UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
OR
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 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 1, 2004: 22,352,094
INDEX
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The accompanying notes are an integral part ofthese condensed consolidated financial statements.
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September 30, 2004
(Unaudited)
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PEDIATRIX MEDICAL GROUP, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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The following discussion highlights the principal factors that have affected 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 the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K. As used in this Quarterly Report, the terms “Pediatrix”, the “Company”, “we”, “us” and “our” refer to Pediatrix Medical Group, Inc. and its consolidated subsidiaries (“PMG”), together with PMG’s affiliated professional associations, corporations and partnerships (“affiliated professional contractors”). PMG has contracts with its affiliated professional contractors, which are separate legal entities that provide physician services in certain states and Puerto Rico.
The following discussion contains forward-looking statements. Please see the Company’s most recent Annual Report on Form 10-K, including the section entitled “Risk Factors,” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. In addition, please see “Caution Concerning Forward-Looking Statements” below.
During the nine months ended September 30, 2004, we completed the acquisition of eight physician group practices. In addition, during 2003, we completed the acquisition of a metabolic screening laboratory and seven physician practice groups. Our results of operations for the three and nine months ended September 30, 2004 include the results of operations for the metabolic screening laboratory and the physician practice groups from their respective dates of acquisition, and therefore are not comparable in some material respects to our results of operations for the three and nine months ended September 30, 2003.
Results of Operations
Three Months Ended September 30, 2004 as Compared to Three Months Ended September 30, 2003
Our net patient service revenue increased $12.8 million, or 8.8%, to $158.3 million for the three months ended September 30, 2004, as compared to $145.5 million for the same period in 2003. Of this $12.8 million increase, $9.7 million, or 75.8%, was primarily attributable to revenue generated from acquisitions completed and the addition of new hospital contracts after June 30, 2003. Same unit net patient service revenue increased $3.1 million, or 2.2%, for the three months ended September 30, 2004. The increase in same unit net patient service revenue was primarily the result of: (i) an increase in neonatal intensive care patient days of 3.9%; (ii) increased revenue from volume growth in maternal-fetal services and other services including hearing screens and newborn nursery services provided by existing practices; (iii) modest price increases implemented on January 1, 2004; and (iv) improved managed care contracting processes. The increase in same unit patient service revenue was partially offset by an increase in patients enrolled in government sponsored programs. Payments received from government programs are substantially less than reimbursement under commercial insurance. Same units are those units at which we provided services for the entire current period and the entire comparable prior year period.
Practice salaries and benefits increased $8.4 million, or 10.5%, to $88.6 million for the three months ended September 30, 2004, as compared to $80.2 million for the same period in 2003. The increase was attributable to costs associated with new physicians and other staff to support acquisition related growth and volume growth at existing units.
Practice supplies and other operating expenses increased $1.1 million, or 23.4%, to $5.9 million for the three months ended September 30, 2004, as compared to $4.8 million for the same period in 2003. The increase was primarily attributable to costs related to acquired and new units at which we provide services and increased supply costs at our metabolic screening laboratory.
General and administrative expenses include expenses related to all other salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our physician group practices. General and administrative expenses increased $200,000, or 0.8%, to $20.0 million for the three months ended September 30, 2004, as compared to $19.8 million for the same period in 2003. This $200,000 increase was primarily due to salaries and benefits and other general and administrative expenses relating to the continued growth of the Company.
Depreciation and amortization expense decreased by $200,000, or 7.9%, to $2.3 million for the three months ended September 30, 2004, as compared to $2.5 million for the same period in 2003. This $200,000 decrease is primarily attributable to certain identifiable intangible assets having become fully amortized.
Income from operations increased $3.3 million, or 8.8%, to $41.5 million for the three months ended September 30, 2004, as compared to $38.2 million for the same period in 2003. Our operating margin decreased 0.1 percentage points to 26.2% for the three months
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ended September 30, 2004, as compared to 26.3% for the same period in 2003. The decrease in operating margin was due to a shift in the Company’s payor mix during the three months ended September 30, 2004. That shift resulted in a lower percentage of patient service reimbursement coming from commercial payors than from government payors, principally the various Medicaid programs in the states where our physicians practice. This payor mix shift has resulted in a decrease in average reimbursement rates. The decrease in operating margin due to the payor mix shift was partially offset by continued operational efficiencies at the physician group practice level and a reduction in general and administrative expenses as a percent of revenue.
