2017 Q4 Form 10-Q Financial Statement

#000078516117000074 Filed on October 31, 2017

View on sec.gov

Income Statement

Concept 2017 Q4 2017 Q3 2016 Q4
Revenue $1.020B $995.6M $949.9M
YoY Change 7.35% 7.42% 8.03%
Cost Of Revenue $38.70M $36.50M $35.80M
YoY Change 8.1% 4.89% 3.47%
Gross Profit $970.1M $942.6M $899.6M
YoY Change 7.84% 7.46% 8.29%
Gross Profit Margin 95.14% 94.68% 94.7%
Selling, General & Admin $616.4M $600.4M $570.9M
YoY Change 7.97% 10.1% 9.81%
% of Gross Profit 63.54% 63.7% 63.46%
Research & Development
YoY Change
% of Gross Profit
Depreciation & Amortization $46.60M $46.20M $43.80M
YoY Change 6.39% 6.21% 5.8%
% of Gross Profit 4.8% 4.9% 4.87%
Operating Expenses $801.3M $780.3M $739.8M
YoY Change 8.31% 9.12% 8.91%
Operating Profit $144.7M $145.2M $145.5M
YoY Change -0.55% -2.02% 7.38%
Interest Expense -$34.10M $36.80M -$39.10M
YoY Change -12.79% -13.41% -7.35%
% of Operating Profit -23.57% 25.34% -26.87%
Other Income/Expense, Net $1.200M $1.000M $800.0K
YoY Change 50.0% 25.0% -38.46%
Pretax Income $135.9M $128.3M $121.5M
YoY Change 11.85% 6.65% 11.88%
Income Tax $34.40M $43.10M $39.70M
% Of Pretax Income 25.31% 33.59% 32.67%
Net Earnings $75.40M $65.90M $65.30M
YoY Change 15.47% 6.81% 38.94%
Net Earnings / Revenue 7.39% 6.62% 6.87%
Basic Earnings Per Share $0.77 $0.67 $0.73
Diluted Earnings Per Share $0.76 $0.67 $0.68
COMMON SHARES
Basic Shares Outstanding 98.31M shares 97.80M shares 89.80M shares
Diluted Shares Outstanding 99.00M shares

Balance Sheet

Concept 2017 Q4 2017 Q3 2016 Q4
SHORT-TERM ASSETS
Cash & Short-Term Investments $54.40M $67.60M $40.50M
YoY Change 34.32% -11.52% -34.25%
Cash & Equivalents $54.40M $67.60M $40.50M
Short-Term Investments
Other Short-Term Assets $113.3M $178.2M $170.2M
YoY Change -33.43% 4.58% 34.44%
Inventory
Prepaid Expenses
Receivables $459.5M $441.6M $432.0M
Other Receivables $0.00 $0.00 $11.80M
Total Short-Term Assets $702.2M $687.4M $654.5M
YoY Change 7.29% 3.21% 9.32%
LONG-TERM ASSETS
Property, Plant & Equipment $1.517B $1.482B $1.392B
YoY Change 9.0% 9.55% 6.24%
Goodwill $1.973B $1.972B $1.927B
YoY Change 2.36% 2.93% 1.96%
Intangibles $403.1M $405.1M $411.3M
YoY Change -1.99% -1.22% -1.93%
Long-Term Investments $11.70M $12.70M
YoY Change -7.87% 11.4%
Other Assets $235.1M $245.3M $221.3M
YoY Change 6.24% 14.68% 12.34%
Total Long-Term Assets $4.162B $4.196B $4.027B
YoY Change 3.35% 5.82% 0.5%
TOTAL ASSETS
Total Short-Term Assets $702.2M $687.4M $654.5M
Total Long-Term Assets $4.162B $4.196B $4.027B
Total Assets $4.865B $4.883B $4.682B
YoY Change 3.9% 5.44% 1.65%
SHORT-TERM LIABILITIES
YoY Change
Accounts Payable $78.40M $81.80M $68.30M
YoY Change 14.79% 21.19% 10.88%
Accrued Expenses $196.8M $398.3M $173.1M
YoY Change 13.69% 7.16% 11.03%
Deferred Revenue
YoY Change
Short-Term Debt $0.00 $0.00 $0.00
YoY Change
Long-Term Debt Due $32.30M $31.10M $37.10M
YoY Change -12.94% -15.49% 0.82%
Total Short-Term Liabilities $517.5M $511.2M $475.6M
YoY Change 8.81% 7.39% 11.54%
LONG-TERM LIABILITIES
Long-Term Debt $2.545B $2.591B $2.979B
YoY Change -14.56% -12.87% -4.96%
Other Long-Term Liabilities $75.20M $186.4M $49.60M
YoY Change 51.61% 17.9% 15.35%
Total Long-Term Liabilities $75.20M $186.4M $49.60M
YoY Change 51.61% 17.9% 15.35%
TOTAL LIABILITIES
Total Short-Term Liabilities $517.5M $511.2M $475.6M
Total Long-Term Liabilities $75.20M $186.4M $49.60M
Total Liabilities $3.248B $3.289B $3.615B
YoY Change -10.14% -8.85% -2.45%
SHAREHOLDERS EQUITY
Retained Earnings -$1.176B -$1.448B
YoY Change -18.79% -14.6%
Common Stock $1.100M $1.100M
YoY Change 0.0% 0.0%
Preferred Stock
YoY Change
Treasury Stock (at cost) $418.5M $614.7M
YoY Change -31.92% 16.55%
Treasury Stock Shares 13.39M shares 20.45M shares
Shareholders Equity $1.153B $1.136B $735.9M
YoY Change
Total Liabilities & Shareholders Equity $4.865B $4.883B $4.682B
YoY Change 3.9% 5.44% 1.65%

Cashflow Statement

Concept 2017 Q4 2017 Q3 2016 Q4
OPERATING ACTIVITIES
Net Income $75.40M $65.90M $65.30M
YoY Change 15.47% 6.81% 38.94%
Depreciation, Depletion And Amortization $46.60M $46.20M $43.80M
YoY Change 6.39% 6.21% 5.8%
Cash From Operating Activities $151.4M $173.8M $144.9M
YoY Change 4.49% 3.64% 8.3%
INVESTING ACTIVITIES
Capital Expenditures -$74.70M -$60.70M -$71.50M
YoY Change 4.48% 35.49% 41.3%
Acquisitions
YoY Change
Other Investing Activities -$600.0K -$16.90M -$17.20M
YoY Change -96.51% 181.67% -98.09%
Cash From Investing Activities -$75.30M -$77.60M -$88.70M
YoY Change -15.11% 52.76% -90.67%
FINANCING ACTIVITIES
Cash Dividend Paid
YoY Change
Common Stock Issuance & Retirement, Net
YoY Change
Debt Paid & Issued, Net
YoY Change
Cash From Financing Activities -89.30M -99.70M -92.10M
YoY Change -3.04% -10.02% -220.23%
NET CHANGE
Cash From Operating Activities 151.4M 173.8M 144.9M
Cash From Investing Activities -75.30M -77.60M -88.70M
Cash From Financing Activities -89.30M -99.70M -92.10M
Net Change In Cash -13.20M -3.500M -35.90M
YoY Change -63.23% -157.38% -95.15%
FREE CASH FLOW
Cash From Operating Activities $151.4M $173.8M $144.9M
Capital Expenditures -$74.70M -$60.70M -$71.50M
Free Cash Flow $226.1M $234.5M $216.4M
