Amsurg (AMSG) 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2014

AMSURG CORP.

(Exact Name of Registrant as Specified in its Charter)

Tennessee	000-22217	62-1493316
(State or Other Jurisdiction of Incorporation)	(Commission  File Number)	(I.R.S. Employer  Identification No.)
20 Burton Hills Boulevard
Nashville, Tennessee		37215
(Address of Principal Executive Offices)		(Zip Code)

 (615) 665-1283

(Registrant’s Telephone Number, Including Area Code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                   No [  ]

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]                   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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    [   ]                                      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 April 30, 2014 there were outstanding 32,531,056 shares of the registrant’s Common Stock, no par value.

Table of Contents to Form 10-Q for the Three Months Ended March 31, 2014
Part I	Financial Information
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	26
Part II	Other Information
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3.	Defaults Upon Senior Securities	27
	Item 4.	Mine Safety Disclosures	27
	Item 5.	Other Information	27
	Item 6.	Exhibits	28
	Signature		29

i

Part I

Item 1.  Financial Statements

AmSurg Corp.

Consolidated Balance Sheets

March 31, 2014 (unaudited) and December 31, 2013

(In thousands)

			March 31,		December 31,
			2014		2013
Assets
Current assets:
	Cash and cash equivalents		$	47,116	$	50,840
	Accounts receivable, net of allowance of $29,120 and $27,862, respectively			106,209		105,072
	Supplies inventory			18,433		18,414
	Deferred income taxes			1,026		3,097
	Prepaid and other current assets			37,151		33,602
		Total current assets		209,935		211,025
Property and equipment, net				169,006		169,895
Investments in unconsolidated affiliates and other				19,484		16,392
Goodwill				1,764,623		1,758,970
Intangible assets, net				21,093		21,662
		Total assets	$	2,184,141	$	2,177,944
Liabilities and Equity
Current liabilities:
	Current portion of long-term debt		$	20,285	$	20,844
	Accounts payable			25,359		27,501
	Accrued salaries and benefits			26,218		32,294
	Other accrued liabilities			12,387		9,231
		Total current liabilities		84,249		89,870
Long-term debt				564,937		583,298
Deferred income taxes				185,882		176,020
Other long-term liabilities				25,753		25,503
Commitments and contingencies
Noncontrolling interests – redeemable				177,683		177,697
Preferred stock, no par value, 5,000 shares authorized, no shares issued or outstanding				-		-
Equity:
	Common stock, no par value, 70,000 shares authorized, 32,505 and 32,353 shares outstanding, respectively			186,894		185,873
	Retained earnings			595,519		578,324
		Total AmSurg Corp. equity		782,413		764,197
		Noncontrolling interests – non-redeemable		363,224		361,359
		Total equity		1,145,637		1,125,556
		Total liabilities and equity	$	2,184,141	$	2,177,944

See accompanying notes to the unaudited consolidated financial statements.

1

Item 1. Financial Statements – (continued)

AmSurg Corp.

Consolidated Statements of Earnings and Comprehensive Income (unaudited)

Three Months Ended March 31, 2014 and 2013

(In thousands, except earnings per share)

			Three Months Ended March 31,
			2014		2013
Revenues			$	263,107	$	258,189
Operating expenses:
	Salaries and benefits			83,194		80,958
	Supply cost			38,720		37,213
	Other operating expenses			55,269		52,727
	Depreciation and amortization			8,374		8,008
		Total operating expenses		185,557		178,906
Gain on deconsolidation				2,045		2,237
Equity in earnings of unconsolidated affiliates				764		402
		Operating income		80,359		81,922
Interest expense				6,963		7,542
	Earnings from continuing operations before income taxes			73,396		74,380
Income tax expense				13,057		12,269
	Net earnings from continuing operations			60,339		62,111
Discontinued operations:
	Earnings from operations of discontinued interests in surgery centers, net of income tax			137		162
	Loss on disposal of discontinued interests in surgery centers, net of income tax			(362)		-
		Net (loss) earnings from discontinued operations		(225)		162
	Net earnings and comprehensive income			60,114		62,273
Less net earnings and comprehensive income attributable to noncontrolling interests:
	Net earnings from continuing operations			42,835		44,361
	Net earnings from discontinued operations			84		101
		Total net earnings and comprehensive income attributable to noncontrolling interests		42,919		44,462
		Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,195	$	17,811
Amounts attributable to AmSurg Corp. common shareholders:
	Earnings from continuing operations, net of income tax		$	17,504	$	17,750
	Discontinued operations, net of income tax			(309)		61
		Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,195	$	17,811
Earnings per share-basic:
	Net earnings from continuing operations attributable to AmSurg Corp. common shareholders		$	0.55	$	0.57
	Net loss from discontinued operations attributable to AmSurg Corp. common shareholders			(0.01)		-
		Net earnings attributable to AmSurg Corp. common shareholders	$	0.54	$	0.57
Earnings per share-diluted:
	Net earnings from continuing operations attributable to AmSurg Corp. common shareholders		$	0.55	$	0.56
	Net loss from discontinued operations attributable to AmSurg Corp. common shareholders			(0.01)		-
		Net earnings attributable to AmSurg Corp. common shareholders	$	0.54	$	0.56
Weighted average number of shares and share equivalents outstanding:
	Basic			31,716		31,217
	Diluted			32,120		31,881

See accompanying notes to the unaudited consolidated financial statements.

2

Item 1. Financial Statements – (continued)

AmSurg Corp.

Consolidated Statements of Changes in Equity (unaudited)

Three Months Ended March 31, 2014 and 2013

(In thousands)

		AmSurg Corp. Shareholders										Noncontrolling
							Noncontrolling						Interests –
								Interests –		Total			Redeemable
		Common Stock			Retained			Non-		Equity			(Temporary		Net
		Shares	Amount		Earnings			Redeemable		(Permanent)			Equity)		Earnings
Balance at December 31, 2013		32,353	$	185,873	$	578,324		$	361,359	$	1,125,556		$	177,697
	Issuance of restricted common stock	200		-		-			-		-			-
	Stock options exercised	20		488		-			-		488			-
	Stock repurchased	(68)		(2,857)		-			-		(2,857)			-
	Share-based compensation	-		2,458		-			-		2,458			-
	Tax benefit related to exercise of stock options	-		1,727		-			-		1,727			-
	Net earnings	-		-		17,195			12,219		29,414			30,700	$	60,114
	Distributions to noncontrolling interests, net of capital contributions	-		-		-			(12,753)		(12,753)			(30,441)
	Purchase of noncontrolling interest	-		286		-			(286)		-			-
	Sale of noncontrolling interest	-		(1,081)		-			1,665		584			-
	Acquisitions and other transactions impacting noncontrolling interests	-		-		-			3,976		3,976			-
	Disposals and other transactions impacting noncontrolling interests	-		-		-			(2,956)		(2,956)			(273)
Balance at March 31, 2014		32,505	$	186,894	$	595,519		$	363,224	$	1,145,637		$	177,683
Balance at January 1, 2013		31,941	$	183,867	$	505,621		$	310,978	$	1,000,466		$	175,382
	Issuance of restricted common stock	263		-		-			-		-			-
	Cancellation of restricted common stock	(14)		-		-			-		-			-
	Stock options exercised	237		5,691		-			-		5,691			-
	Stock repurchased	(528)		(16,758)		-			-		(16,758)			-
	Share-based compensation	-		2,050		-			-		2,050			-
	Tax benefit related to exercise of stock options	-		1,630		-			-		1,630			-
	Net earnings	-		-		17,811			12,232		30,043			32,230	$	62,273
	Distributions to noncontrolling interests, net of capital contributions	-		-		-			(11,891)		(11,891)			(31,823)
	Purchase of noncontrolling interest	-		(304)		-			(133)		(437)			(316)
	Sale of noncontrolling interest	-		(644)		-			1,419		775			236
	Acquisitions and other transactions impacting noncontrolling interests	-		-		-			266		266			-
	Disposals and other transactions impacting noncontrolling interests	-		-		-			(317)		(317)			-
Balance at March 31, 2013		31,899	$	175,532	$	523,432		$	312,554	$	1,011,518		$	175,709

See accompanying notes to the unaudited consolidated financial statements.

3

Item 1. Financial Statements – (continued)

AmSurg Corp.

Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31, 2014 and 2013

(In thousands)

					Three Months Ended March 31,
					2014		2013
Cash flows from operating activities:
	Net earnings				$	60,114	$	62,273
	Adjustments to reconcile net earnings to net cash flows provided by operating activities:
		Depreciation and amortization				8,374		8,008
		Net loss on sale of long-lived assets				604		-
		Gain on deconsolidation				(2,045)		(2,237)
		Share-based compensation				2,458		2,050
		Excess tax benefit from share-based compensation				(1,727)		(288)
		Deferred income taxes				11,933		12,929
		Equity in earnings of unconsolidated affiliates				(764)		(402)
		Increases (decreases) in cash and cash equivalents, net of effects of acquisitions and dispositions, due to changes in:
			Accounts receivable, net			(1,651)		(1,705)
			Supplies inventory			(245)		(201)
			Prepaid and other current assets			(3,638)		17
			Accounts payable			(3,578)		(3,040)
			Accrued expenses and other liabilities			(606)		(4,101)
			Other, net			590		562
				Net cash flows provided by operating activities		69,819		73,865
Cash flows from investing activities:
	Acquisition of interests in surgery centers and related transactions					(5,038)		(252)
	Acquisition of property and equipment					(7,038)		(6,110)
	Proceeds from sale of interests in surgery centers					1,111		-
	Other					(418)		-
				Net cash flows used in investing activities		(11,383)		(6,362)
Cash flows from financing activities:
	Proceeds from long-term borrowings					31,945		30,870
	Repayment on long-term borrowings					(50,853)		(48,211)
	Distributions to noncontrolling interests					(43,194)		(43,914)
	Proceeds from issuance of common stock upon exercise of stock options					488		5,691
	Repurchase of common stock					(2,857)		(16,758)
	Capital contributions and ownership transactions by noncontrolling interests					584		559
	Excess tax benefit from share-based compensation					1,727		288
	Financing cost incurred					-		(13)
				Net cash flows used in financing activities		(62,160)		(71,488)
Net decrease in cash and cash equivalents						(3,724)		(3,985)
Cash and cash equivalents, beginning of period						50,840		46,398
Cash and cash equivalents, end of period					$	47,116	$	42,413

See accompanying notes to the unaudited consolidated financial statements.