We recorded net interest expense of $202,000 for the three months ended September 30, 2004, as compared to net interest expense of $341,000 for the same period in 2003. The decrease in net interest expense is primarily due to lower long term debt outstanding during the three months ended September 30, 2004 as compared to the prior year period. We had no borrowings under our line of credit for the three months ended September 30, 2004. Interest expense for the three months ended September 30, 2004 consisted primarily of commitment fees and amortized debt costs associated with our line of credit.
Our effective income tax rates were 37.3% and 38.0% for the three months ended September 30, 2004 and 2003, respectively. This decline in our effective rate is principally due to changes in our apportionment of income for state income taxes.
Net income increased to $25.9 million for the three months ended September 30, 2004, as compared to $23.5 million for the same period in 2003.
Diluted net income per common and common equivalent share was $1.04 on weighted average shares of 25.0 million for the three months ended September 30, 2004, as compared to $0.97 on weighted average shares of 24.2 million for the same period in 2003. The net increase in weighted average shares outstanding was primarily due to the exercise of employee stock options offset in part by the impact of shares repurchased since July 1, 2003.
Nine Months Ended September 30, 2004 as Compared to Nine Months Ended September 30, 2003
Our net patient service revenue increased $53.2 million, or 13.1%, to $458.6 million for the nine months ended September 30, 2004, as compared to $405.4 million for the same period in 2003. Of this $53.2 million increase, $28.7 million, or 53.9%, was primarily attributable to revenue generated from acquisitions completed during 2003 and 2004 and the addition of new hospital contracts in 2003. Same unit net patient service revenue increased $24.5 million, or 6.3%, for the nine months ended September 30, 2004. The increase in same unit net patient service revenue was primarily the result of: (i) a 3.2% increase in neonatal intensive care unit patient days; (ii) increased revenue from volume growth in maternal-fetal services and other services including hearing screens and newborn nursery services provided by existing practices; (iii) modest price increases implemented on January 1, 2004; (iv) changes in reimbursement for our services due to modifications to billing codes implemented by the American Medical Association in early 2003; and (v) improved managed care contracting processes. The increase in same unit patient service revenue was partially offset by an increase in patients enrolled in government sponsored programs. Payments received from government programs are substantially less than reimbursement under commercial insurance. 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 $28.4 million, or 12.4%, to $258.9 million for the nine months ended September 30, 2004, as compared to $230.5 million for the same period in 2003. 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; and (ii) an increase in incentive compensation as a result of same unit growth and operational improvements at the physician practice level.
Practice supplies and other operating expenses increased $3.6 million, or 26.9%, to $17.2 million for the nine months ended September 30, 2004, as compared with $13.6 million for the same period in 2003. The increase was primarily attributable to supply costs related to our acquisition of a metabolic screening laboratory in May 2003 and other costs related to acquired and new units at which we provide services.
General and administrative expenses include expenses related to all other salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our physician group practices. General and administrative expenses increased $2.3 million, or 4.0%, to $59.5 million for the nine months ended September 30, 2004, as compared to $57.2 million for the same period in 2003. This $2.3 million increase was primarily due to salaries and benefits relating to our continued growth and our metabolic screening laboratory which we acquired in May 2003.
Depreciation and amortization expense increased by $1.0 million, or 15.7%, to $7.0 million for the nine months ended September 30, 2004, as compared to $6.0 million for the same period in 2003. This $1.0 million increase is attributable to amortization of identifiable intangible assets related to our acquisitions and depreciation related to the purchase of property and equipment.
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Income from operations increased $17.8 million, or 18.2%, to $116.0 million for the nine months ended September 30, 2004, as compared with $98.2 million for the same period in 2003. Our operating margin increased 1.1 percentage points to 25.3% for the nine months ended September 30, 2004, as compared to 24.2% for the same period in 2003. The increase in operating margin is directly attributable to a reduction in general and administrative expenses as a percent of revenue, partially offset by the shift in the Company’s payor mix which occurred during the three months ended September 30, 2004.