YoY Change 4.48% 10.35% 17.35%

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CY2016Q3 us-gaap Equity Method Investment Summarized Financial Information Revenue
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us-gaap Equity Method Investment Summarized Financial Information Revenue
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33400000 USD
CY2017Q3 us-gaap Equity Method Investment Summarized Financial Information Revenue
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9900000 USD
us-gaap Equity Method Investment Summarized Financial Information Revenue
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31000000 USD
CY2016Q3 us-gaap Extinguishment Of Debt Gain Loss Net Of Tax
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0 USD
us-gaap Extinguishment Of Debt Gain Loss Net Of Tax
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0 USD
CY2017Q3 us-gaap Extinguishment Of Debt Gain Loss Net Of Tax
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0 USD
us-gaap Extinguishment Of Debt Gain Loss Net Of Tax
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6200000 USD
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us-gaap Gains Losses On Extinguishment Of Debt
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CY2017Q3 us-gaap Gains Losses On Extinguishment Of Debt
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us-gaap Gains Losses On Extinguishment Of Debt
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us-gaap General And Administrative Expense
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CY2017Q3 us-gaap General And Administrative Expense
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us-gaap General And Administrative Expense
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CY2016Q4 us-gaap Goodwill
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CY2017Q3 us-gaap Goodwill
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CY2016Q3 us-gaap Health Care Organization Patient Service Revenue Provisionfor Bad Debts
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14800000 USD
us-gaap Health Care Organization Patient Service Revenue Provisionfor Bad Debts
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46700000 USD
CY2017Q3 us-gaap Health Care Organization Patient Service Revenue Provisionfor Bad Debts
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12600000 USD
us-gaap Health Care Organization Patient Service Revenue Provisionfor Bad Debts
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42700000 USD
CY2016Q3 us-gaap Health Care Organization Revenue
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us-gaap Health Care Organization Revenue
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CY2017Q3 us-gaap Health Care Organization Revenue
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us-gaap Income Loss From Continuing Operations
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us-gaap Income Loss From Continuing Operations Attributable To Noncontrolling Entity
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53700000 USD
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us-gaap Income Loss From Continuing Operations Attributable To Noncontrolling Entity
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120300000 USD
us-gaap Income Loss From Continuing Operations Before Income Taxes Extraordinary Items Noncontrolling Interest
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360500000 USD
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128300000 USD
us-gaap Income Loss From Continuing Operations Before Income Taxes Extraordinary Items Noncontrolling Interest
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360500000 USD
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us-gaap Income Loss From Continuing Operations Including Portion Attributable To Noncontrolling Interest
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236300000 USD
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85200000 USD
us-gaap Income Loss From Continuing Operations Including Portion Attributable To Noncontrolling Interest
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249100000 USD
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us-gaap Income Loss From Continuing Operations Per Basic Share
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us-gaap Income Loss From Continuing Operations Per Diluted Share
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us-gaap Income Loss From Discontinued Operations Net Of Tax
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us-gaap Income Loss From Discontinued Operations Net Of Tax
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us-gaap Income Loss From Discontinued Operations Net Of Tax Attributable To Reporting Entity
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us-gaap Income Loss From Discontinued Operations Net Of Tax Attributable To Reporting Entity
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us-gaap Income Loss From Discontinued Operations Net Of Tax Per Basic Share
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0.00
