, 2014 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

43


PART 2. OTHER INFORMATION
Item�1.
Legal Proceedings
We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.
On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Companys services at hospitals that were affiliated with Health Management Associates, Inc. (the HMA) and subsequently acquired by Community Health Systems. The Company is cooperating with the government in its investigation.
Item�1A.
Risk Factors
For a discussion of our potential risks and uncertainties, please see Risk Factors in Part 1, Item�1A of our annual report on Form 10-K for the year ended December�31, 2013, filed with the Securities and Exchange Commission on February�13, 2014. In addition, please see Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors and Trends that Affect Our Results of Operations herein and the 2013 Form 10-K. There have been no material changes to the risk factors disclosed in Part 1, Item�1A of the 2013 Form 10-K.
Item�2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item�3.
Defaults upon Senior Securities
None.
Item�4.
Mine Safety Disclosures
Not Applicable.
Item�5.
Other Information
Members of the Companys board of directors and certain employees, including senior executives and others who regularly have access to material non-public information, may from time to time enter into trading plans (Rule 10b5-1plans) designed to comply with the Companys Securities Trading Policy and the requirements of Rule 10b5-1 promulgated by the Securities and Exchange Commission under Section�10(b) of the Securities Exchange Act of 1934, as amended.
As of the date of this report, H. Lynn Massingale, M.D., our Executive Chairman, and Oliver Rogers, our Executive Vice President and Chief Operating Officer, were the only executive officers that have entered into Rule 10b5-1 trading plans that remain in effect. Greg Roth, a member of our Board, also has a Rule 10b5-1 trading plan in effect.
The Company does not undertake any obligation to report Rule 10b5-1 plans that may be adopted by any officers or directors of the Company in the future, or to report any modifications or termination of any publicly announced plan or to report any plan adopted by an employee who is not an executive officer.

44


Item�6.
Exhibits
3.1

Certificate of Incorporation of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on December�18, 2009: File No. 001-34583)
3.2

Amended and Restated By-laws of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on April 18, 2013: File No. 001-34583)
10.1

Third Amendment to Amended and Restated Employment Agreement, dated May 20, 2014, between Team Health, Inc. and H. Lynn Massingale, M.D. (incorporated by reference to Exhibit 10.1 of Team Health Holdings, Inc.s Current Report on Form 8-K (File No.�001-34583) dated May�22, 2014)
10.2

Incremental Amendment No. 2, dated as of September 9, 2014, to the Credit Agreement, dated June 29, 2011, among Team Health Holdings, Inc., Team Health, Inc., JPMorgan Chase Bank, N.A., and the other agents party thereto (incorporated by reference to Exhibit 10.1 of Team Health Holdings, Inc.'s Current Report on Form 8-K (File No. 001-34583) dated September 9, 2014)
31.1

Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 4, 2014 as required by Section�302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
31.2

Certification by David P. Jones for Team Health Holdings, Inc. dated November 4, 2014 as required by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.1

Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 4, 2014 as required by Section�906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.2

Certification by David P. Jones for Team Health Holdings, Inc. dated November 4, 2014 as required by Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
101

The following financial information from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statement of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013, and (iv) Notes to Consolidated Financial Statements.

45


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
TEAM HEALTH HOLDINGS, INC.
November 4, 2014
/S/����MICHAEL D.�SNOW��������
Michael D. Snow
President and Chief Executive Officer
November 4, 2014
/S/����DAVID�P. JONES��������
David P. Jones
Executive Vice President and Chief Financial Officer

46


EXHIBIT INDEX
3.1

Certificate of Incorporation of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on December�18, 2009: File No. 001-34583)
3.2

Amended and Restated By-laws of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on April 18, 2013: File No. 001-34583)
10.1

Third Amendment to Amended and Restated Employment Agreement, dated May 20, 2014, between Team Health, Inc. and H. Lynn Massingale, M.D. (incorporated by reference to Exhibit 10.1 of Team Health Holdings, Inc.s Current Report on Form 8-K (File No.�001-34583) dated May�22, 2014)
10.2

Incremental Amendment No. 2, dated as of September 9, 2014, to the Credit Agreement, dated June 29, 2011, among Team Health Holdings, Inc., Team Health, Inc., JPMorgan Chase Bank, N.A., and the other agents party thereto (incorporated by reference to Exhibit 10.1 of Team Health Holdings, Inc.'s Current Report on Form 8-K (File No. 001-34583) dated September 9, 2014)
31.1

Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 4, 2014 as required by Section�302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
31.2

Certification by David P. Jones for Team Health Holdings, Inc. dated November 4, 2014 as required by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.1

Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 4, 2014 as required by Section�906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.2

Certification by David P. Jones for Team Health Holdings, Inc. dated November 4, 2014 as required by Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
101

The following financial information from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statement of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013, and (iv) Notes to Consolidated Financial Statements.

47
Exhibit 31.1
Certifications
I, Michael D. Snow, certify that:
1.
I have reviewed this quarterly report on Form 10-Q for the quarter ended September�30, 2014 of Team Health Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By:
/S/����MICHAEL D.�SNOW��������
Michael D. Snow
President and Chief Executive Officer
Date: November�4, 2014


Exhibit 31.2
Certifications
I, David P. Jones, certify that:
1.
I have reviewed this quarterly report on Form 10-Q for the quarter ended September�30, 2014 of Team Health Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By:
/S/����DAVID�P. JONES��������
David P. Jones
Executive Vice President and Chief Financial Officer
Date: November�4, 2014


Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Team Health Holdings, Inc. (the Company) on Form 10-Q (Form�10-Q) for the quarter ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof, I, Michael D. Snow, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Form 10-Q fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/����MICHAEL D.�SNOW��������
Michael D. Snow
President and Chief Executive Officer
Date: November�4, 2014


Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Team Health Holdings, Inc. (the Company) on Form 10-Q (Form�10-Q) for the quarter ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof, I, David P. Jones, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Form 10-Q fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
/S/����DAVID�P. JONES��������
David P. Jones
Executive Vice President and Chief Financial Officer
Date: November�4, 2014




Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

SEC Filings