4

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements

(1)  Basis of Presentation           

AmSurg Corp. (the “Company”), through its wholly owned subsidiaries, owns interests, primarily 51%, in limited partnerships (“LPs”) and limited liability companies (“LLCs”) which own and operate ambulatory surgery centers (“centers”).  The Company does not have an ownership interest in a LP or LLC greater than 51% which it does not consolidate.  The Company has ownership interests of less than 51% in seven LPs and LLCs, three of which it consolidates as the Company has substantive participation rights and four of which it does not consolidate as the Company’s rights are limited to protective rights only.  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and the consolidated LPs and LLCs.  Consolidation of such LPs and LLCs is necessary as the Company’s wholly owned subsidiaries have primarily 51% or more of the financial interest, are the general partner or majority member with all the duties, rights and responsibilities thereof, are responsible for the day-to-day management of the LPs and LLCs, and have control of the entities.  The responsibilities of the Company’s noncontrolling partners (LPs and noncontrolling members) are to supervise the delivery of medical services, with their rights being restricted to those that protect their financial interests, such as approval of the acquisition of significant assets or the incurrence of debt which they are generally required to guarantee on a pro rata basis based upon their respective ownership interests.  Intercompany profits, transactions and balances have been eliminated.  All LPs and LLCs and noncontrolling partners are referred to herein as “partnerships” and “partners”, respectively.

Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the consolidated financial statements within the equity section but separate from the Company’s equity.  However, with instances in which certain redemption features that are not solely within the control of the Company are present, classification of noncontrolling interests outside of permanent equity is required.  Consolidated net income attributable to the Company and to the noncontrolling interests are identified and presented on the face of the consolidated statements of earnings and comprehensive income; changes in ownership interests are accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary is measured at fair value.  Certain transactions with noncontrolling interests are also classified within financing activities in the statements of cash flows. 

As further described in note 11, upon the occurrence of various fundamental regulatory changes, the Company would be obligated, under the terms of certain partnership and operating agreements, to purchase the noncontrolling interests related to a substantial majority of the Company’s partnerships.  While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of March 31, 2014, the occurrence of such regulatory changes is outside the control of the Company.  As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of the Company’s equity and are classified as noncontrolling interests – redeemable on the Company’s consolidated balance sheets.

Center profits and losses of consolidated entities are allocated to the Company’s partners in proportion to their ownership percentages and reflected in the aggregate as net earnings attributable to noncontrolling interests.  The partners of the Company’s center partnerships typically are organized as general partnerships, LPs or LLCs that are not subject to federal income tax.  Each partner shares in the pre-tax earnings of the center in which it is a partner.  Accordingly, the earnings attributable to noncontrolling interests in each of the Company’s consolidated partnerships are generally determined on a pre-tax basis, and total net earnings attributable to noncontrolling interests are presented after net earnings.  However, the Company considers the impact of the net earnings attributable to noncontrolling interests on earnings before income taxes in order to determine the amount of pre-tax earnings on which the Company must determine its tax expense.  In addition, distributions from the partnerships are made to both the Company’s wholly owned subsidiaries and the partners on a pre-tax basis.

Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method.  These investments are included as investments in unconsolidated affiliates and other in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments are reported in equity in earnings of unconsolidated affiliates in the accompanying consolidated statement of earnings and comprehensive income.  The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

Each of the Company’s centers have similar economic characteristics and are aggregated into a single component. The Company operates this component as one reportable business segment, the ownership and operation of ambulatory surgery centers.

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X.  In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented.  The results of operations for any interim period are not necessarily indicative of results for the full year.

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2013 Annual Report on Form 10-K. Certain prior year amounts in the accompanying consolidated financial statements and these notes have been reclassified to reflect the impact of additional discontinued operations as further discussed in note 5.

5

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

(2)  Use of Estimates

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

The determination of contractual and bad debt allowances constitutes a significant estimate.  Some of the factors considered by management in determining the amount of such allowances are the historical trends of the centers’ cash collections and contractual and bad debt write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.  Accordingly, net accounts receivable at March 31, 2014 and December 31, 2013 reflect allowances for contractual adjustments of $280,582,000 and $289,937,000, respectively, and allowances for bad debt expense of $29,120,000 and $27,862,000, respectively.  For the three months ended March 31, 2014 and 2013, bad debt expense from continuing operations was approximately $5,208,000 and $5,900,000, respectively, and is included in other operating expenses in the accompanying consolidated statements of earnings and comprehensive income.

(3)  Revenue Recognition

Center revenues consist of billing for the use of the centers’ facilities directly to the patient or third-party payor and, at certain of the Company’s centers (primarily centers that perform gastrointestinal endoscopy procedures), billing for anesthesia services provided by medical professionals employed or contracted by the Company’s centers.  Such revenues are recognized when the related surgical procedures are performed.  Revenues exclude any amounts billed for physicians’ surgical services, which are billed separately by the physicians to the patient or third-party payor.

Revenues from centers are recognized on the date of service, net of estimated contractual adjustments from third-party medical service payors including Medicare and Medicaid.  During each of the three months ended March 31, 2014 and 2013, the Company derived approximately 25% of its revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs.  Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

(4)  Acquisitions and Investments in Unconsolidated Affiliates

As a significant part of its growth strategy, the Company primarily acquires controlling interests in centers.  The Company accounts for its business combinations under the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer be identified for each business combination.  The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control.  The assets acquired, liabilities assumed and any noncontrolling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination.  Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.  Equity method investments are initially recorded at cost, unless such investments are a result of the Company entering into a transaction whereby the Company loses control of a previously controlled entity but retains a noncontrolling interest.  Such transactions, which result in the deconsolidation of a previously consolidated entity, are measured at fair value.

During the three months ended March 31, 2014 the Company, through a wholly owned subsidiary, acquired a controlling interest in one center. The aggregate amount paid for the center acquired during the three months ended March 31, 2014 was approximately $5,038,000, net of cash acquired, and was paid in cash and funded by a combination of operating cash flow and borrowings under the Company’s revolving credit facility.  The total fair value of an acquisition includes an amount allocated to goodwill, which results from the centers’ favorable reputations in their markets, their market positions and their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model. 

In conjunction with the Company’s acquisition of 17 centers from National Surgical Care, Inc.  (“NSC”) on September 1, 2011, the Company agreed to pay as additional consideration an amount up to $7,500,000 based on a multiple of the excess earnings over the targeted earnings of the acquired centers, if any, from the period of January 1, 2012 to December 31, 2012.  During the three months ended March 31, 2013, the Company paid NSC $2,744,000 as final settlement of the additional consideration due in accordance with the purchase agreement.

6

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

The acquisition date fair value of the total consideration transferred and acquisition date fair value of each major class of consideration for the acquisition completed in the three months ended March 31, 2014 and 2013, including post acquisition date adjustments recorded to finalize purchase price allocations, are as follows (in thousands):

		Three Months Ended March 31,
		2014		2013
Accounts receivable		$	417	$	-
Supplies, inventory, prepaid and other current assets			81		-
Property and equipment			429		-
Goodwill			8,260		-
Accounts payable			(125)		-
Other accrued liabilities			(39)		-
	Total fair value		9,023		-
	Less:  Fair value attributable to noncontrolling interests		3,985		-
	Acquisition date fair value of total consideration transferred	$	5,038	$	-

Fair value attributable to noncontrolling interests is based on significant inputs that are not observable in the market.  Key inputs used to determine the fair value include financial multiples used in the purchase of noncontrolling interests in centers.  Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability.  The fair value of noncontrolling interests for acquisitions where the purchase price allocation is not finalized may be subject to adjustment as the Company completes its initial accounting for acquired intangible assets.  For the three months ended March 31, 2014 approximately $4,670,000 of goodwill recorded was deductible for tax purposes.  The acquisition related costs incurred by the Company were not significant for the three months ended March 31, 2014 and 2013,respectively.

Revenues and net earnings included in the three months ended March 31, 2014 and 2013 associated with this acquisition are as follows (in thousands):

		Three Months Ended March 31,
		2014		2013
Revenues		$	1,031	$	-
Net earnings			245		-
Less:  Net earnings attributable to noncontrolling interests			151		-
	Net earnings attributable to AmSurg Corp. common shareholders	$	94	$	-

The unaudited consolidated pro forma results for the three months ended March 31, 2014 and 2013, assuming all 2014 acquisitions had been consummated on January 1, 2013 and all 2013 acquisitions had been consummated on January 1, 2012, are as follows (in thousands, except per share data):

			Three Months Ended March 31,
			2014		2013
Revenues			$	263,107	$	270,371
Net earnings				60,114		65,385
Amounts attributable to AmSurg Corp. common shareholders:
	Net earnings from continuing operations			17,504		18,830
	Net earnings			17,195		18,891
	Net earnings from continuing operations per common share:
		Basic	$	0.55	$	0.60
		Diluted	$	0.54	$	0.59
	Net earnings:
		Basic	$	0.54	$	0.61
		Diluted	$	0.54	$	0.59
	Weighted average number of shares and share equivalents:
		Basic		31,716		31,217
		Diluted		32,120		31,881

7

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

During the three months ended March 31, 2014, the Company entered into a transaction whereby it contributed a controlling interest in one center in exchange for $600,000 and a noncontrolling interest in an entity jointly owned by a hospital that, after the completion of the transaction, controls the contributed center.  During the three months ended March 31, 2013, the Company entered into a transaction whereby it contributed cash of $252,000 plus a controlling interest in one center in exchange for a noncontrolling interest in an entity jointly owned by a hospital that, after the completion of the transaction, controlled the contributed center and one additional center. Management of the Company believes these structures provide both economies of scale and potential future growth opportunities in the markets in which the centers are located.  As a result of these transactions, the Company recorded in the accompanying consolidated balance sheets as a component of investments in unconsolidated affiliates and other, the fair value of the noncontrolling interest in the entities which control the contributed centers of approximately $1,238,000 and $5,200,000 as of the three months ended March 31, 2014 and 2013, respectively.  Accordingly, during the three months ended March 31, 2014 and 2013, the Company recognized a gain on deconsolidation in the accompanying consolidated statements of earnings and comprehensive income of approximately $2,045,000 and $2,237,000, respectively.  In each of these transactions, the gain on deconsolidation was determined based on the difference between the fair value of the Company’s noncontrolling interest in the new entity and the carrying value of both the tangible and intangible assets of the contributed centers immediately prior to each transaction.