us-gaap Income Loss From Discontinued Operations Net Of Tax Per Basic Share
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0.00
us-gaap Income Loss From Discontinued Operations Net Of Tax Per Diluted Share
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0.00
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0.00
us-gaap Income Loss From Discontinued Operations Net Of Tax Per Diluted Share
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0.00
CY2016Q3 us-gaap Income Loss From Equity Method Investments
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2500000 USD
us-gaap Income Loss From Equity Method Investments
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7300000 USD
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2100000 USD
us-gaap Income Loss From Equity Method Investments
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6200000 USD
CY2016Q3 us-gaap Income Loss From Subsidiaries Before Tax
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0 USD
us-gaap Income Loss From Subsidiaries Before Tax
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0 USD
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0 USD
us-gaap Income Loss From Subsidiaries Before Tax
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CY2016Q3 us-gaap Income Tax Expense Benefit
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42100000 USD
us-gaap Income Tax Expense Benefit
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124200000 USD
CY2017Q3 us-gaap Income Tax Expense Benefit
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43100000 USD
us-gaap Income Tax Expense Benefit
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111400000 USD
us-gaap Increase Decrease In Accounts Payable
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6100000 USD
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75700000 USD
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54200000 USD
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8700000 USD
us-gaap Increase Decrease In Accrued Salaries
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3100000 USD
us-gaap Increase Decrease In Interest Payable Net
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6000000 USD
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7300000 USD
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4400000 USD
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7400000 USD
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11800000 USD
us-gaap Increase Decrease In Other Operating Liabilities
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12500000 USD
us-gaap Increase Decrease In Restricted Cash
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7100000 USD
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9900000 USD
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us-gaap Incremental Common Shares Attributable To Conversion Of Debt Securities
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CY2017Q1 us-gaap Incremental Common Shares Attributable To Conversion Of Debt Securities
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us-gaap Incremental Common Shares Attributable To Conversion Of Debt Securities
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CY2016Q3 us-gaap Incremental Common Shares Attributable To Share Based Payment Arrangements
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us-gaap Incremental Common Shares Attributable To Share Based Payment Arrangements
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us-gaap Incremental Common Shares Attributable To Share Based Payment Arrangements
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4600000 USD
CY2016Q4 us-gaap Investments In Affiliates Subsidiaries Associates And Joint Ventures
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13000000 USD
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12600000 USD
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31100000 USD
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us-gaap Management Fees Revenue
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us-gaap Management Fees Revenue
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43100000 USD
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37100000 USD
us-gaap Net Cash Provided By Used In Financing Activities
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us-gaap Net Cash Provided By Used In Financing Activities
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499400000 USD
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us-gaap Net Income Loss
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CY2016Q3 us-gaap Net Income Loss Attributable To Nonredeemable Noncontrolling Interest
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us-gaap Net Income Loss Attributable To Nonredeemable Noncontrolling Interest
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3700000 USD
us-gaap Net Income Loss Attributable To Redeemable Noncontrolling Interest
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11200000 USD
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4200000 USD
