Pediatrix Medical Group - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number 0-26762

PEDIATRIX MEDICAL GROUP, INC.

(Exact name of registrant as specified in its charter)

1301 Concord Terrace
Sunrise, Florida 33323
(Address of principal executive offices)
(Zip Code)

(954) 384-0175
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and fiscal year, if changed since last report)

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   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   x   No   o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Shares of Common Stock outstanding as of August 8, 2003: 23,030,940

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PEDIATRIX MEDICAL GROUP, INC.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PEDIATRIX MEDICAL GROUP, INC.

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

June 30, 2003
(Unaudited)

1.                    Basis of Presentation:

2.                    Summary of Significant Accounting Policies:

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

2.                    Summary of Significant Accounting Policies, Continued:

3.                    Business Acquisitions:

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

3.                    Business Acquisitions, Continued:

4.                    Accounts Payable and Accrued Expenses:

5.                    Net Income Per Share:

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

5.                    Net Income Per Share, Continued:

6.                    Common Stock Repurchase Program:

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

7.                    Contingencies:

8.                    Subsequent Events:

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

     The following discussion highlights the principal factors affecting our financial condition and results of operations, as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of June 30, 2003, and for the three and six months ended June 30, 2003 and 2002, and the notes thereto, presented in this Quarterly Report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (including the discussion of our critical accounting policies) and our consolidated financial statements and the notes thereto contained in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year. As used herein, “us”, “we” and “our” refer to Pediatrix Medical Group, Inc. and its subsidiaries and the professional associations, corporations and partnerships (the “PA Contractors”) with which Pediatrix Medical Group, Inc. or one of its subsidiaries has specific management arrangements.

     The matters discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical facts are forward-looking and are based on estimates, forecasts and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. See “Caution Concerning Forward-Looking Statements” below.

Results of Operations

     Three Months Ended June 30, 2003 as Compared to Three Months Ended June 30, 2002

     Our net patient service revenue increased $17.5 million, or 15.0%, to $133.7 million for the three months ended June 30, 2003, as compared to $116.2 million for the same period in 2002. Of this $17.5 million increase, $4.9 million, or 28.0%, was primarily attributable to physician and newborn screening services which we provide as a result of acquisitions. Same unit patient service revenue increased $12.6 million, or 11.1%, for the three months ended June 30, 2003. The increase in same unit net patient service revenue was primarily the result of: (i) an increase in neonatal intensive care patient days of 7.0%; (ii) increased reimbursement for our services due to the changes in billing codes introduced by the American Medical Association in early 2003; (iii) price increases implemented on January 1, 2003; (iv) increased revenue from volume growth in perinatal services and other services including hearing screens and newborn nursery services provided in existing practices; and (v) improved managed care contracting. Same units are those units at which we provided services for the entire current period and the entire comparable period.

     Practice salaries and benefits increased $10.5 million, or 16.1%, to $75.6 million for the three months ended June 30, 2003, as compared to $65.2 million for the same period in 2002. The increase was attributable to: (i) costs associated with new physicians and other staff to support new unit growth and volume growth at existing units; (ii) an increase in incentive compensation as a result of same unit growth and operational improvements at the physician practice level; and (iii) an increase in professional liability and group insurance costs.

     Practice supplies and other operating expenses increased $764,000, or 19.3%, to $4.7 million for the three months ended June 30, 2003, as compared to $4.0 million for the same period in 2002. The increase was attributable to new units at which we provide services as a result of acquisitions and our recent acquisition of a metabolic screening laboratory.

     General and administrative expenses include all salaries, benefits, supplies and other operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collection functions. General and administrative expenses increased $1.3 million, or 7.1%, to $19.0 million for the three months ended June 30, 2003, as compared to $17.7 million for the same period in 2002. This $1.3 million increase was primarily due to salaries and benefits as a result of the continued growth of the Company and increased group health insurance costs.

     Depreciation and amortization expense increased by $440,000, or 30.1%, to $1.9 million for the three months ended June 30, 2003, as compared to $1.5 million for the same period in 2002. This $440,000 increase is attributable to: (i) the purchase of computer hardware and software, furniture, equipment and improvements at our corporate headquarters and our regional offices, and (ii) amortization of identifiable intangible assets related to our acquisitions.