We recorded net interest expense of $500,000 for the nine months ended September 30, 2004, as compared with net interest expense of $846,000 for the same period in 2003. The decrease in net interest expense is primarily due to lower long term debt outstanding during the nine months ended September 30, 2004 as compared to the prior year period. We had no borrowings under our line of credit for the nine months ended September 30, 2004. Interest expense for the nine months ended September 30, 2004 consisted primarily of commitment fees and amortized debt costs associated with our line of credit.
Our effective income tax rates were 37.3% and 38.0% for the nine months ended September 30, 2004 and 2003, respectively. This decline in our effective rate is principally due to changes in our apportionment of income for state income tax purposes.
Net income increased to $72.5 million for the nine months ended September 30, 2004, as compared to $60.4 million for the same period in 2003.
Diluted net income per common and common equivalent share was $2.88 on weighted average shares of 25.2 million for the nine months ended September 30, 2004, as compared to $2.46 on the weighted average shares of 24.5 million for the same period in 2003. The net increase in weighted average shares outstanding was primarily due to the issuance of shares under our employee stock purchase plan and for the exercise of employee stock options offset in part by the impact of shares repurchased since January 1, 2003.
Liquidity and Capital Resources
As of September 30, 2004, we had approximately $30.9 million of cash and cash equivalents on hand as compared to $27.9 million at December 31, 2003. Additionally, we had working capital of approximately $44.3 million at September 30, 2004, an increase of $19.8 million from working capital of $24.5 million at December 31, 2003. The increase in working capital at September 30, 2004 is primarily due to increased accounts receivable balances and a reduction in liabilities outstanding primarily due to the payment of physician bonuses, accrued at December 31, 2003, in the first quarter of 2004.
Our net cash provided from operating activities was approximately $80.3 million for the nine months ended September 30, 2004. In addition to the cash provided from operations during the nine months ended September 30, 2004, we generated cash proceeds from the exercise of employee stock options of approximately $27.3 million and approximately $1.1 million from the sale of assets relating to certain office based practices. For the nine months ended September 30, 2004, we used cash proceeds of approximately $41.7 million to complete the acquisition of eight physician group practices and approximately $57.3 million to repurchase common stock (as more fully discussed below).
During 2003, we repurchased approximately 3.0 million shares of our common stock for approximately $100 million under repurchase programs approved by our Board of Directors. During July 2004, we completed a $50 million common stock repurchase program which was authorized by our Board of Directors in May 2004. In August 2004, our Board of Directors authorized the repurchase of an additional $50 million of our common stock which was subsequently increased by the Board of Directors to $100 million in September 2004. During the three and nine months ended September 30, 2004, we repurchased approximately 503,000 and 851,000 shares at a cost of $34.1 million and $57.3 million, respectively, under these repurchase programs. In October 2004, we completed our common stock repurchase program by buying an additional 1.7 million shares of our common stock at a cost of approximately $92.7 million.
In July 2004, we obtained a new revolving line of credit and simultaneously terminated our old line of credit. The new line of credit is a $150 million revolving credit facility which includes (1) a $25 million subfacility for the issuance of letters of credit and (2) a $15 million subfacility for swingline loans. The new line of credit matures in July 2009. At our option the new line of credit (other than swingline loans) bears interest at (1) the base rate (defined as the higher of (i) the Federal Funds Rate plus .5% and (ii) the Bank of America prime rate) and (2) the Eurodollar rate plus an applicable margin rate ranging from .75% to 1.75% based on our consolidated leverage ratio. Swing line loans bear interest at the base rate. Our new line of credit is collateralized by substantially all of our assets. We are subject to certain covenants and restrictions specified in our new line of credit, including covenants that require us to maintain a minimum level of net worth and that restrict us from paying dividends and making certain other distributions as specified therein. At September 30, 2004, we believe we were in compliance with such financial covenants and restrictions. We had no outstanding principal balances under our line of credit at September 30, 2004. We have outstanding letters of credit which reduced the amount available under our new line of credit by $7.0 million at September 30, 2004. During October 2004, we borrowed under our line of credit to finance the repurchase of our common stock and to complete an acquisition. As of November 1, 2004, the outstanding principal balance under our line of credit was $60.0 million.