us-gaap Net Income Loss Attributable To Redeemable Noncontrolling Interest
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9900000 USD
CY2016Q3 us-gaap Net Income Loss Available To Common Stockholders Diluted
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us-gaap Net Income Loss Including Portion Attributable To Nonredeemable Noncontrolling Interest
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0 USD
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100000 USD
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200000 USD
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400000 USD
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100000 USD
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500000 USD
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us-gaap Undistributed Earnings Loss Allocated To Participating Securities Basic
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us-gaap Payments For Proceeds From Other Investing Activities
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us-gaap Payments For Repurchase Of Common Stock
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us-gaap Payments For Repurchase Of Common Stock
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us-gaap Payments For Software
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14600000 USD
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62400000 USD
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67000000 USD
us-gaap Payments Related To Tax Withholding For Share Based Compensation
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us-gaap Payments Related To Tax Withholding For Share Based Compensation
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us-gaap Payments To Acquire Businesses Net Of Cash Acquired
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19600000 USD
us-gaap Payments To Acquire Businesses Net Of Cash Acquired
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36600000 USD
us-gaap Payments To Acquire Property Plant And Equipment
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113900000 USD
us-gaap Payments To Acquire Property Plant And Equipment
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155700000 USD
us-gaap Payments To Minority Shareholders
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49500000 USD
us-gaap Payments To Minority Shareholders
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us-gaap Prior Period Reclassification Adjustment
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us-gaap Proceeds From Long Term Lines Of Credit
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<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Contingencies and Other Commitments</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period. </font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;">Nichols Litigation&#8212;</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">We have been named as a defendant in a lawsuit filed March 28, 2003 by several individual stockholders in the Circuit Court of Jefferson County, Alabama, captioned </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Nichols v. HealthSouth Corp</font><font style="font-family:inherit;font-size:10pt;">. The plaintiffs allege that we, some of our former officers, and our former investment bank engaged in a scheme to overstate and misrepresent our earnings and financial position. The plaintiffs are seeking compensatory and punitive damages. This case was stayed in the Circuit Court on August&#160;8, 2005. The plaintiffs filed an amended complaint on November 9, 2010 to which we responded with a motion to dismiss filed on December 22, 2010. During a hearing on February&#160;24, 2012, plaintiffs&#8217; counsel indicated his intent to dismiss certain claims against us. Instead, on March 9, 2012, the plaintiffs amended their complaint to include additional securities fraud claims against HealthSouth and add several former officers to the lawsuit. On September 12, 2012, the plaintiffs further amended their complaint to request certification as a class action. One of the former officers named as a defendant has repeatedly attempted to remove the case to federal district court, most recently on December 11, 2012. We filed our latest motion to remand the case back to state court on January 10, 2013. On September 27, 2013, the federal court remanded the case back to state court. On November 25, 2014, the plaintiffs filed another amended complaint to assert new allegations relating to the time period of 1997 to 2002. On December&#160;10, 2014, we filed a motion to dismiss on the grounds the plaintiffs lack standing because their claims are derivative in nature, and the claims are time-barred by the statute of limitations. On May 26, 2016, the court granted our motion to dismiss. The plaintiffs appealed the dismissal of the case to the Supreme Court of Alabama on June 28, 2016. The Supreme Court has not yet scheduled a hearing on the appeal.