     Income from operations increased $4.5 million, or 16.3%, to $32.4 million for the three months ended June 30, 2003, as compared to $27.9 million for the same period in 2002. Our operating margin increased 0.3 percentage points to 24.3% for the three months ended June 30, 2003, as compared to 24.0% for the same period in 2002. The increase in operating margin is directly attributable to a reduction in general and administrative expenses as a percent of revenue.

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     We recorded net interest expense of $354,000 for the three months ended June 30, 2003, as compared to net interest expense of $65,000 for the same period in 2002. The increase in net interest expense is primarily due to the use of cash on hand and borrowings under our line of credit for acquisitions and to repurchase our common stock.

     Our effective income tax rates were 38.0% and 39.0% for the three months ended June 30, 2003 and 2002, respectively.

     Net income increased to $19.9 million for the three months ended June 30, 2003, as compared to $17.0 million for the same period in 2002.

     Diluted net income per common and common equivalent share was $0.82 on weighted average shares of 24.3 million for the three months ended June 30, 2003, as compared to $0.62 on the weighted average shares of 27.4 million for the same period in 2002. The net decrease in weighted average shares outstanding was due to the weighted average impact of approximately 3.6 million shares purchased under our repurchase program, offset in part by an increase in outstanding shares due to stock option exercises and shares issued under our employee stock purchase plans.

     Six Months Ended June 30, 2003 as Compared to Six Months Ended June 30, 2002

     Our net patient service revenue increased $36.4 million, or 16.3%, to $259.9 million for the six months ended June 30, 2003, as compared to $223.5 million for the same period in 2002. Of this $36.4 million increase, $9.0 million, or 24.7%, was primarily attributable to physician and newborn screening services which we provide as a result of acquisitions. Same unit patient service revenue increased $27.4 million, or 12.5%, for the six months ended June 30, 2003. The increase in same unit net patient service revenue was primarily the result of: (i) an increase in neonatal intensive care patient days of 6.3%; (ii) increased reimbursement for our services due to the changes in billing codes introduced by the American Medical Association in early 2003; (iii) increased revenue from volume growth in perinatal services and other services including hearing screens and newborn nursery services provided in existing practices; (iv) price increases implemented on January 1, 2003; and (v) improved managed care contracting. Same units are those units at which we provided services for the entire current period and the entire comparable period.

     Practice salaries and benefits increased $22.5 million, or 17.7%, to $150.3 million for the six months ended June 30, 2003, as compared to $127.7 million for the same period in 2002. The increase was attributable to: (i) costs associated with new physicians and other staff to support new unit growth and volume growth at existing units; (ii) an increase in incentive compensation as a result of same unit growth and operational improvements at the physician practice level; (iii) an increase in professional liability and group insurance costs; and (iv) an increase in payroll taxes related to increased incentive compensation payouts.

     Practice supplies and other operating expenses increased $1.4 million, or 18.0%, to $8.8 million for the six months ended June 30, 2003, as compared with $7.4 million for the same period in 2002. The increase was attributable to new units at which we provide services as a result of acquisitions and our recent acquisition of a metabolic screening laboratory.

     General and administrative expenses include all salaries, benefits, supplies and other operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collection functions. General and administrative expenses increased $2.0 million, or 5.6%, to $37.3 million for the six months ended June 30, 2003, as compared to $35.3 million for the same period in 2002. This $2.0 million increase was primarily due to salaries and benefits as a result of the continued growth of the Company and increased group health insurance costs. General and administrative expenses for the six months ended June 30, 2002 include settlement costs of $1.3 million related to a Colorado Medicaid investigation.

     Depreciation and amortization expense increased by $626,000, or 21.4%, to $3.6 million for the six months ended June 30, 2003, as compared to $2.9 million for the same period in 2002. This $626,000 increase is attributable to: (i) the purchase of computer hardware and software, furniture, equipment and improvements at our corporate headquarters and our regional offices, and (ii) amortization of identifiable intangible assets related to our acquisitions.

     Income from operations increased $9.9 million, or 19.7%, to $60.0 million for the six months ended June 30, 2003, as compared with $50.1 million for the same period in 2002. Our operating margin increased 0.7 percentage points to 23.1% for the six months ended June 30, 2003, as compared to 22.4% for the same period in 2002. The increase in operating margin is directly attributable to a reduction in general and administrative expenses as a percent of revenue.

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     We recorded net interest expense of $505,000 for the six months ended June 30, 2003, as compared with net interest expense of $195,000 for the same period in 2002. The increase in net interest expense is primarily due to the use of cash on hand and borrowings under our line of credit for acquisitions and to repurchase our common stock.