(5)  Dispositions

During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company initiated the disposition of certain of its centers due to management’s assessment of the Company’s strategy in the market and due to the limited growth opportunities at these centers.  Results of operations (net of income tax) of the centers discontinued for the three months ended March 31, 2014 and 2013 are as follows (in thousands):

	Three Months Ended March 31,
	2014		2013
Cash proceeds from disposal	$	1,147	$	-
Net (loss) earnings from discontinued operations		(225)		162
Net (loss) earnings from discontinued operations attributable to AmSurg Corp.		(309)		61

The results of operations of discontinued centers have been classified as discontinued operations in all periods presented.  Results of operations of the combined discontinued centers for the three months ended March 31, 2014 and 2013 are as follows (in thousands):

	Three Months Ended March 31,
	2014		2013
Revenues	$	1,048	$	1,872
Earnings before income taxes		172		209
Net earnings		137		162

(6)  Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows (in thousands):

Balance as of December 31, 2013	$	1,758,970
Goodwill acquired, including post acquisition adjustments		8,328
Goodwill disposed, including impact of deconsolidation transaction		(2,675)
Balance as of March 31, 2014	$	1,764,623

8

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

Amortizable intangible assets at March 31, 2014 and December 31, 2013 consisted of the following (in thousands):

		March 31, 2014						December 31, 2013
		Gross						Gross
		Carrying		Accumulated				Carrying		Accumulated
		Amount		Amortization		Net		Amount		Amortization		Net
Deferred financing cost		$	15,814	$	(5,452)	$	10,362	$	15,814	$	(4,953)	$	10,861
Agreements, contracts and other intangible assets			3,448		(2,542)		906		3,448		(2,472)		976
	Total amortizable intangible assets	$	19,262	$	(7,994)	$	11,268	$	19,262	$	(7,425)	$	11,837

Amortization of intangible assets for the three months ended March 31, 2014 and 2013 was $569,000 and $545,000, respectively.  Estimated amortization of intangible assets for the remainder of 2014 and the following five years and thereafter is $1,682,000, $2,241,000, $2,240,000, $1,986,000, $1,423,000, $859,000 and $837,000, respectively.  The Company expects to recognize amortization of intangible assets over a weighted average period of 5.5 years with no expected residual values.

At March 31, 2014and December 31, 2013, other non-amortizable intangible assets related to restrictive covenant arrangements were $9,825,000, respectively.

(7)Long-term Debt

Long-term debt at March 31, 2014 and December 31, 2013 was comprised of the following (in thousands):

		March 31,		December 31,
		2014		2013
Revolving credit agreement		$	237,500	$	252,500
Senior Unsecured Notes due 2020 (5.625%)			250,000		250,000
Senior Secured Notes due 2020 (8.04%)			66,964		69,643
Other debt due through 2025			20,193		21,149
Capitalized lease arrangements due through 2026			10,565		10,850
			585,222		604,142
Less current portion			20,285		20,844
	Long-term debt	$	564,937	$	583,298

a.     Credit Facility

On June 14, 2013, the Company amended its revolving credit agreement to adjust the interest rate spreads and extend the maturity date by one year. The revolving credit agreement, as amended, permits the Company to borrow up to $475,000,000 at an interest rate equal to, at the Company’s option, the base rate plus 0.25% to 1.00% or LIBOR plus 1.25% to 2.00%, or a combination thereof; provides for a fee of 0.25% to 0.40% of unused commitments; and contains certain covenants relating to the ratio of debt to operating performance measurements, interest coverage ratios and minimum net worth.  Borrowings under the revolving credit agreement mature in June 2018 and are secured primarily by a pledge of the stock of the Company’s wholly-owned subsidiaries and the Company’s partnership and membership interests in the LPs and LLCs.  The Company was in compliance with the covenants contained in the revolving credit agreement at March 31, 2014.

b.     Senior Unsecured Notes

On November 20, 2012, the Company completed a private offering of $250,000,000 aggregate principal amount of 5.625% senior unsecured notes due 2020 (the “Senior Unsecured Notes”).  On May 31, 2013 the Company completed an offer to exchange the outstanding Senior Unsecured Notes for an equal amount of such notes that are registered under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Senior Unsecured Notes were used to reduce the outstanding indebtedness under the Company’s revolving credit agreement. The Senior Unsecured Notes are general unsecured obligations of the Company and are guaranteed by its existing and subsequently acquired or organized wholly owned domestic subsidiaries. The Senior Unsecured Notes are pari passu in right of payment with all the existing and future senior debt of the Company and senior to all existing and future subordinated debt of the Company. Interest on the Senior Unsecured Notes accrues at the rate of 5.625% per annum and is payable semi-annually in arrears on May 30 and November 30, through the maturity date of November 30, 2020.

Prior to November 30, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior Unsecured Notes at a redemption price of 105.625% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, using proceeds of one or more equity offerings.  On or after November 30, 2015, the Company may redeem the Senior Unsecured Notes in whole or in part. The redemption price for such a

9

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

redemption (expressed as percentages of principal amount) is set forth below, plus accrued and unpaid interest and liquidated damages, if any, if redeemed during the twelve-month period beginning on November 30 of the years indicated below:

Period	Redemption Price
2015	104.219%
2016	102.813%
2017	101.406%
2018 and thereafter	100.000%

The Senior Unsecured Notes contain certain covenants which, among other things, limit, but may not restrict the Company’s ability to enter into or guarantee additional borrowings, sell preferred stock, pay dividends and repurchase stock.  The Company was in compliance with the covenants contained in the indenture relating to the Senior Unsecured Notes at March 31, 2014.

c.     Senior Secured Notes

The Company issued $75,000,000 principal amount of senior secured notes (the “Senior Secured Notes”) on May 28, 2010 pursuant to a note purchase agreement.  The Senior Secured Notes mature on May 28, 2020.  The Senior Secured Notes, which were originally issued with a stated interest rate of 6.04%, were amended on November 7, 2012 to allow for the Company’s issuance of the Senior Unsecured Notes, which resulted in an increase in the annual interest rate to 8.04%, and included certain other adjustments to the existing covenants.  The Senior Secured Notes are pari passu with the indebtedness under the Company’s revolving credit agreement and the Senior Unsecured Notes and principal payments began in August 2013.  The note purchase agreement governing the Senior Secured Notes contains covenants similar to the covenants in the revolving credit agreement and includes a make whole provision in the event of any prepayment of principle.  The Company was in compliance with the covenants contained in the note purchase agreement relating to the Senior Secured Notes at March 31, 2014.

(8)  Fair Value Measurements

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability.  The inputs used by the Company to measure fair value are classified into the following hierarchy:

Level 1:  Quoted prices in active markets for identical assets or liabilities.

Level 2:  Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3:  Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

In determining the fair value of assets and liabilities that are measured on a recurring basis at March 31, 2014 and December 31, 2013, the Company utilized Level 2 inputs to perform such measurements methods, which were commensurate with the market approach.  As of March 31, 2014 and December 31, 2013, the fair value of the supplemental executive and director retirement savings plan investments, which are included in prepaid and other current assets in the accompanying consolidated balance sheets, was $16,175,000 and $13,313,000, respectively. The fair values were determined using the calculated net asset values obtained from the plan administrator and observable inputs of similar public mutual fund investments (Level 2). There were no transfers to or from Levels 1 and 2 during the three months ended March 31, 2014.

Cash and cash equivalents, receivables and payables are reflected in the financial statements at cost, which approximates fair value.  The fair value of fixed rate long-term debt, with a carrying value of $345,253,000, was $365,111,000 at March 31, 2014.  The fair value of variable rate long-term debt approximates its carrying value of $239,969,000 at March 31, 2014.  With the exception of the Company’s Senior Unsecured Notes, the fair value of fixed rate debt (Level 2) is determined based on an estimation of discounted future cash flows of the debt at rates currently quoted or offered to the Company for similar debt instruments of comparable maturities by its lenders.  The fair value of the Company’s Senior Unsecured Notes (Level 1) is determined based on quoted prices in an active market.

10

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

(9)  Shareholders’ Equity

a.   Common Stock

On April 24, 2012, the Board of Directors authorized a stock purchase program for up to $40,000,000 of the Company’s shares of common stock.  The Company completed this repurchase program in August 2013.  On August 9, 2013, the Board of Directors authorized a stock purchase program for up to $40,000,000 of the Company’s shares of common stock to be purchased through February 9, 2015.  As of March 31, 2014, there was approximately $27,100,000 available under the stock repurchase program.

During the three months ended March 31, 2014, the Company did not purchase any shares under the stock repurchase program.  During the three months ended March 31, 2013, the Company purchased 438,668 shares of the Company’s common stock for approximately $13,943,000, at an average price of $31.76 per share, in order to mitigate the dilutive effect of shares issued upon the exercise of stock options pursuant to the Company’s stock incentive plans. 

In addition, the Company repurchases shares to cover payroll withholding taxes in connection with the vesting of restricted stock awards in accordance with the restricted stock agreements.  During the three months ended March 31, 2014, and 2013, the Company repurchased 68,014 shares and 89,788 shares, respectively, of common stock for approximately $2,857,000 and $2,815,000, respectively.

b.   Stock Incentive Plans

In May 2006, the Company adopted the AmSurg Corp. 2006 Stock Incentive Plan.  The Company also has options outstanding under the AmSurg Corp. 1997 Stock Incentive Plan, under which no additional awards may be granted.  Under these plans, the Company has granted restricted stock and non-qualified options to purchase shares of common stock to employees and outside directors from its authorized but unissued common stock.  At March 31, 2014, 2,760,250 shares were authorized for grant under the 2006 Stock Incentive Plan and 763,445 shares were available for future equity grants, including 601,327 shares available for issuance as restricted stock.  Restricted stock granted to outside directors prior to 2012 vested over a two year period and restricted stock granted to outside directors during 2012 and after vest over a one year period.  Restricted stock granted to employees during 2010 and thereafter vests over four years in three equal installments beginning on the second anniversary of the date of grant.  Restricted stock granted to employees prior to 2010 vests at the end of four years from the date of grant.  The fair value of restricted stock is determined based on the closing bid price of the Company’s common stock on the grant date.  Under Company policy, shares held by outside directors and senior management are subject to certain holding restrictions.