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">We intend to vigorously defend ourselves in this case. Based on the stage of litigation, review of the current facts and circumstances as we understand them, the nature of the underlying claim, the results of the proceedings to date, and the nature and scope of the defense we continue to mount, we do not believe an adverse judgment or settlement is probable in this matter, and it is also not possible to estimate an amount of loss, if any, or range of possible loss that might result from an adverse judgment or settlement of this case.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;">Other Litigation&#8212;</font></div><div style="line-height:120%;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">One</font><font style="font-family:inherit;font-size:10pt;"> of our hospital subsidiaries was named as a defendant in a lawsuit filed August 12, 2013 by an individual in the Circuit Court of Etowah County, Alabama, captioned </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Honts</font><font style="font-family:inherit;font-size:10pt;">&#160;</font><font style="font-family:inherit;font-size:10pt;font-style:italic;">v. HealthSouth Rehabilitation Hospital of Gadsden, LLC.</font><font style="font-family:inherit;font-size:10pt;">&#160;The plaintiff alleged that her mother, who died more than three months after being discharged from our hospital, received an unprescribed opiate medication at the hospital. We deny the patient received any such medication, accounted for all the opiates at the hospital and argued the plaintiff established no causal liability between the actions of our staff and her mother&#8217;s death. The plaintiff sought recovery for punitive damages. On May 18, 2016, the jury in this case returned a verdict in favor of the plaintiff for </font><font style="font-family:inherit;font-size:10pt;">$20.0 million</font><font style="font-family:inherit;font-size:10pt;">. On June 17, 2016, we filed a renewed motion for judgment as a matter of law or, in the alternative, a motion for new trial or, in the further alternative, a motion seeking reduction of the damages awarded (collectively, the &#8220;post-judgment motions&#8221;).&#160;The trial court denied the post-judgment motions. We appealed the verdict as well as the rulings on the post-judgment motions to the Supreme Court of Alabama on October 12, 2016. The Supreme Court scheduled an oral hearing on the appeal for November 8, 2017.</font></div><div style="line-height:120%;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div><div style="line-height:120%;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">We posted a bond in the amount of the judgment pending resolution of our appeal. We intend to vigorously defend ourselves in this case. Although we continue to believe in the merit of our defenses and counterarguments, we recorded a net charge of </font><font style="font-family:inherit;font-size:10pt;">$5.7 million</font><font style="font-family:inherit;font-size:10pt;"> to </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Other operating expenses</font><font style="font-family:inherit;font-size:10pt;"> in our consolidated statements of operations for the year ended December&#160;31, 2016. As of September 30, 2017, we maintained a liability of </font><font style="font-family:inherit;font-size:10pt;">$20.2 million</font><font style="font-family:inherit;font-size:10pt;"> in&#160;</font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Accrued expenses and other liabilities</font><font style="font-family:inherit;font-size:10pt;">&#160;in our condensed consolidated balance sheet with a corresponding receivable of </font><font style="font-family:inherit;font-size:10pt;">$15.5 million</font><font style="font-family:inherit;font-size:10pt;"> in&#160;</font><font style="font-family:inherit;font-size:10pt;font-style:italic;">Other current assets</font><font style="font-family:inherit;font-size:10pt;">&#160;for the portion of the liability we would expect to be covered through our excess insurance coverages. The portion of this liability that would be a covered claim through our captive insurance subsidiary, HCS, Ltd. is </font><font style="font-family:inherit;font-size:10pt;">$6.0 million</font><font style="font-family:inherit;font-size:10pt;">.</font></div><div style="line-height:120%;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;">Governmental Inquiries and Investigations&#8212;</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">On June 24, 2011, we received a document subpoena addressed to HealthSouth Hospital of Houston, a long-term acute care hospital (&#8220;LTCH&#8221;) we closed in August 2011, and issued from the Dallas, Texas office of the United States Department of Health and Human Services Office of Inspector General (&#8220;HHS-OIG&#8221;). The subpoena stated it was in connection with an investigation of possible false or otherwise improper claims submitted to Medicare and Medicaid and requested documents and materials relating to patient admissions, length of stay, and discharge matters at this closed LTCH. We furnished the documents requested and have heard nothing from the HHS-OIG since December 2012.