     Our effective income tax rates were 38.0% and 39.0% for the six months ended June 30, 2003 and 2002, respectively.

     Net income increased to $36.9 million for the six months ended June 30, 2003, as compared to $30.4 million for the same period in 2002.

     Diluted net income per common and common equivalent share was $1.49 on weighted average shares of 24.7 million for the six months ended June 30, 2003, as compared to $1.13 on the weighted average shares of 27.0 million for the same period in 2002. The net decrease in weighted average shares outstanding was due to the weighted average impact of approximately 3.1 million shares purchased under our repurchase program, offset in part by an increase in outstanding shares due to stock option exercises and shares issued under our employee stock purchase plans.

Liquidity and Capital Resources

     As of June 30, 2003, we had approximately $11.6 million of cash and cash equivalents on hand as compared to $73.2 million at December 31, 2002. For the six months ended June 30, 2003, the Company generated cash flow from operations of $33.5 million. Additionally, we had working capital of approximately $32.2 million at June 30, 2003, a decrease of $47.4 million from working capital of $79.6 million at December 31, 2002. The decrease in working capital is primarily due to the use of cash for acquisitions and the repurchase of common stock (as more fully discussed below) offset by cash generated by operations.

     In November 2002, our Board of Directors approved a common stock repurchase program (the “Repurchase Program”). Under our Repurchase Program, we were authorized to repurchase up to $50 million of our common stock in the open market, subject to market conditions and trading restrictions. During the three months ended March 31, 2003, we repurchased approximately 1.6 million shares at a cost of approximately $50 million under the Repurchase Program. In April 2003, our Board of Directors authorized an increase in the Repurchase Program for an additional $50 million. Under the additional authorization we repurchased approximately 730,000 shares of our common stock at a cost of approximately $24.8 million during the three months ended June 30, 2003. We completed this repurchase in July 2003 by repurchasing an additional 640,000 shares at a cost of approximately $25.2 million.

     The Company currently has a line of credit in the amount of $100 million which matures August 14, 2004 (the “Line of Credit”). At our option, the Line of Credit bears interest at either the prime rate or the Eurodollar rate plus an applicable margin rate ranging from 2% to 2.75%. The Line of Credit is collateralized by substantially all of our assets. We are subject to certain financial covenants and restrictions specified in our Line of Credit, including covenants that require us to maintain a minimum level of net worth and earnings and a restriction on the payment of dividends and certain other distributions, as specified therein. At June 30, 2003, we were in compliance with such financial covenants and restrictions. The outstanding balance under our Line of Credit at June 30, 2003 was $17.0 million. We had no outstanding balance under our Line of Credit at December 31, 2002.

     We maintain professional liability coverage that indemnifies us and our health care professionals on a claims-made basis for losses incurred related to medical malpractice litigation with a portion of self insurance retention. We record a liability for self-insured deductibles and an estimated liability for malpractice claims incurred but not reported based on an actuarial valuation. Effective May 1, 2003, we obtained professional liability coverage that expires April 30, 2004 with terms substantially similar to our previous policy. Such coverage includes an increase in premium costs as compared to our prior policies.

     Our annual capital expenditures have typically been for computer hardware and software, furniture, equipment and improvements at the corporate headquarters and our regional offices. During the six months ended June 30, 2003, capital expenditures amounted to approximately $2.3 million.

     We anticipate that funds generated from operations, together with cash on hand, and funds available under our Line of Credit, will be sufficient to meet our working capital requirements, finance our required capital expenditures and meet our contractual obligations for at least the next 12 months.

Caution Concerning Forward-Looking Statements

     Certain information included or incorporated by reference in this Quarterly Report may be deemed to be “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements may include, but are not limited to, statements

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relating to our objectives, plans and strategies, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward looking statements. Such statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions. These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements in this Quarterly Report are made as of the date hereof. We disclaim any duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements.

