UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26762
PEDIATRIX MEDICAL GROUP, INC.
1301 Concord TerraceSunrise, 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 November 3, 2003: 23,520,130
TABLE OF CONTENTS
INDEX
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PART I — FINANCIAL INFORMATION
The accompanying notes are an integral part ofthese condensed consolidated financial statements.
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September 30, 2003(Unaudited)
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PEDIATRIX MEDICAL GROUP, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
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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 September 30, 2003, and for the three and nine months ended September 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.
During the nine months ended September 30, 2003, we completed the acquisition of a metabolic screening laboratory and five physician practice groups. Our results of operations for the three and nine month periods ended September 30, 2003 and 2002 include the results of operations for the metabolic screening laboratory and the physician practice groups from the respective dates of acquisition, and therefore are not comparable and are not indicative of the results which would have occurred had the acquisitions been completed at the beginning of the periods presented.
Results of Operations
Three Months Ended September 30, 2003 as Compared to Three Months Ended September 30, 2002
Our net patient service revenue increased $23.0 million, or 18.8%, to $145.5 million for the three months ended September 30, 2003, as compared to $122.5 million for the same period in 2002. Of this $23.0 million increase, $7.9 million, or 34.3%, was primarily attributable to revenue generated from physician practice groups and a metabolic screening laboratory which were acquired in 2003. Same unit patient service revenue increased $15.1 million, or 12.5%, for the three months ended September 30, 2003. The increase in same unit net patient service revenue was primarily the result of: (i) increased reimbursement for our services due to the changes in billing codes introduced by the American Medical Association in early 2003; (ii) an increase in neonatal intensive care patient days of 3.6%; (iii) modest 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 at 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 prior period.
Practice salaries and benefits increased $12.0 million, or 17.5%, to $80.2 million for the three months ended September 30, 2003, as compared to $68.2 million for the same period in 2002. The increase was attributable to: (i) an increase in incentive compensation as a result of same unit growth and operational improvements at the physician practice level; (ii) costs associated with new physicians and other staff to support acquisition-related growth and volume growth at existing units; and (iii) an increase in professional liability and group health insurance costs.
Practice supplies and other operating expenses increased $781,000, or 19.5%, to $4.8 million for the three months ended September 30, 2003, as compared to $4.0 million for the same period in 2002. The increase was primarily attributable to supply and other operating costs related to 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 $2.3 million, or 13.5%, to $19.8 million for the three months ended September 30, 2003, as compared to $17.5 million for the same period in 2002. This $2.3 million increase was attributable to: (i) salaries and benefits as a result of the continued growth of the Company; (ii) increased legal costs primarily related to the ongoing investigation by the Federal Trade Commission (see Note 9 of Notes to Condensed Consolidated Financial Statements); and (iii) increased group health and other insurance costs.
Depreciation and amortization expense increased by $975,000, or 64.1%, to $2.5 million for the three months ended September 30, 2003, as compared to $1.5 million for the same period in 2002. This $975,000 increase is attributable to: (i) amortization of identifiable intangible assets related to our acquisitions, and (ii) the
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purchase of computer hardware and software, furniture, equipment and improvements at our corporate headquarters and regional offices.
Income from operations increased $6.9 million, or 22.2%, to $38.2 million for the three months ended September 30, 2003, as compared to $31.3 million for the same period in 2002. Our operating margin increased 0.8 percentage points to 26.3% for the three months ended September 30, 2003, as compared to 25.5% for the same period in 2002. The increase in operating margin is primarily attributable to a reduction in general and administrative expenses as a percent of revenue.
We recorded net interest expense (investment income less interest expense) of $341,000 for the three months ended September 30, 2003, as compared to net interest expense of $67,000 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 to fund acquisitions and repurchase shares of our common stock.
Our effective income tax rate was 38.0% for the three months ended September 30, 2003 and 2002.
Net income increased to $23.5 million for the three months ended September 30, 2003, as compared to $19.3 million for the same period in 2002.
Diluted net income per common and common equivalent share was $0.97 on weighted average shares of 24.2 million for the three months ended September 30, 2003, as compared to $0.73 on weighted average shares of 26.4 million for the same period in 2002. The net decrease in weighted average shares outstanding was due to the weighted average impact of approximately 4.7 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.
Nine Months Ended September 30, 2003 as Compared to Nine Months Ended September 30, 2002
Our net patient service revenue increased $59.4 million, or 17.2%, to $405.4 million for the nine months ended September 30, 2003, as compared to $346.0 million for the same period in 2002. Of this $59.4 million increase, $18.2 million, or 30.6%, was primarily attributable to revenue generated from physician practice groups and a metabolic screening laboratory which were acquired in 2003. Same unit patient service revenue increased $41.2 million, or 12.3%, for the nine months ended September 30, 2003. The increase in same unit net patient service revenue was primarily the result of: (i) increased reimbursement for our services due to the changes in billing codes introduced by the American Medical Association in early 2003; (ii) an increase in neonatal intensive care patient days of 5.2%; (iii) modest 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 at 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 prior period.