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">On March 4, 2013, we received document subpoenas from an office of the HHS-OIG addressed to </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">four</font><font style="font-family:inherit;font-size:10pt;"> of our hospitals. Those subpoenas also requested complete copies of medical records for </font><font style="font-family:inherit;font-size:10pt;">100</font><font style="font-family:inherit;font-size:10pt;"> patients treated at each of those hospitals between September 2008 and June 2012. The investigation is being conducted by the United States Department of Justice (the &#8220;DOJ&#8221;). On April 24, 2014, we received document subpoenas relating to an additional </font><font style="font-family:inherit;font-size:10pt;">seven</font><font style="font-family:inherit;font-size:10pt;"> of our hospitals. The new subpoenas reference substantially similar investigation subject matter as the original subpoenas and request materials from the period January 2008 through December 2013. </font><font style="font-family:inherit;font-size:10pt;">Two</font><font style="font-family:inherit;font-size:10pt;"> of the four hospitals addressed in the original set of subpoenas have received supplemental subpoenas to cover this new time period. The most recent subpoenas do not include requests for specific patient files. However, in February 2015, the DOJ requested the voluntary production of the medical records of an additional </font><font style="font-family:inherit;font-size:10pt;">70</font><font style="font-family:inherit;font-size:10pt;"> patients, some of whom were treated in hospitals not subject to the subpoenas, and we provided these records. We have not received any subsequent requests for medical records from the DOJ.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">All of the subpoenas are in connection with an investigation of alleged improper or fraudulent claims submitted to Medicare and Medicaid and request documents and materials relating to practices, procedures, protocols and policies, of certain pre- and post-admissions activities at these hospitals including, among other things, marketing functions, pre-admission screening, post-admission physician evaluations, patient assessment instruments, individualized patient plans of care, and compliance with the Medicare </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">60%</font><font style="font-family:inherit;font-size:10pt;"> rule. Under the Medicare rule commonly referred to as the &#8220;</font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">60%</font><font style="font-family:inherit;font-size:10pt;"> rule,&#8221; an inpatient rehabilitation hospital must treat </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">60%</font><font style="font-family:inherit;font-size:10pt;"> or more of its patients from at least one of a specified list of medical conditions in order to be reimbursed at the inpatient rehabilitation hospital payment rates, rather than at the lower acute care hospital payment rates. </font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">We are cooperating fully with the DOJ in connection with this investigation and are currently unable to predict the timing or outcome of it. We intend to vigorously defend ourselves in this matter. Based on discussions with the DOJ, review of the current facts and circumstances as we understand them, and the nature of the investigation, it is not possible to estimate an amount of loss, if any, or range of possible loss that might result from it.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-style:italic;">Other Matters&#8212;</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The False Claims Act allows private citizens, called &#8220;relators,&#8221; to institute civil proceedings alleging violations of the False Claims Act. These </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> cases are sealed by the court at the time of filing. Prior to the release of the seal by the presiding court, the only parties typically privy to the information contained in the complaint are the relator, the federal government, and the court. It is possible that </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> lawsuits have been filed against us and that those suits remain under seal or that we are unaware of such filings or prevented by existing law, or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed </font><font style="font-family:inherit;font-size:10pt;font-style:italic;">qui tam</font><font style="font-family:inherit;font-size:10pt;"> cases brought pursuant to the False Claims Act.</font></div><div style="line-height:120%;padding-bottom:13px;text-align:left;text-indent:48px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the HHS-OIG and the United States Centers for Medicare and Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, or may result in, HealthSouth refunding amounts to Medicare or other federal healthcare programs.</font></div></div>

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