     Some of the factors that may cause actual results, developments and business decisions to differ materially from those projected or anticipated by such forward-looking statements, as more fully discussed under the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, include pending and future investigations by federal and state government authorities of our billing or other practices (including the previously disclosed investigation by a U.S. Attorney’s Office regarding our Medicaid billing practices nationwide and an investigation by the Federal Trade Commission); unfavorable regulatory or other changes or conditions in geographic areas where our operations are concentrated; determinations that we failed to comply with applicable health care laws and regulations; limitations, reductions or retroactive adjustments to reimbursement amounts or rates by government-sponsored health care programs; audits by third party payors with respect to our billings for services; failure of physicians affiliated with us to appropriately record and document the services that they provide; our failure to find suitable acquisition candidates or successfully integrate any future or recent acquisitions; our failure to successfully implement our strategy of diversifying our operations; impairment of long-lived assets, such as goodwill; federal and state health care reform, including changes in the interpretation of government-sponsored health care programs; our failure to successfully recruit additional and retain existing qualified physicians; pending and future malpractice and other lawsuits (including the previously disclosed shareholder class action lawsuits); our failure to manage growth effectively and to maintain effective and efficient information systems; our failure to collect reimbursements from third party payors in a timely manner; cancellation or non-renewal of our arrangements with hospitals, or renewal of such arrangements on less favorable terms; loss of our affiliated physicians’ privileges or ability to provide services in hospitals, or hospitals entering into arrangements with physicians not affiliated with us; and increased competition in the health care industry.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     Our Line of Credit and certain operating lease agreements are subject to market risk and interest rate changes. The total amount available under our Line of Credit is $100 million. At our option, the Line of Credit bears interest at either the prime rate or the Eurodollar rate plus an applicable margin rate ranging from 2% to 2.75%. The leases bear interest at LIBOR-based variable rates. The outstanding principal balance on the Line of Credit was $17.0 million at June 30, 2003. The outstanding balances related to the operating leases totaled approximately $15.9 million at June 30, 2003. Considering the total outstanding balances under these instruments at June 30, 2003 of approximately $32.9 million, a 1% change in interest rates would result in an impact to pre-tax earnings of approximately $329,000 per year.

Item 4. Disclosure Controls and Procedures.

     We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of our evaluation, including any significant actions regarding any deficiencies.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     In June and July 2003, several purported federal securities law class actions were commenced against us, two of our principal officers and our Chairman of the Board in the United States District Court for the Southern District of Florida. The plaintiffs seek to represent all purchasers of our common stock beginning on various dates in 2002 and ending on June 23, 2003, the date prior to our announcement that we had been advised by a U.S. Attorney’s Office that it is conducting an investigation with respect to our Medicaid billing practices nationwide. The plaintiffs claim that we violated the antifraud provisions of the federal securities laws by issuing false and misleading statements concerning our billing practices and results of operations. They are seeking unspecified damages and other relief. We believe the claims are without merit and intend to defend the cases vigorously. If we are unsuccessful in defending the claims, damages awarded could exceed the limits of our insurance coverage and have a material adverse effect on our business, financial condition, results of operations or the trading price of our shares.

     On June 6, 2002, we received a written request from the Federal Trade Commission (“FTC”) to submit information on a voluntary basis in connection with an investigation of issues of competition related to the 2001 acquisition of Magella Healthcare Corporation and our business practices generally. On February 5, 2003, we received additional information requests from the FTC in the form of a Subpoena and Civil Investigative Demand. Pursuant to these requests, the FTC has requested documents and information relating to the acquisition and our business practices in certain markets. We are cooperating fully with the FTC, but at this time cannot predict the outcome of the investigation and whether it will have a material adverse effect on our business, financial condition, results of operations or the trading price of our shares.

     In April 1999, we received requests from federal investigators for information related to our billing practices for services reimbursed by the TRICARE program for military dependents. In June 2003, we were advised by a U.S. Attorney’s Office that it is conducting a similar civil investigation with respect to our Medicaid billing practices nationwide. These investigations are active and ongoing. We believe that additional audits, inquiries and investigations from government agencies will continue to occur in the ordinary course of our business. We cannot predict whether any such pending or future audits, inquiries or investigations will have a material adverse effect on our business, financial condition, results of operations or the trading price of our shares.

     During the ordinary course of our business, we have become a party to pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice. Although these actions and proceedings are generally expected to be covered by insurance, there can be no assurance that our medical malpractice insurance coverage will be adequate to cover liabilities arising out of medical malpractice claims if the outcomes of such claims are unfavorable to us. We believe, based upon our review of these pending matters, that the expected resolutions of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations or the trading price of our shares.

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PEDIATRIX MEDICAL GROUP, INC.

Item 4.            Submission of Matters to a Vote of Security-Holders.

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Item 6. Exhibits and Reports on Form 8-K.

                 (a)  Exhibits.

                 (b)  Reports on Form 8-K.

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SIGNATURES

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

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EXHIBIT INDEX

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