No options have been issued subsequent to 2008 and all outstanding options are fully vested.  Options were granted at market value on the date of the grant and vested over four years.  Outstanding options have a term of ten years from the date of grant.

Other information pertaining to share-based activity during the three months ended March 31, 2014 and 2013 was as follows (in thousands):

	Three Months Ended March 31,
	2014		2013
Share-based compensation expense	$	2,458	$	2,050
Fair value of shares vested		9,175		9,182
Cash received from option exercises		488		5,691
Tax benefit from option exercises		1,727		288

As of March 31, 2014, the Company had total unrecognized compensation cost of approximately $13,227,000 related to non-vested awards, which the Company expects to recognize through 2018 and over a weighted average period of 1.2 years.

For the period ended March 31, 2014 and 2013, there were no options that were anti-dilutive.

A summary of the status of non-vested restricted shares at March 31, 2014 and changes during the three months ended March 31, 2014 is as follows:

			Weighted
		Number	Average
		of Shares	Grant Price
Non-vested shares at December 31, 2013		743,869	$	26.54
	Shares granted	200,391		42.38
	Shares vested	(218,405)		21.62
Non-vested shares at March 31, 2014		725,855	$	32.40

11

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

A summary of stock option activity for the three months ended March 31, 2014 is summarized as follows:

					Weighted
					Average
			Weighted		Remaining
		Number	Average		Contractual
		of Shares	Exercise Price		Term (in years)
Outstanding at December 31, 2013		270,464	$	23.16	2.5
	Options exercised with total intrinsic value of $488,000	(19,921)		24.49
Outstanding at March 31, 2014 with aggregate intrinsic value of $6,020,000		250,543	$	23.05	2.2
Vested at March 31, 2014 with aggregate intrinsic value of  $6,020,000		250,543	$	23.05	2.2
Exercisable at March 31, 2014 with aggregate intrinsic value of $6,020,000		250,543	$	23.05	2.2

The aggregate intrinsic value represents the total pre-tax intrinsic value received by the option holders on the exercise date or that would have been received by the option holders had all holders of in-the-money outstanding options at March 31, 2014 exercised their options at the Company’s closing stock price on March 31, 2014.

c.   Earnings per Share

The following is a reconciliation of the numerator and denominators of basic and diluted earnings per share (in thousands, except per share amounts):

		Three Months Ended March 31,
		Earnings		Shares	Per Share
		(Numerator)		(Denominator)	Amount
2014:
Net earnings from continuing operations attributable to AmSurg Corp. per common share (basic)		$	17,504	31,716	$	0.55
Effect of dilutive securities options and non-vested shares			-	404
	Net earnings from continuing operations attributable to AmSurg Corp. per common share (diluted)	$	17,504	32,120	$	0.55
Net earnings attributable to AmSurg Corp. per common share (basic)		$	17,195	31,716	$	0.54
Effect of dilutive securities options and non-vested shares			-	404
	Net earnings attributable to AmSurg Corp.  per common share (diluted)	$	17,195	32,120	$	0.54
2013:
Net earnings from continuing operations attributable to AmSurg Corp. per common share (basic)		$	17,750	31,217	$	0.57
Effect of dilutive securities options and non-vested shares			-	664
	Net earnings from continuing operations attributable to AmSurg Corp. per common share (diluted)	$	17,750	31,881	$	0.56
Net earnings attributable to AmSurg Corp. per common share (basic)		$	17,811	31,217	$	0.57
Effect of dilutive securities options and non-vested shares			-	664
	Net earnings attributable to AmSurg Corp. per common share (diluted)	$	17,811	31,881	$	0.56

(10)  Income Taxes

The Company files a consolidated federal income tax return.  Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company applies recognition thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as it relates to accounting for uncertainty in income taxes.  In addition, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its consolidated statement of earnings and

12

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

comprehensive income.  The Company does not expect significant changes to its tax positions or liability for tax uncertainties during the next 12 months.

The Company and its subsidiaries file U.S. federal and various state tax returns.  With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2010.

(11)  Commitments and Contingencies

The Company and its subsidiaries are insured with respect to medical malpractice risk on a claims-made basis.  The Company also maintains insurance for general liability, director and officer liability, workers’ compensation liability and property damage.  Certain policies are subject to deductibles.  In addition to the insurance coverage provided, the Company indemnifies its officers and directors for actions taken on behalf of the Company and its subsidiaries.  Management is not aware of any claims against it or its subsidiaries which would have a material financial impact on the Company.

Certain of the Company’s wholly owned subsidiaries, as general partners in the LPs, are responsible for all debts incurred but unpaid by the LPs.  As manager of the operations of the LPs, the Company has the ability to limit potential liabilities by curtailing operations or taking other operating actions.

In the event of a change in current law that would prohibit the physicians’ current form of ownership in the partnerships, the Company would be obligated to purchase the physicians’ interests in a substantial majority of the Company’s partnerships.  The purchase price to be paid in such event would be determined by a predefined formula, as specified in the partnership agreements.  The Company believes the likelihood of a change in current law that would trigger such purchases was remote as of March 31, 2014. 

On December 27, 2012, the Company entered into a lease agreement with an initial term of 15 years plus renewal options, pursuant to which the Company has agreed to lease an approximately 110,000 square foot building to be constructed in Nashville, Tennessee. The Company intends that the building will serve as its corporate headquarters beginning in 2015. Prior to taking possession, the Company may terminate the agreement if the landlord fails to satisfy certain construction milestones.  The Company’s annual rental obligation at the inception of the lease, which will occur upon completion of construction currently estimated to occur in late 2014, is approximately $2,300,000 and increases by 1.9% annually thereafter during the initial term. In addition to base rent, the Company will pay additional rent consisting of, among other things, operating expenses, real estate taxes and insurance costs. The landlord will provide the Company with an allowance of approximately $4,400,000 for certain interior tenant improvements.

(12)  Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” which raised the threshold for a disposal to qualify as a discontinued operation and requires certain new disclosures for individually material disposals that do not meet the new definition of a discontinued operation.  The ASU’s intent is to reduce the number of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on the Company’s operations and financial results rather than routine disposals that are not a change in the Company’s strategy.  The guidance is effective for interim and annual periods beginning after December 15, 2014, with earlier adoption permitted.  From time to time, the Company will dispose of certain of its centers due to management’s assessment of the Company’s strategy in the market and due to limited growth opportunities at those centers.  Historically, these dispositions were classified as discontinued operations and recorded separately from continuing operations.  When adopted, this ASU will require the Company to record the results of operations and the associated gain or loss from similar dispositions as a component of continuing operations.  The Company does not believe this ASU will have a material impact on the Company’s consolidated financial position or cash flows.

(13)  Supplemental Cash Flow Information

Supplemental cash flow information for the three months ended March 31, 2014 and 2013 is as follows (in thousands):

		Three Months Ended March 31,
		2014		2013
Cash paid during the period for:
	Interest	$	3,132	$	3,547
	Income taxes, net of refunds		65		69
Non-cash investing and financing activities:
	Increase (decrease) in accounts payable associated with acquisition of property and equipment		1,111		(675)
	Capital lease obligations		116		-

13

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

(14)  Financial Information for the Company and Its Subsidiaries

The Senior Unsecured Notes are senior unsecured obligations of the Company and are guaranteed by its existing and subsequently acquired or organized wholly owned domestic subsidiaries.  The Senior Unsecured Notes are guaranteed on a full and unconditional and joint and several basis, with limited exceptions considered customary for such guarantees, including the release of the guarantee when a subsidiary's assets are sold. The following condensed consolidating financial statements present the Company (as parent issuer), the subsidiary guarantors, the subsidiary non-guarantors and consolidating adjustments. These condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered."  The operating and investing activities of the separate legal entities are fully interdependent and integrated. Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis.

Condensed Consolidating Balance Sheet - March 31, 2014 (In thousands)
						Guarantor		Non-Guarantor		Consolidating		Total
				Parent Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Assets
Current assets:
	Cash and cash equivalents			$	5,562	$	-	$	41,554	$	-	$	47,116
	Accounts receivable, net				-		-		106,209		-		106,209
	Supplies inventory				52		-		18,381		-		18,433
	Deferred income taxes				1,026		-		-		-		1,026
	Prepaid and other current assets				28,618		-		13,350		(4,817)		37,151
		Total current assets			35,258		-		179,494		(4,817)		209,935
Property and equipment, net					10,129		-		158,877		-		169,006
Investments in unconsolidated affiliates and other					1,489,635		1,458,185		-		(2,928,336)		19,484
Goodwill and intangible assets, net					20,185		-		909		1,764,622		1,785,716
			Total assets	$	1,555,207	$	1,458,185	$	339,280	$	(1,168,531)	$	2,184,141
Liabilities and Equity
Current liabilities:
	Current portion of long-term debt			$	10,714	$	-	$	9,571	$	-	$	20,285
	Accounts payable				1,014		-		28,972		(4,627)		25,359
	Accrued liabilities				24,092		-		14,703		(190)		38,605
		Total current liabilities			35,820		-		53,246		(4,817)		84,249
Long-term debt					543,750		-		52,009		(30,822)		564,937
Deferred income taxes					185,882		-		-		-		185,882
Other long-term liabilities					7,342		-		18,411		-		25,753
Noncontrolling interests – redeemable					-		-		63,691		113,992		177,683
Equity:
		Total AmSurg Corp. equity			782,413		1,458,185		113,448		(1,571,633)		782,413
		Noncontrolling interests – non-redeemable			-		-		38,475		324,749		363,224
		Total equity			782,413		1,458,185		151,923		(1,246,884)		1,145,637
			Total liabilities and equity	$	1,555,207	$	1,458,185	$	339,280	$	(1,168,531)	$	2,184,141