Practice salaries and benefits increased $34.5 million, or 17.6%, to $230.5 million for the nine months ended September 30, 2003, as compared to $196.0 million for the same period in 2002. The increase was attributable to: (i) costs associated with new physicians and other staff to support acquisition-related 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 health insurance costs.
Practice supplies and other operating expenses increased $2.2 million, or 18.5%, to $13.6 million for the nine months ended September 30, 2003, as compared with $11.4 million for the same period in 2002. The increase was attributable to supply and other operating costs related 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 $4.4 million, or 8.2%, to $57.2 million for the nine months ended September 30, 2003, as compared to $52.8 million for the same period in 2002. This $4.4 million increase was primarily due to salaries and benefits as a result of the continued growth of the Company and increased group health and other insurance costs. General and administrative expenses for the nine months ended September 30, 2002 include settlement costs of $1.3 million related to a Colorado Medicaid investigation.
Depreciation and amortization expense increased by $1.6 million, or 36.0%, to $6.0 million for the nine months ended September 30, 2003, as compared to $4.4 million for the same period in 2002. This $1.6 million increase is attributable to: (i) amortization of identifiable intangible assets related to our acquisitions, and (ii) the purchase of computer hardware and software, furniture, equipment and improvements at our corporate headquarters and regional offices.
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Income from operations increased $16.8 million, or 20.7%, to $98.2 million for the nine months ended September 30, 2003, as compared with $81.4 million for the same period in 2002. Our operating margin increased 0.7 percentage points to 24.2% for the nine months ended September 30, 2003, as compared to 23.5% 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.
We recorded net interest expense (investment income less interest expense) of $846,000 for the nine months ended September 30, 2003, as compared with net interest expense of $262,000 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 to fund acquisitions and repurchase shares of our common stock.
Our effective income tax rates were 38.0% and 38.6% for the nine months ended September 30, 2003 and 2002, respectively.
Net income increased to $60.4 million for the nine months ended September 30, 2003, as compared to $49.8 million for the same period in 2002.
Diluted net income per common and common equivalent share was $2.46 on weighted average shares of 24.5 million for the nine months ended September 30, 2003, as compared to $1.86 on weighted average shares of 26.8 million for the same period in 2002. The net decrease in weighted average shares outstanding was due to the weighted average impact of approximately 4.7 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 September 30, 2003, we had approximately $10.4 million of cash and cash equivalents on hand as compared to $73.2 million at December 31, 2002. For the nine months ended September 30, 2003, the Company generated cash flow from operations of $79.8 million. Additionally, we had working capital (current assets less current liabilities) of approximately $615,000 at September 30, 2003, a decrease of $78.9 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 on hand and our line of credit to repurchase shares of our common stock (as more fully discussed below) and fund the acquisition of physician group practices and a metabolic screening laboratory.
Since July 2002, we bought approximately 4.7 million shares of our common stock at a cost of approximately $150 million under repurchase programs approved by our Board of Directors. During 2002, we completed our first repurchase program buying approximately 1.7 million shares of our common stock at a cost of approximately $50 million. During 2003, we completed two additional $50 million repurchase programs buying approximately 3.0 million shares of our common stock at a cost of approximately $100 million. All repurchases were made in the open market, subject to market conditions and trading restrictions.
The Company currently has a revolving line of credit in the amount of $100 million that 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 September 30, 2003, to our knowledge, we were in compliance with such financial covenants and restrictions. The outstanding balance under our Line of Credit at September 30, 2003 was $14.5 million. As of November 3, 2003, we had no balance outstanding under our Line of Credit. We also had no balance outstanding under our Line of Credit at December 31, 2002.
We are currently evaluating a proposal from one of our lenders with respect to a new revolving credit facility. However, there can be no assurance that we will be able to obtain a new credit facility in the amount and on terms substantially similar to the Line of Credit.
In September 2003, we purchased our corporate office building for approximately $10.1 million in cash pursuant to a lease purchase option. The building was previously leased under an operating lease agreement with a LIBOR-based variable interest rate. Our other capital expenditures have typically been for computer hardware and software, furniture, equipment and improvements at our corporate headquarters and regional offices. During the nine months ended September 30, 2003, capital expenditures amounted to approximately $13.7 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.
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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 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 investigations 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 an aircraft operating lease agreement 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 lease bears interest at a LIBOR-based variable rate. The outstanding principal balance on the Line of Credit was $14.5 million at September 30, 2003. The outstanding balance related to the aircraft operating lease totaled approximately $5.7 million at September 30, 2003. Considering the total outstanding balances under these instruments at September 30, 2003 of approximately $20.2 million, a 1% change in interest rates would result in an impact to pre-tax earnings of approximately $202,000 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 as of September 30, 2003. There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
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PEDIATRIX MEDICAL GROUP, INC.PART II — OTHER INFORMATION — (Continued)
Item 6. Exhibits and 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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