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We maintain professional liability insurance policies with third-party insurers, subject to deductibles, exclusions and other restrictions. We self-insure our liabilities to pay deductibles under our professional liability insurance coverage through a wholly-owned captive insurance subsidiary. We record a liability for self-insured deductibles and an estimate of liabilities for claims incurred but not reported based on an actuarial valuation using historical loss patterns. Effective May 1, 2004, we obtained professional liability coverage that expires on April 30, 2005 with substantially similar terms as our previous policy which includes a provision which may result in additional premiums or a return of premium based upon our actual losses. Such coverage includes an increase in premium costs as compared to our prior policy.
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, anticipated acquisitions, capital expenditures as presently planned and 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 the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions and 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, and we undertake no 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. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in our most recent Annual Report on Form 10-K, including the section entitled “Risk Factors”.
Our line of credit and an aircraft operating lease agreement are subject to market risk and interest rate changes. The line of credit bears interest at our option (other than swingline loans) at (1) the base rate (defined as the higher of (i) the Federal Funds Rate plus .5% and (ii) the Bank of America prime rate) and (2) the Eurodollar rate plus an applicable margin rate ranging from .75% to 1.75% based on our consolidated leverage ratio. Swing line loans bear interest at the base rate. The aircraft operating lease bears interest at a LIBOR-based variable rate. We had no outstanding principal balance under our line of credit at September 30, 2004. The outstanding balance related to the aircraft operating lease totaled approximately $5.1 million at September 30, 2004. Considering the total outstanding balance under the operating lease at September 30, 2004 of approximately $5.1 million, a 1% change in interest rates would result in an impact to income before income taxes of approximately $51,000 per year.
As of November 1, 2004, the outstanding principal balance under our line of credit was $60.0 million. Considering the total outstanding balance of this instrument at November 1, 2004, a 1% change in interest rates would result in an impact to income before income taxes of approximately $600,000 per year.
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 our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2004, were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
In June 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 our May 2001 acquisition of Magella Healthcare Corporation and our business practices generally. In February 2003, we received additional information requests from the FTC in the form of a Subpoena and Civil Investigative Demand. Pursuant to these requests, we produced documents and information relating to the acquisition and our business practices in certain markets. We have also provided on a voluntary basis additional information and testimony on issues related to the investigation. At this time, the investigation remains active and ongoing and we are cooperating fully with the FTC.
Beginning in April 1999, we received requests from various federal and state investigators for information relating to our billing practices for services reimbursed by Medicaid, and the United States Department of Defense’s TRICARE program for military dependants and retirees. Since then, a number of the individual state investigations were resolved through agreements to refund certain overpayments and reimburse certain costs to the states. In June 2003, we were advised by a United States Attorney’s Office that it was conducting a civil investigation with respect to our Medicaid billing practices nationwide. This federal Medicaid investigation, the TRICARE investigation, and related state inquiries are now being coordinated and are active and ongoing. We are cooperating fully with federal and state authorities with respect to these investigations and inquiries.
In November 2003, our maternal-fetal practice in Las Vegas, Nevada was served with a search warrant by the State of Nevada. The warrant requested information concerning Medicaid billings for maternal-fetal care provided by us in that state. We do not know the basis for the warrant or the nature of the issues relating to this investigation. We are cooperating fully with appropriate officials in the investigation.
Currently, management cannot predict the timing or outcome of any of these pending investigations and inquiries and whether they will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations and the trading price of our common stock.
We also expect that additional audits, inquiries and investigations from government authorities and agencies will continue to occur in the ordinary course of our business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations and the trading price of our common stock.
In the ordinary course of our business, we have become involved as a defendant in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated physicians. Our contracts with hospitals also generally require us to indemnify them and their affiliates for losses resulting from the negligence of our affiliated physicians. We are also subject to other lawsuits which may involve large claims and significant defense costs. We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition or results of operations and the trading price of our common stock. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition or results of operations and the trading price of our common stock.
Although we currently maintain liability insurance coverage intended to cover medical malpractice and certain other claims, this coverage generally must be renewed annually and may not continue to be available to us in future years at acceptable costs and on favorable terms. In addition, our insurance coverage may not be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable to us. Liabilities in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
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PEDIATRIX MEDICAL GROUP, INC.PART II — OTHER INFORMATION — (Continued)
ISSUER PURCHASES OF EQUITY SECURITIES
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See Exhibit Index.
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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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