14

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

Condensed Consolidating Balance Sheet - December 31, 2013 (In thousands)
						Guarantor		Non-Guarantor		Consolidating		Total
				Parent Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Assets
Current assets:
	Cash and cash equivalents			$	6,710	$	-	$	44,130	$	-	$	50,840
	Accounts receivable, net				-		-		105,072		-		105,072
	Supplies inventory				33		-		18,381		-		18,414
	Deferred income taxes				3,097		-		-		-		3,097
	Prepaid and other current assets				23,993		-		13,971		(4,362)		33,602
		Total current assets			33,833		-		181,554		(4,362)		211,025
Property and equipment, net					9,829		-		160,066		-		169,895
Investments in unconsolidated affiliates and other					1,484,974		1,453,596		-		(2,922,178)		16,392
Goodwill and intangible assets, net					20,684		-		978		1,758,970		1,780,632
			Total assets	$	1,549,320	$	1,453,596	$	342,598	$	(1,167,570)	$	2,177,944
Liabilities and Equity
Current liabilities:
	Current portion of long-term debt			$	10,714	$	-	$	10,130	$	-	$	20,844
	Accounts payable				1,972		-		29,487		(3,958)		27,501
	Accrued liabilities				27,419		-		14,510		(404)		41,525
		Total current liabilities			40,105		-		54,127		(4,362)		89,870
Long-term debt					561,429		-		53,246		(31,377)		583,298
Deferred income taxes					176,020		-		-		-		176,020
Other long-term liabilities					7,569		-		17,934		-		25,503
Noncontrolling interests – redeemable					-		-		63,704		113,993		177,697
Equity:
		Total AmSurg Corp. equity			764,197		1,453,596		114,671		(1,568,267)		764,197
		Noncontrolling interests – non-redeemable			-		-		38,916		322,443		361,359
		Total equity			764,197		1,453,596		153,587		(1,245,824)		1,125,556
			Total liabilities and equity	$	1,549,320	$	1,453,596	$	342,598	$	(1,167,570)	$	2,177,944

15

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

Condensed Consolidating Statement of Earnings and Comprehensive Income - For the Three Months Ended March 31, 2014 (In thousands)
						Guarantor		Non-Guarantor		Consolidating		Total
				Parent Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Revenues				$	6,127	$	-	$	261,589	$	(4,609)	$	263,107
Operating expenses:
	Salaries and benefits				14,485		-		68,830		(121)		83,194
	Supply cost				-		-		38,720		-		38,720
	Other operating expenses				4,166		-		55,591		(4,488)		55,269
	Depreciation and amortization				825		-		7,549		-		8,374
		Total operating expenses			19,476		-		170,690		(4,609)		185,557
Gain on deconsolidation					2,045		2,045		-		(2,045)		2,045
Equity in earnings of unconsolidated affiliates					48,052		48,052		-		(95,340)		764
		Operating income			36,748		50,097		90,899		(97,385)		80,359
Interest expense					6,452		-		511		-		6,963
	Earnings from continuing operations before income taxes				30,296		50,097		90,388		(97,385)		73,396
Income tax expense					12,704		-		353		-		13,057
	Net earnings from continuing operations				17,592		50,097		90,035		(97,385)		60,339
	Net earnings (loss) from discontinued operations				(397)		-		172		-		(225)
		Net earnings and comprehensive income			17,195		50,097		90,207		(97,385)		60,114
Less net earnings and comprehensive income attributable to noncontrolling interests:
	Net earnings from continuing operations				-		-		42,835		-		42,835
	Net earnings from discontinued operations				-		-		84		-		84
		Total net earnings and comprehensive income attributable to noncontrolling interests			-		-		42,919		-		42,919
			Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,195	$	50,097	$	47,288	$	(97,385)	$	17,195
Amounts attributable to AmSurg Corp. common shareholders:
	Earnings from continuing operations, net of income tax			$	17,592	$	50,097	$	47,200	$	(97,385)	$	17,504
	Discontinued operations, net of income tax				(397)		-		88		-		(309)
			Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,195	$	50,097	$	47,288	$	(97,385)	$	17,195

16

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

Condensed Consolidating Statement of Earnings and Comprehensive Income - For the Three Months Ended March 31, 2013 (In thousands)
						Guarantor		Non-Guarantor		Consolidating		Total
				Parent Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Revenues				$	5,716	$	-	$	256,711	$	(4,238)	$	258,189
Operating expenses:
	Salaries and benefits				15,421		-		65,650		(113)		80,958
	Supply cost				-		-		37,213		-		37,213
	Other operating expenses				5,060		-		51,792		(4,125)		52,727
	Depreciation and amortization				772		-		7,236		-		8,008
		Total operating expenses			21,253		-		161,891		(4,238)		178,906
Gain on deconsolidation					2,237		2,237		-		(2,237)		2,237
Equity in earnings of unconsolidated affiliates					49,955		49,955		-		(99,508)		402
		Operating income			36,655		52,192		94,820		(101,745)		81,922
Interest expense					6,923		-		619		-		7,542
	Earnings from continuing operations before income taxes				29,732		52,192		94,201		(101,745)		74,380
Income tax expense					11,877		-		392		-		12,269
	Net earnings from continuing operations				17,855		52,192		93,809		(101,745)		62,111
	Net earnings (loss) from discontinued operations				(44)		-		206		-		162
		Net earnings and comprehensive income			17,811		52,192		94,015		(101,745)		62,273
Less net earnings and comprehensive income attributable to noncontrolling interests:
	Net earnings from continuing operations				-		-		44,361		-		44,361
	Net earnings from discontinued operations				-		-		101		-		101
		Total net earnings and comprehensive income attributable to noncontrolling interests			-		-		44,462		-		44,462
			Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,811	$	52,192	$	49,553	$	(101,745)	$	17,811
Amounts attributable to AmSurg Corp. common shareholders:
	Earnings from continuing operations, net of income tax			$	17,855	$	52,192	$	49,448	$	(101,745)	$	17,750
	Discontinued operations, net of income tax				(44)		-		105		-		61
			Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	$	17,811	$	52,192	$	49,553	$	(101,745)	$	17,811

17

Item 1. Financial Statements – (continued)

AmSurg Corp.

Notes to the Unaudited Consolidated Financial Statements – (continued)

Condensed Consolidating Statement of Cash Flows - For the Three Months Ended March 31, 2014 (In thousands)
			Parent		Guarantor		Non-Guarantor		Consolidating		Total
			Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Cash flows from operating activities:
		Net cash flows provided by operating activities	$	18,482	$	48,096	$	96,257	$	(93,016)	$	69,819
Cash flows from investing activities:
	Acquisition of interests in surgery centers and related transactions			-		(5,082)		-		44		(5,038)
	Acquisition of property and equipment			(1,237)		-		(5,801)		-		(7,038)
	Proceeds from sale of interests in surgery centers			-		1,111		-		-		1,111
	Other			(629)		211		-		-		(418)
		Net cash flows used in investing activities		(1,866)		(3,760)		(5,801)		44		(11,383)
Cash flows from financing activities:
	Proceeds from long-term borrowings			30,000		-		1,945		-		31,945
	Repayment on long-term borrowings			(47,679)		-		(3,174)		-		(50,853)
	Distributions to owners, including noncontrolling interests			-		(44,920)		(91,290)		93,016		(43,194)
	Changes in intercompany balances with affiliates, net			556		-		(556)		-		-
	Other financing activities, net			(641)		584		43		(44)		(58)
		Net cash flows used in financing activities		(17,764)		(44,336)		(93,032)		92,972		(62,160)
Net decrease in cash and cash equivalents				(1,148)		-		(2,576)		-		(3,724)
Cash and cash equivalents, beginning of period				6,710		-		44,130		-		50,840
Cash and cash equivalents, end of period			$	5,562	$	-	$	41,554	$	-	$	47,116

Condensed Consolidating Statement of Cash Flows - For the Three Months Ended March 31, 2013 (In thousands)
			Parent		Guarantor		Non-Guarantor		Consolidating		Total
			Issuer		Subsidiaries		Subsidiaries		Adjustments		Consolidated
Cash flows from operating activities:
		Net cash flows provided by operating activities	$	23,940	$	49,577	$	99,411	$	(99,063)	$	73,865
Cash flows from investing activities:
	Acquisition of interests in surgery centers and related transactions			-		(242)		-		(10)		(252)
	Acquisition of property and equipment			(853)		-		(5,257)		-		(6,110)
		Net cash flows used in investing activities		(853)		(242)		(5,257)		(10)		(6,362)
Cash flows from financing activities:
	Proceeds from long-term borrowings			29,700		-		1,170		-		30,870
	Repayment on long-term borrowings			(45,024)		-		(3,187)		-		(48,211)
	Distributions to owners, including noncontrolling interests			-		(49,486)		(93,491)		99,063		(43,914)
	Changes in intercompany balances with affiliates, net			533		-		(533)		-		-
	Other financing activities, net			(10,792)		151		398		10		(10,233)
		Net cash flows used in financing activities		(25,583)		(49,335)		(95,643)		99,073		(71,488)
Net decrease in cash and cash equivalents				(2,496)		-		(1,489)		-		(3,985)
Cash and cash equivalents, beginning of period				7,259		-		39,139		-		46,398
Cash and cash equivalents, end of period			$	4,763	$	-	$	37,650	$	-	$	42,413

(15)  Subsequent Events

The Company assessed events occurring subsequent to March 31, 2014 for potential recognition and disclosure in the unaudited consolidated financial statements. No events have occurred that would require adjustment to or disclosure in the unaudited consolidated financial statements.

18

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements (all statements other than with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby.  Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2013 and listed below in this report, some of which are beyond our control.  Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate.  Therefore there can be no assurance that the forward-looking statements included in this report will prove to be accurate.  Actual results could differ materially and adversely from those contemplated by any forward-looking statement.  In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.  We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events.

Forward-looking statements and our liquidity, financial condition and results of operations, may be affected by the following risks and uncertainties and the other risks and uncertainties discussed in this report, in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 1A. – Risk Factors”, as well as other unknown risks and uncertainties:

•       the risk that payments from third-party payors, including government healthcare programs, may decrease or not increase as costs increase;

•       our ability to acquire and develop additional surgery centers on favorable terms;

•       our ability to compete for physician partners, managed care contracts, patients and strategic relationships;

•       adverse developments affecting the medical practices of our physician partners;

•       our ability to maintain favorable relations with our physician partners;

•our ability to grow revenues by increasing procedure volume while maintaining operating margins and profitability at our existing centers;

•our ability to manage the growth in our business and integrate acquired businesses;

•our ability to obtain sufficient capital resources to complete acquisitions and develop new surgery centers;

•our ability to generate sufficient cash to service all of our indebtedness;

•adverse weather and other factors beyond our control that may affect our surgery centers;

•our failure to comply with applicable laws and regulations;

•our failure to effectively and timely transition to the ICD-10 coding system;

•the risk of changes in legislation, regulations or regulatory interpretations that may negatively affect us;

•the risk of becoming subject to federal and state investigation;

•the risk from an unpredictable impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”);

•the risk of regulatory changes that may obligate us to buy out interests of physicians who are minority owners of our surgery centers;

•potential liabilities associated with our status as a general partner of limited partnerships;

•liabilities for claims brought against our facilities;

•our legal responsibility to minority owners of our surgery centers, which may conflict with our interests and prevent us from acting solely in our best interests;

•potential write-offs of the impaired portion of intangible assets; and

•potential liabilities relating to the tax deductibility of goodwill.

19

Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Overview

We acquire, develop and operate ambulatory surgery centers (“centers” or “ASCs”) in partnership primarily with physicians.  As of March 31, 2014, we had 242 operating ASCs, of which we owned a majority interest (primarily 51%) in 235 ASCs and owned a minority interest in seven ASCs (three of which are consolidated). The following table presents the number of procedures performed at our continuing centers and changes in the number of ASCs in operation, under development and under letter of intent for the three months ended March 31, 2014 and 2013.  An ASC is deemed to be under development when a limited partnership (“LP”) or limited liability company (“LLC”) has been formed with the physician partners to develop the ASC.

	Three Months Ended March 31,
	2014	2013
Procedures	389,987	391,703
Continuing centers in operation, end of period (consolidated)	238	233
Continuing centers in operation, end of period (unconsolidated)	4	4
Average number of continuing centers in operation, during period	239	234
New centers added during period	1	1
Centers discontinued during period	1	-
Centers under development, end of period	1	-
Centers under letter of intent, end of period	7	4

Of the continuing centers in operation at March 31, 2014, 151 centers performed gastrointestinal endoscopy procedures, 48 centers performed procedures in multiple specialties, 36 centers performed ophthalmology procedures and seven centers performed orthopaedic procedures.  We intend to expand primarily through the acquisition and development of additional centers and through future same-center growth.  Our growth strategy for 2014 includes the acquisition and development of additional centers, which on an annual basis we expect would generate additional operating income of $25 million to $29 million.  We anticipate that because the majority of these acquisitions will occur in the latter part of 2014, their contribution to our 2014 operating income would not be significant.  We expect a 1% to 2% increase in our same-center revenue for 2014, which reflects positive rate adjustments from the Centers for Medicare and Medicaid Services (“CMS”) in 2014. Our same-center revenue guidance also reflects the expected impact of sequestration.  During the three months ended March 31, 2014 compared to the same 2013 period, our same-center revenues decreased 2% primarily due to the impact of inclement weather that impacted our centers and adversely affected our procedure volumes.

While we own less than 100% of each of the entities that own the centers, our consolidated statements of earnings include 100% of the results of operations of each of our consolidated entities, reduced by the noncontrolling partners’ interests share of the net earnings or loss of the surgery center entities.  The noncontrolling ownership interest in each LP or LLC is generally held directly or indirectly by physicians who perform procedures at the center.  Our share of the profits and losses of four non-consolidated entities are reported in equity in earnings of unconsolidated affiliates in our consolidated statement of earnings. 

Sources of Revenues

Our revenues are derived from facility fees charged for surgical procedures performed in our centers and, at certain of our centers (primarily centers that perform gastrointestinal endoscopy procedures), charges for anesthesia services provided by medical professionals employed or contracted by our centers.  These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications.  Facility fees do not include professional fees charged by the physicians that perform the surgical procedures.  Revenues are recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors. Our billing and accounting systems provide us historical trends of the centers’ cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly for each of our centers as revenues are recognized. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our centers perform and bill for limited types of procedures, the range of reimbursement for those procedures within each surgery center specialty is very narrow and payments are typically received within 15 to 45 days of billing. These estimates are not, however, established from billing system generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter.

ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients.  We derived approximately 25% of our revenues for each of the three months ended March 31, 2014 and 2013, respectively, from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles.  The Medicare program currently pays ASCs in accordance with predetermined fee schedules.  Our centers are not required to file cost reports and, accordingly, we have no unsettled amounts from governmental third-party payors.

ASCs are paid under the Medicare program based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective patient system and reimbursement rates for ASCs are increased annually based on increases in the consumer price index (“CPI”). Effective for federal fiscal year (“FFY”) 2011 and subsequent years, the Health Reform Law provides for the annual CPI increases

20

Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

applicable to ASCs to be reduced by a productivity adjustment, which is based on historical nationwide productivity gains. In 2013, reimbursement rates increased by 0.6%, which positively impacted our 2013 revenues by approximately $2.5 million and our net earnings per diluted share by $0.02. In 2014, reimbursement rates increased by 1.2%, which we estimate will positively impact our 2014 revenues by approximately $6.0 million, net of the continued effects of sequestration, as discussed below. There can be no assurance that CMS will not revise the ASC payment system or that any annual CPI increases will be material. 

The Budget Control Act of 2011 (“BCA”) requires automatic spending reductions of $1.2 trillion for FFYs 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The percentage reduction for Medicare may not be more than 2% for a FFY, with a uniform percentage reduction across all Medicare programs. These BCA-mandated spending cuts are commonly referred to as "sequestration." Sequestration began on March 1, 2013, and CMS imposed a 2% reduction on Medicare claims as of April 1, 2013. These reductions have been extended through FFY 2024. We cannot predict with certainty what other deficit reduction initiatives may be proposed by Congress, whether Congress will attempt to restructure or suspend sequestration or the impact sequestration may have on our centers.  Based on current volumes, we estimate that the imposed spending reductions will have a negative impact on 2014 revenues of approximately $1.5 million, concentrated in the three months ended March 31, 2014.

The Health Reform Law represents significant change across the healthcare industry.  The Health Reform Law contains a number of provisions designed to reduce Medicare program spending, including the annual productivity adjustment discussed above that reduces payment updates to ASCs.  However, the Health Reform Law also expands coverage of uninsured individuals through a combination of public program expansion and private sector health insurance reforms.  For example, the Health Reform Law has expanded eligibility under existing Medicaid programs in states that have not opted out of the expansion, created financial penalties on individuals who fail to carry insurance coverage, established affordability credits for those not enrolled in an employer-sponsored health plan, resulted in the establishment of, or participation in, a health insurance exchange for each state and allowed states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid.  The Health Reform Law also required a number of private health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage. 

Many health plans are required to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive Services Task Force, including screening colonoscopies.  Medicare now covers these preventive services without cost-sharing, and states that provide Medicaid coverage of these preventive services without cost-sharing receive a one percentage point increase in their federal medical assistance percentage for these services.

Health insurance market reforms that expand insurance coverage may result in an increased volume for certain procedures at our centers.  However, certain of the provisions of the Health Reform Law are not currently effective, and the provisions may be amended, repealed or delayed or their impact could be offset by reductions in reimbursement under the Medicare program.  It is unclear what the resulting impact of the Health Reform Law will be on the number of uninsured individuals or what the payment terms will be for individuals covered by the Medicaid expansion or who purchase coverage through health insurance exchanges. Further, the employer mandate, which requires firms with 50 or more full-time employees to offer health insurance or pay fines, has been delayed until January 1, 2015 and will not be fully implemented until January 1, 2016.  The federal online insurance marketplace and certain state exchanges experienced significant technical issues that negatively impacted the ability of individuals to purchase health insurance.  These technical issues are being addressed, but additional implementation issues could lead to further delays of the individual mandate tax penalties, delays in individuals obtaining health insurance and a reduction in the number of individuals choosing to purchase health insurance rather than paying the individual mandate tax penalties. 

In addition, the Health Reform Law established a Medicare Shared Savings Program, which created Accountable Care Organizations (“ACOs”) to allow groups of doctors, hospitals and other healthcare providers to come together voluntarily to provide coordinated high quality care to Medicare patients. Under the Health Reform Law, CMS may contract directly with ACOs. The formation of ACOs or other coordinated care models could negatively impact our centers and the medical practices of our physician partners.

Because of the many variables involved, including the law’s complexity, lack of implementing definitive regulations or interpretive guidance, gradual or partially delayed implementation, amendments, repeal, or further implementation delays, we are unable to predict the net effect of the reductions in Medicare spending, the expected increases in revenues from increased procedure volumes, and numerous other provisions in the law that may affect us.  We are further unable to foresee how individuals and employers will respond to the choices afforded them by the Health Reform Law.  Thus, we cannot predict the full impact of the Health Reform Law on us at this time.

CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery audit contractor (“RAC”) program.  RACs are private contractors that have historically conducted post-payment reviews of providers and suppliers that bill Medicare to detect and correct improper payments for services. CMS has also established the Recovery Audit Prepayment Review (“RAPR”) demonstration that allows RACs to perform pre-payment reviews on certain types of claims that historically result in high rates of improper payments, beginning with claims for certain hospital services, but potentially including other facility types in the future. The RAPR demonstration began in 2012 and runs for a three year period.  The U.S. Department of Health and Human Services (“HHS”) has suspended the assignment of new Medicare appeals to Administrative Law Judges for at least two years beginning July 16, 2013, so that HHS may work through a backlog of appeals.  Thus, we will experience a significant delay in appealing any RAC payment denials that occur during the suspension period. The Health Reform Law expands the RAC program’s scope to include Medicaid claims.  In addition to RACs, other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and correct improper payments.  We could incur costs associated with appealing any alleged overpayments and be required to repay any alleged overpayments identified by these or other administrative audits.

21

Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. CMS has promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient or the wrong site.  Several commercial payors also do not reimburse providers for certain preventable adverse events.  CMS established a quality reporting program for ASCs under which ASCs that fail to report on certain required quality measures will receive a 2% reduction in reimbursement for calendar year 2014.  We have implemented programs and procedures at each of our centers to comply with the quality reporting program prescribed by CMS.  Further, as required by the Health Reform Law, HHS reported to Congress on its plan for implementing a value-based purchasing program for ASCs that would tie Medicare payments to quality and efficiency measures. As required by the Health Reform Law, HHS studied whether to expand to ASCs its current policy of not paying additional amounts for care provided to treat conditions acquired during an inpatient hospital stay and reported to Congress that it would not be feasible to expand the policy in its current form, but that further exploration of other payment policies aimed at this same goal should be undertaken.

In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private healthcare insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as preferred provider organizations and health maintenance organizations.  The strengthening of managed care systems nationally has resulted in substantial competition among providers of surgery center services that contract with these systems. Further, most of the plans offered through the health insurance exchanges provide for narrow networks that restrict the number of participating providers or tiered networks that impose significantly higher cost sharing obligations on patients who obtain services from providers in a disfavored tier. Exclusion from participation in a managed care network or assignment to a disfavored tier could result in material reductions in patient volume and revenues.  Some of our competitors have greater financial resources and market penetration than we do.  We believe that all payors, both governmental and private, will continue their efforts over the next several years to reduce healthcare costs and that their efforts will generally result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of our efforts to contract with healthcare payors, we believe that our position as a low‑cost alternative for certain surgical procedures should enable our centers to compete effectively in the evolving healthcare marketplace.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in our 2013 Annual Report on Form 10-K.  Our critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K.  There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2013.

Results of Operations

Our revenues are directly related to the number of procedures performed at our centers.  Our overall growth in procedure volume is impacted directly by the increase in the number of centers in operation and the growth in procedure volume at existing centers.  We increase our number of centers through both acquisitions and developments.  Procedure growth at an existing center may result from additional contracts entered into with third-party payors, increased market share of our physician partners, additional physicians utilizing the center and/or scheduling and operating efficiencies gained at the surgery center.  A significant measurement of how much our revenues grow from year to year for existing centers is our same-center revenue percentage.  We define our same-center group each year as those centers that contain full year-to-date operations in both comparable reporting periods, including the expansion of the number of operating centers associated with a LP or LLC.  Our 2014 same-center group, comprised of 232 centers and constituting approximately 97% of our total number of consolidated centers, experienced a 2% decline in revenue during the three months ended March 31, 2014 as compared to the three months ended March 31, 2014 primarily due to significant widespread inclement weather which impacted 38% of our centers, including certain centers that do not routinely experience adverse weather during this time of year.

Expenses directly and indirectly related to procedures performed at our centers include clinical and administrative salaries and benefits, supply cost and other operating expenses such as linen cost, repair and maintenance of equipment, billing fees and bad debt expense.  The majority of our corporate salary and benefits cost is associated directly with the number of centers we own and manage and tends to grow in proportion to the growth of our centers in operation.  Our centers and corporate offices also incur costs that are more fixed in nature, such as lease expense, legal fees, property taxes, utilities and depreciation and amortization.

Center profits are allocated to our noncontrolling partners in proportion to their individual ownership percentages and reflected in the aggregate as total net earnings attributable to noncontrolling interests and are presented after net earnings.  The noncontrolling partners of our center LPs and LLCs typically are organized as general partnerships, LPs or LLCs that are not subject to federal income tax.  Each noncontrolling partner shares in the pre-tax earnings of the center of which it is a partner.  Accordingly, net earnings attributable to the noncontrolling interests in each of our center LPs and LLCs are generally determined on a pre-tax basis, and pre-tax earnings are presented before net earnings attributable tononcontrolling interests have been subtracted.

The effective tax rate on pre-tax earnings as presented is approximately 17.8%.  However, the effective tax rate based on pre-tax earnings attributable to AmSurg Corp. common shareholders, on an annual basis, will remain near the historical percentage of 40%, excluding the varying impact from gains and losses from deconsolidation and disposal of centers.  We file a consolidated federal income tax return and numerous state income tax returns with varying tax rates.  Our income tax expense reflects the blending of these rates.

22

Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases.

Net earnings from continuing operations attributable to AmSurg Corp. common shareholders are disclosed on the unaudited consolidated statements of earnings.

The following table shows certain statement of earnings items expressed as a percentage of revenues for the three months ended March 31, 2014 and 2013:

			Three Months Ended  March 31,
			2014	2013
Revenues			100.0%	100.0%
Operating expenses:
	Salaries and benefits		31.6	31.4
	Supply cost		14.7	14.4
	Other operating expenses		21.0	20.4
	Depreciation and amortization		3.2	3.1
		Total operating expenses	70.5	69.3
Gain on deconsolidation			0.7	0.9
Equity in earnings of unconsolidated affiliates			0.3	0.1
		Operating income	30.5	31.7
Interest expense			2.6	2.9
	Earnings from continuing operations before income taxes		27.9	28.8
Income tax expense			5.0	4.8
	Net earnings from continuing operations		22.9	24.0
Discontinued operations:
	Earnings from operations of discontinued interests in surgery centers, net of income tax		0.1	0.1
	Loss on disposal of discontinued interests in surgery centers, net of income tax		(0.2)	-
		Net (loss) earnings from discontinued operations	(0.1)	0.1
		Net earnings	22.8	24.1
Less net earnings and comprehensive income attributable to noncontrolling interests:
	Net earnings from continuing operations		16.3	17.2
	Net earnings from discontinued operations		-	-
		Total net earnings and comprehensive income attributable to noncontrolling interests	16.3	17.2
		Net earnings attributable to AmSurg Corp. common shareholders	6.5%	6.9%
Amounts attributable to AmSurg Corp. common shareholders:
	Earnings from continuing operations, net of income tax		6.7%	6.9%
	Discontinued operations, net of income tax		(0.2)	-
		Net earnings and comprehensive income attributable to AmSurg Corp. common shareholders	6.5%	6.9%

Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013

The number of procedures performed in our ASCs remained relatively flat during the three months ended March 31, 2014 compared to the 2013 period with 389,987 and 391,703 procedures being performed in the three months ended March 31, 2014 and 2013, respectively.  Revenues increased $4.9 million, or 2%, to $263.1 million in the three months ended March 31, 2014 from $258.2 million in the comparable 2013 period.  Our revenue was impacted during the three months ended March 31, 2014 primarily due to the following:

·centers acquired or opened in 2013, which contributed $10.4 million of additional revenues in the three months ended March 31, 2014 due to having a full period of operations in 2014;

·center acquired in 2014, which generated $1.0 million in revenues during the three months ended March 31, 2014; and

·approximately $6.0 million of revenue decline for the three months ended March 31, 2014, recognized by our 2014 same-center group, reflecting a 2% decrease, primarily as a result of inclement weather that occurred across the country that impacted over 38% of our centers, resulting in canceled procedures, center closures and delays in re-establishing normal daily procedure volumes.

Salaries and benefits increased $2.2 million, or 3%, to $83.2 million in the three months ended March 31, 2014 from $81.0 million in the comparable 2013 period.  Salaries and benefits as a percentage of revenues increased by 20 basis points in the three months ended March 31, 2014, compared to

23

Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

the three months ended March 31, 2013.  Staff at newly acquired and developed centers, as well as the additional staffing required at existing centers, resulted in a 5% increase in salaries and benefits at our centers in the three months ended March 31, 2014.  Furthermore, we experienced a decrease in salaries and benefits at our corporate offices due to lower bonus and deferred compensation expense incurred during the three months ended March 31, 2014 compared to the 2013 period.

Supply cost increased $1.5 million, or 4%, to $38.7 million in the three months ended March 31, 2014 from $37.2 million in the comparable 2013 period.  The increase was primarily the result of an increase in our average supply cost per procedure of 5% due in part to higher cost per procedure at certain of our multispecialty centers.

Other operating expenses increased $2.5 million, or 5%, to $55.3 million in the three months ended March 31, 2014 from $52.7 million in the comparable 2013 period.  The additional expense in the 2014 period resulted primarily from:

·an increase of $2.0 million in other operating expenses at our 2014 same-center group; and

·centers acquired or opened during 2013, which resulted in an increase of $1.7 million in other operating expenses in the three months ended March 31, 2014.

Depreciation and amortization expense increased $366,000, or 5%, in the three months ended March 31, 2014, primarily as a result of centers acquired during 2013.

We anticipate further increases in operating expenses in 2014, primarily due to additional acquired centers and an additional start-up center currently under development.  Typically, a start-up center will incur start-up losses while under development and during its initial months of operation and will experience lower revenues and operating margins than an established center.  This typically continues until the case load at the center grows to a more normal operating level, which generally is expected to occur within 12 months after the center opens. At March 31, 2014, we had one center under development.

During the three months ended March 31, 2014, we contributed a controlling interest in one center in exchange for $600,000 and a noncontrolling interest in an entity that controls the contributed center after the completion of the transaction.  As a result of the transaction, we recognized a gain on deconsolidation of approximately $2.0 million.  This gain was determined based on the difference between the fair value of the retained noncontrolling interest under the new ownership and operating structure and the carrying value of both the tangible and intangible assets of the entity immediately prior to the transaction.  However, due to a tax asset valuation allowance established in connection with the transaction, the net gain was approximately $550,000.

Interest expense decreased $579,000, or 8%, to $7.0 million from $7.5 million, in the three months ended March 31, 2014, primarily due to a lower outstanding balance on the revolving credit facility during the three months ended March 31, 2014 compared to the three months ended March 31, 2013.  See “— Liquidity and Capital Resources.”

We recognized income tax expense of $13.1 million in the three months ended March 31, 2014 compared to $12.3 million in the three months ended March 31, 2013.  Our effective tax rate during the three months ended March 31, 2014 was 17.8% of earnings from continuing operations before income taxes.  This differs from the federal statutory income tax rate of 35.0% primarily due to the exclusion of the noncontrolling interests’ share of pre-tax earnings and the impact of state income taxes.  Because we deduct goodwill amortization for tax purposes only, more than 60% of our income tax expense is deferred and our deferred tax liability continues to increase, which would only be due in part or in whole upon the disposition of a portion or all of our centers.

During the three months ended March 31, 2014, we classified one surgery center in discontinued operations, which was sold during the period.  We pursued the disposition of this center due to our assessment of its limited growth opportunities.  This center’s results of operations and gains and losses associated with its disposition have been classified as discontinued operations in all periods presented.  We recognized an after-tax loss on the disposition of discontinued interests in the center of $362,000 during the three months ended March 31, 2014.  The net earnings from the operations of the discontinued center was $137,000 and $162,000 during the three months ended March 31, 2014 and 2013, respectively.

Noncontrolling interests in net earnings for the three months ended March 31, 2014 decreased $1.6 million, or 4%, to $42.9 million from $44.5 million in the comparable 2013 period, primarily as a result of the one disposition and one deconsolidation recorded during the period.  The net earnings from discontinued operations attributable to noncontrolling interests was $84,000 and $101,000 during the three months ended March 31, 2014 and 2013, respectively.

Liquidity and Capital Resources

Cash and cash equivalents at March 31, 2014 and 2013 were $47.1 million and $42.4million, respectively.  At March 31, 2014, we had working capital of $125.7 million, compared to $121.1 million at December 31, 2013.  Operating activities for the three months ended March 31, 2014 generated $69.8 million in cash flow from operations, compared to $73.9 million in the three months ended March 31, 2013.  The decrease in operating cash flow resulted primarily from lower net earnings in the 2014 period compared to the 2013 period.  Positive operating cash flows of individual centers are the sole source of cash used to make distributions to our wholly-owned subsidiaries, as well as to our physician partners, which we are obligated to make on a monthly basis in accordance with each partnership’s partnership or operating agreement.  Distributions to

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Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

noncontrolling interests, which is considered a financing activity, in the three months ended March 31, 2014 and 2013 were $43.2 million and $43.9 million, respectively.

The principal source of our operating cash flow is the collection of accounts receivable from governmental payors, commercial payors and individuals.  Each of our centers bills for services as delivered, usually within a few days following the date of the procedure.  Generally, unpaid amounts that are 30 days past due are rebilled based on a standard set of procedures.  If amounts remain uncollected after 60 days, our centers proceed with a series of late-notice notifications until amounts are either collected, contractually written off in accordance with contracted rates or determined to be uncollectible, typically after 90 to 120 days.  Receivables determined to be uncollectible are written off and such amounts are applied to our estimate of allowance for bad debts as previously established in accordance with our policy for bad debt expense.  The amount of actual write-offs of account balances for each of our centers is continuously compared to established allowances for bad debt to ensure thatsuch allowances are adequate.  At March 31, 2014 and 2013, our net accounts receivable represented 38 and 36 days of revenue outstanding, respectively.

During the three months ended March 31, 2014, we had total acquisition and capital expenditures of $12.0million, which included:

·$5.0 million for the acquisition of interests in ASCs and related transactions; and

·$7.1 million for new or replacement property at existing centers including $116,000 in new capital leases.

At March 31, 2014, we had unfunded construction and equipment purchase commitments for our new corporate headquarters and for centers under development or under renovation of approximately $3.2 million, which we intend to fund through additional borrowings of long-term debt, operating cash flow and capital contributions by our partners. 

On June 14, 2013, we amended our revolving credit agreement to adjust the interest rate spreads and extend the maturity date by one year from June 2017 to June 2018; and the interest rate spread on our LIBOR option was reduced to LIBOR plus 1.25% to 2.0% from LIBOR plus 1.50% to 2.25%.  At March 31, 2014, we had $237.5 million available under our revolving credit agreement.

During 2012, we completed a private offering of $250.0 million aggregate principle amount of 5.625% senior unsecured notes due 2020 (the “Senior Unsecured Notes”).  In May 2013, we completed an exchange of the outstanding Senior Unsecured Notes for an equal amount of such notes that are registered under the Securities Act of 1933, as amended.  Interest accrues at the rate of 5.625% per annum and is payable semi-annually in arrears on May 30^th and November 30^th, through the maturity date on November 30, 2020.  At March 31, 2014, we had approximately $4.7 million in accrued interest associated with the Senior Unsecured Notes reflected in other accrued liabilities.  The Senior Unsecured Notes contain certain covenants which, among other things, limit our ability to enter into or guarantee additional borrowing, sell preferred stock, pay dividends and repurchase stock, in each case subject to certain exceptions. 

During the three months ended March 31, 2014, we had net repayments on long-term debt of $18.9 million.  At March 31, 2014, we had $237.5 million outstanding under our revolving credit agreement, $250.0 million outstanding pursuant to our Senior Unsecured Notes and $67.0 million outstanding pursuant to our 8.04% senior secured notes due 2020 (the “Senior Secured Notes”).  Our Senior Secured Notes began to amortize in quarterly installments beginning in August 2013.  As of March 31, 2014, we were in compliance with all covenants contained in our revolving credit agreement, the note purchase agreement governing our Senior Secured Notes and the indenture governing our Senior Unsecured Notes. 

During the three months ended March 31, 2014, we received approximately $500,000 from the exercise of stock options under our employee stock incentive plans.  The tax benefit received from the exercise of those options was approximately $1.7 million. 

On August 9, 2013, our Board of Directors approved a stock repurchase program for up to $40.0 million of our shares of common stock to be purchased through February 9, 2015.  As of March 31, 2014, there was approximately $27.1 million available under the stock repurchase program.  We intend to fund the purchase price for shares acquired under the plan using cash generated from the proceeds received when employees exercise stock options, cash generated from our operations or borrowings under our revolving credit facility.

During the three months ended March 31, 2014, we repurchased 68,014 shares with a value of approximately $2.9 million to cover payroll withholding taxes in connection with the vesting of restricted stock awards in accordance with the restricted stock agreements.

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Item. 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-08 “Presentation of Financial Statements and Property, Plant and Equipment” which raised the threshold for a disposal to qualify as a discontinued operation and requires certain new disclosures for individually material disposals that do not meet the new definition of a discontinued operation.  The ASU’s intent is to reduce the number of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on our operations and financial results rather than routine disposals that are not a change in our strategy.  The guidance is effective for interim and annual periods beginning after December 15, 2014, with earlier adoption permitted.  From time to time, we will dispose of certain of our centers due to management’s assessment of our strategy in the market and due to limited growth opportunities at those centers.  Historically, these dispositions were classified as discontinued operations and recorded separately from continuing operations.  When adopted, this ASU will require us to record the results of operations and the associated gain or loss from similar dispositions as a component of continuing operations.  We do not believe this ASU will have a material impact on our consolidated financial position or cash flows.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities.  We utilize a balanced mix of maturities along with both fixed rate and variable rate debt to manage our exposures to changes in interest rates.  Our variable debt instruments are primarily indexed to the prime rate or LIBOR.  Interest rate changes would result in gains or losses in the market value of our fixed rate debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements.  Based upon our indebtedness at March 31, 2014, a 100 basis point interest rate change would impact our net earnings and cash flow by approximately $1.4 million annually.  Although there can be no assurances that interest rates willnot change significantly, we do not expect changes in interest rates to have a material effect on our net earnings or cash flows in 2014.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2014.  Based on that evaluation, our chief executive officer (principal executive officer) and chief financial officer (principal accounting officer) have concluded that our disclosure controls and procedures are effective to allow timely decisions regarding disclosure of material information required to be included in our periodic reports.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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Part II

Item 1.        Legal Proceedings

                    There have been no material changes to the legal proceedings we previously described in our 2013 Annual Report on Form 10-K during the three months ended March 31, 2014.

Item 1A.     Risk Factors

                    There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
							(d) Maximum Number
		(a) Total			(c) Total Number of		(or Approximate Dollar
		Number of		(b) Average	Shares (or Units)		Value) of Shares (or
		Shares		Price Paid	Purchased as Part of		Units) That May Yet
		(or Units)		per Share	Publicly Announced		Be Purchased Under
Period		Purchased (1)		(or Unit)	Plans or Programs		the Plans or Programs
January 1, 2014 through January 31, 2014		18,648	$	42.65	-	$	27,078,575	(2)
February 1, 2014 through February 28, 2014		49,283		41.75	-		27,078,575
March 1, 2014 through March 31, 2014		83		42.79	-		27,078,575
	Total	68,014	$	42.00	-	$	27,078,575

(1)During the three months ended March 31, 2014, we repurchased 68,014 shares with a value of approximately $2.9 million to cover payroll withholding taxes in connection with the vesting of restricted stock awards in accordance with the restricted stock agreements.

(2)On August 9, 2013, we announced that our Board of Directors had authorized a stock repurchase program, allowing for the purchase of up to $40,000,000 of our outstanding common stock over an 18 month period through February 9, 2015.

Item 3.        Defaults Upon Senior Securities

                    Not applicable.

Item 4.        Mine Safety Disclosures

Not applicable.

Item 5.        Other Information

Not applicable.

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Item 6.        Exhibits

10.1     Form of Indemnification Agreement with directors, executive officers and advisors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated February 4, 2014)

10.2     Third Amended and Restated Employment Agreement, dated January 30, 2014, between AmSurg and Claire M. Gulmi (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated February 4, 2014)

10.3     Third Amended and Restated Employment Agreement, dated January 30, 2014, between AmSurg and David L. Manning (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, dated February 4, 2014)

10.4     Amended and Restated Employment Agreement, dated January 30, 2014, between AmSurg and Phillip A. Clendenin (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, dated February 4, 2014)

10.5     Amended and Restated Employment Agreement, dated January 30, 2014, between AmSurg and Kevin D. Eastridge (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, dated February 4, 2014)

31.1     Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2     Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1     Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101      Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, (ii) the Consolidated Statements of Earnings and Comprehensive Income for the three month periods ended March 31, 2014 and 2013, (iii) the Consolidated Statements of Changes in Equity for the three month periods ended March 31, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2014 and 2013 and (v) the notes to the Unaudited Consolidated Financial Statements for the three month periods ended March 31, 2014 and 2013.

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Signature

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMSURG CORP.
Date:  May 1, 2014
	By:	/s/ Claire M. Gulmi
		Claire M. Gulmi
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Duly Authorized Officer)

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